Navigating risk management in lending: Trends, challenges, and solutions 

Navigating-risk-management-in-the-lending-landscape

 Alain Cauwenberghs, Markaaz’s Chief Growth Officer, discusses lenders’ risk management challenges and the KYB solutions that can combat fraud and protect customers.

In the current financial landscape, banks and lenders are facing unprecedented new challenges. Inflation is an ongoing issue, default risk is on the rise, and lenders are feeling skittish. 

What does this mean for those wielding the loan approval stamp? Stricter risk evaluation and more demanding Know Your Business (KYB) verification procedures. 

As a result, it’s harder to approve loan applications. That winning startup with great financials and a promising future? Sorry, but a subpar credit rating and minor record inconsistencies won’t cut it. Strict verification processes mean even responsible loan applicants can get auto rejected. 

So how can banks and lenders find more effective ways to verify legitimate customers

New challenges in the banking and lending industry 

Regulations worldwide are tightening, and financial institutions are swallowing the cost. A growing population means more customers, but budget cuts mean less staff. Loan approvals remain a key hurdle, and SMB loan demand is growing.  

For small businesses relying on loans to fund their operations, expand their business, or invest in new ventures, rising interest rates could restrict access to capital. Lenders, too, are struggling, as the risk landscape becomes more treacherous. Minimizing exposure to risk is now a key challenge.  

Here, we investigate these challenges and some solutions that banks and lenders can enact to expand operations without compromising the accuracy of their approvals: 

Difficulty in qualifying for loans

The main issue that small businesses now face is loan approval. As interest rates increase, the cost of borrowing rises. The result is more expensive loans and stricter lending criteria. Lenders are so cautious when considering loan applications that rejection rates are skyrocketing. Subsequently, SMBs with modest credit ratings or limited collateral can’t get the approval they need. 

Lender risk exposure 

On the flip side, lenders are facing a growing risk of defaults and fraud. Higher interest rates make it harder for SMBs to meet their debt obligations. Some borrowers even resort to fraud to get the loans they need to keep operating. Lenders must adopt stricter risk assessment measures to mitigate these risks. While doing so, they must not compromise the approval of legitimate applications. 

Optimizing access to capital

Initiatives like government-backed loans are already helping small businesses, but lenders can also adopt ways to optimize the approval process. Open banking protocols are critical in helping financial institutions share information that can accelerate approvals. Educating customers about risk thresholds is another way that lenders can improve the frequency of application approvals. 

Adopting third-party digital solutions

Digital verification solutions that automate KYB procedures show promise in streamlining approvals. In particular, big data and artificial intelligence (AI) are key areas of focus. When used together, they can rapidly verify large quantities of disparate data with a high degree of accuracy. 

Mitigate rising interest rates 

As the Federal Reserve and global banks raise interest rates, borrowing costs increase. This can hinder economic growth and hamper business expansion. In addition to using technology for approvals, lenders should consider alternative offerings like fixed-rate loans to address these rising costs. 

How risk thresholds impact SMBs  

Small businesses suffer from a variety of risk thresholds that need careful attention and monitoring. No matter how effective your approval process is, bad risk management on the part of SMBs will result in rejections. Understanding these risks and their consequences will help you better manage expectations. 

There are several things that could affect an SMB’s chances of approval: 

  • Insufficient credit history 
  • High debt-to-equity ratio 
  • Lack of collateral 
  • Reputation (negative publicity, past controversy) 
  • Legal issues 

Lenders can help educate SMBs on the risk thresholds that affect them and recommend a proactive approach to improve their risk profiles. Maintaining up-to-date records, managing cash flow, and taking steps to improve credit scores are a good start. 

SMBs must also understand the importance of reputation. They should keep close tabs on their public image and online presence. This makes them more attractive to lenders, increasing their chances of loan approval. 

The importance of accurate KYB compliance and anti-money laundering (AML) procedures for risk assessment 

KYB compliance and AML procedures are critical aspects of the lending process. 

  • With KYB, banks and lenders can confirm corporate identities to assess their legitimacy. Inaccurate KYB verification can have severe consequences, including reputational damage and lost business. 
  • KYB also plays an important role in AML, helping organizations better monitor cash flow and identify suspicious transactions. This is critical to ensure you don’t play a part in fraudulent or criminal activities. 

Lenders often reject up to 40% of applicants due to incomplete documentation. While stringent verification processes are necessary, they can reject legitimate applicants, too. This puts pressure on revenues and undercuts growth goals. An advanced KYB solution like Markaaz combines human expertise and cutting-edge technology to avoid false rejections without compromising accuracy. 

Streamlining approval with better verification

Rising interest rates make access to capital more challenging for SMBs. The imperative of accurate KYB verification further adds complexity to the process. To meet these challenges, banks and lenders need to adopt new methods to achieve their goals. 

This requires optimizing the approval process to avoid rejecting legitimate applications. Using APIs and powerful data analytics tools for automation can help assess creditworthiness more efficiently. And when combined with AI, lenders can find ways to achieve this even more rapidly.  

Don’t let risk rob you of customers

Rapid and accurate verification is no longer a foreign concept. With the right technology, banks and lenders can onboard the customers they need without the risk. Markaaz’s business verification solution leverages a massive SMB database of over 300 million businesses to provide 25% better match rates match rates. Each match attribute can be individually graded, revealing even more precisely the best possible match for your business interests.   

You can’t risk losing out on potentially profitable partnerships because of minor data inconsistencies. Markaaz helps enterprises reduce false rejections while optimizing approvals. This keeps risk at a minimum while ensuring small businesses get access to the loans they need.  

Contact us today to see how our industry-leading verification and enrichment solutions can work for you. 

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