Lending to small businesses is like balancing on a tightrope. On one side, you need to grow revenues. On the other side, you have the risks of fraud and defaults that small business lending presents. Legacy business practices tend to keep lenders away from opportunities because of the risk. But taking a balanced approach can unlock revenues while appropriately mitigating risk.
Many of the problems with the legacy approach to risk vs. reward are due to manual underwriting processes. These are slow and costly tactics that don’t accurately account for fraud and other risks, leaving traditional bank lenders more risk-averse. Meanwhile, fintechs are solving this problem with technology, delivering superior customer experiences, and capturing the SMB market share that banks won’t touch.
The solution for banks to recapture the SMB lending space is to embrace technology like AI decisioning, which allows banks to compete with fintechs on speed in a smarter and safer way. Using AI in small business lending, banks can automate labor-intensive processes that slow them down and gain deeper insights that open the door to more small business customers.
In this article, we’ll break down how AI underwriting for banks can:
The small business lending market is a tremendous untapped opportunity for banks, with a $1.4T market size for small businesses that make up 43% of the USA’s GDP. Yet, less than half of small business credit needs are being met. Much of this unmet demand is due to banks’ limitations in using traditional underwriting processes that make small business lending seem overly risky.
With fragmented data and slow manual processes, banks can’t get a unified view of their applicants. This makes them unable to approve certain qualified applicants while also making it harder to catch fraudulent applicants that appear qualified. Additionally, siloed data and manual reviews make it hard to keep up with compliance and regulatory requirements. All these factors create risks that prevent banks from serving the vast, untapped small business market.
However, banks can utilize AI lending automation to mitigate the risks associated with traditional methods and unlock safe revenue streams, creating a new risk-reward balance for small business customers.
AI decisioning is transforming the loan origination process from slow and manual to fast, automated, and intelligent. Modern AI lending tools automate each step of the underwriting and decisioning process, providing lenders with instant, comprehensive views of borrower creditworthiness.
Here’s how the speed, consistency, and scalability of AI decisioning can transform the loan origination process for banks:
Manual origination and underwriting processes are notoriously slow, making them ripe for disruption by AI. Automated systems now handle tasks like document collection, data extraction, and initial credit assessments. By eliminating manual workflows, banks can dramatically reduce decisioning time.
According to a McKinsey study on AI in banking, banks using AI systems to prepare credit memos (a summary of why a customer needs a loan and if they qualify) saw 20% to 60% higher analyst productivity and an average of 30% faster decision-making.
Manual underwriting can lead to inconsistent outcomes for similar borrowers due to human error and biases. Additionally, siloed data with inconsistent formatting can make it challenging to weigh data from different sources equally.
AI systems thoroughly and quickly analyze thousands of data points to create more complete and accurate risk profiles than traditional models. Every application is evaluated using the same data-driven criteria, free from bias. Outcomes are consistent and reliable, enabling lenders to build a stronger portfolio over time. Additionally, data is in a standardized format, and all steps are documented with comprehensive audit trails for regulatory compliance.
Manual decisioning is a time-intensive process, which is another reason that banks don’t target the small business market–they simply don’t have the time. AI-driven loan origination unlocks the smaller end of the market by enabling banks to scale the number of applications they can process. According to V7 Labs, banks using AI underwriting software handle 3-4x more loan volume per underwriter.
Not only that, but they are also able to make smarter decisions with better risk assessments in a broader pool of borrowers. The efficiency of AI decisioning changes the risk-reward balance and opens the door to cost-effective SMB lending at scale.
Decisioneer by Rapid Finance is an AI loan origination platform that accelerates decisioning, streamlines workflows, and elevates the small business customer experience. Lenders use Decisioneer to unlock the speed, consistency, and scalability needed to serve the massive small business lending market.
AI lending tools aren’t just about lending smarter; they’re equally powerful at protecting against ever-evolving fraud. The urgency in fraud prevention has never been stronger, especially in SMB lending, where fraud has increased by around 14% per year, and 64% of lenders are expecting the problem to worsen. Traditional rules-based fraud detection systems are often too slow and rigid to keep up with the fast rates of change in digital fraud.
AI-powered fraud prevention platforms go beyond traditional fraud checks. They can analyze millions of data points across multiple sources against applicant information to detect subtle patterns and relationships. This higher-level detection can more easily signal fraud rings or lone fraudsters repeatedly attempting to defraud a bank.
AI lending automation tools that incorporate fraud prevention give banks two significant benefits: accelerating lending workflows and safeguarding portfolios against fraud. Banks can confidently grow their loan portfolios faster, without taking on additional risk.
Lynx by Rapid Finance enables lenders to use AI-powered fraud protection to detect and take action against fraudsters proactively. Lynx offers protection against ever-evolving threats with customizable rules for different loan types, applicant profiles, and risk threats. It produces comprehensive customer profiles and provides real-time insights and robust fraud detection capabilities.
AI has already fundamentally reshaped the lending industry. Today, cutting-edge platforms enable banks to overcome the limitations of manual underwriting and scalability issues. Finally, qualified small businesses are starting to see more financing options. Much of this is due to lenders using AI to grow their portfolios in a way that smartly balances risk and reward.
AI lending tools are the key to meeting the unmet demand for small business capital. Banks can now achieve unprecedented scalability and approve more loans to qualified applicants without adding risk. AI underwriting and fraud prevention is the start of a golden era, not just for banks, but for the countless legitimate small businesses that are hungry for growth.
But digital, AI-based loan decisioning is not just ‘nice to have’; it’s on the way to becoming a requirement for banks. Customer expectations are already starting to shift towards faster, smoother experiences, and manual underwriting cannot provide that.
Soon, businesses of all sizes (not just small) will expect the speed and convenience that AI-powered lending provides. By embracing AI lending, banks are not just modernizing operations but future-proofing their revenue streams.
Ready to start your AI-powered lending journey? Schedule a demo to see how Decisioneer + Lynx can unlock small business lending scalability without adding risk to your portfolio.
Just want to learn more? Read our whitepaper on how AI in lending, combined with network insights and data automation, speeds up the lending process while reducing fraud.