Get ready to challenge conventional wisdom as we plunge into the timeless dilemma: To build or to buy a Loan Origination System (LOS)? We'll dissect the advantages and drawbacks of each route, weighing critical factors like cost, speed-to-market, adaptability, and scalability.
The Million Dollar Question for Lenders!
Many prominent lenders encounter a crucial decision regarding their loan origination software (LOS): whether to persist with a tailor-made solution crafted to align precisely with their distinctive business needs or to embrace an out-of-the-box solution readily available in the market.
A bespoke LOS offers the advantage of aligning precisely with the lender's workflows, processes, and specific requirements, accommodating intricate needs and unique business rules. However, such customization typically demands a significant investment in development, maintenance, and ongoing support. Conversely, off-the-shelf solutions provide standardized features, potentially necessitating adjustments to the lender's processes to fit within the software's parameters.
For businesses utilizing off-the-shelf loan origination systems, the imperative for a customized solution becomes increasingly evident at a certain juncture. But precisely when does this critical threshold emerge?
Buy - Why do Lenders prefer an Off-The-Shelf LOS?
1. Faster Time-To-Market
A pre-built loan origination solution designed for specific applications and use cases requires minimal implementation time. Often, it can be readily deployed almost instantly; simply install and launch like any SaaS product, and enterprises are ready to enter the market. There are no delays or waiting periods; it's a quick setup and go. This time-saving aspect can lead to a faster return on investment (ROI), which is crucial when seeking investments.
However, the benefits seem promising only at a surface level. While out-of-the-box loan origination systems are ideal for new and smaller businesses with straightforward processes, they present particular challenges for growing or innovative companies seeking more customization. Overcoming these challenges often necessitates transitioning to a custom solution.
2. Industry Best Practices
LOS vendors leverage industry expertise and best practices to develop their solutions, ensuring that banks benefit from proven methodologies and compliance standards. By purchasing an LOS, banks gain access to a wealth of knowledge and resources that help streamline their loan origination processes and mitigate risk.
3. Ongoing Support and Updates
LOS vendors provide dedicated support and regular updates to their systems, ensuring that banks remain equipped with the latest features, security patches, and regulatory compliance enhancements. This ongoing support minimizes downtime, enhances system reliability, and enables banks to focus on their core business objectives.
What factors determine the custom building of LOS?
1. Unique Risk Assessment Criteria
It involves analysing factors such as Financial history, Credit Score, Income Stability, debt outstanding levels and repayment behaviour to make informed lending decisions. Effective risk assessment criteria empowers organizations to manage their credit portfolios prudently and minimize potential losses.
Examination of financial statements viz., Balance Sheet, Income Statements and Cash Flow Statements gives valuable insights into a borrower’s financial health. Key metrics viz., liquidity ratios, leverage ratios and profitability indicators helps assess borrowers stability and repayment capacity.
The Risk assessment criteria vary between financial institutions on following aspects:
• Risk Appetite and Tolerance
• Business Model and Activities
• Regulatory Environment
• Size and Complexity
• Internal Policies and practices
The key is for each institution to have tailor made Loan Origination System with its risk assessment framework to align with its unique circumstances, business model, and strategic objectives while meeting regulatory requirements.
2. Unique Processes & Strategies
The Indian economy is experiencing rapid growth with consumption levels estimated to reach ₹224 lakh crore by 2026. There is a huge demand for credit from households across all income levels. There still remains a disparity between the credit demand and credit supply.
Digital lending in India is still in its early stages compared to traditional lending but is expanding swiftly. The total value of digital lending during FY’23 is ₹92,848 Crore with a total volume of 72.6 Million loans as per recent report by FinTech Association for Consumer Empowerment (FACE).
There are various unique factors specific to India—including socio-economic conditions, demographics and surge in credit demand—that are propelling the growth for Credit.
It is imperative to have unique processes and strategies that aligns with the existing business models with a focus on increasing scale and profitability.
Custom built Loan Origination Systems can help in mitigating ecosystem challenges and build business models of future with an inclination towards innovative disruption. It enables configurability for workflows, rules, policies, features, the decision engine. It enhances financial institutions’ ability to scale their operations without degrading their quality of processes or decisioning.
3. Total Cost of Ownership (TCO)
The costs associated with buying software can escalate significantly especially if the vendor increases licence fees or introduce updated version with premium features with additional costs.
Furthermore, depending on a third-party vendor for essential software functions means you're subject to their pricing structure and business decisions. Custom software development offers ownership and control over your solution, liberating you from vendor lock-in and enabling you to allocate your budget more effectively.
While the upfront cost of building a LOS may be higher than buying an off-the-shelf solution, over the long term, the total cost of ownership (including maintenance, upgrades, and licensing fees) might be lower for a custom-built system.
Although commercial-off-the-shelf solutions often include support and maintenance services, these can be limited. Specific customizations or modifications may incur additional charges or may not be feasible at all. Custom developed Loan Origination System, on the other hand, provides dedicated support and maintenance from the development team. They possess an in-depth understanding of your solution, enabling them to address issues promptly and provide ongoing support customized to your specific needs. This approach reduces downtime, ensures seamless operations, and eliminates unexpected support costs.
4. Full Control when Organization Growth and Requirements increase
Building an LOS from scratch allows for greater scalability and flexibility as your organization grows and requirements evolve. You have full control over the architecture and can adapt it to changing business needs without being dependent on external vendors.
Off the Shelf LOS are often designed to serve a wide range of users in financial institutions, making customization and adaptation to specific product or business lending needs challenging. As your company evolves, scalability and flexibility limitations may become apparent with these solutions.
In contrast, Loan Origination System development provides scalability and adaptability advantages. It enables you to create a solution that can expand with your business, integrating new features, integrations, and functionalities as your requirements evolve. This approach eliminates hidden costs associated with future software replacements or upgrades.
5. Integration requirements with existing internal systems
LOS often face challenges when it comes to seamless integration with your current infrastructure. This can result in the need for additional resources, time, and effort to bridge compatibility gaps. Ultimately, integration issues can lead to data inconsistencies, decreased productivity, and higher implementation and maintenance costs.
Custom built LOS presents a compelling alternative by enabling the creation of a solution from the ground up with integration as a central focus. By developing bespoke software tailored to your specific needs and existing infrastructure, you can ensure seamless compatibility and minimize the associated costs and complexities of integration.
Custom built LOS is designed with a clear understanding of your organization's unique systems and processes. This allows for a strategic integration approach that aligns seamlessly with your existing infrastructure, minimizing disruptions and ensuring data consistency.
Custom built LOS can be designed to accommodate future growth and changes in your business. This scalability ensures that your integrated systems can evolve alongside your organization without major overhauls or compatibility challenges. If your LOS needs to seamlessly integrate with existing internal systems (such as accounting, CRM, or risk management platforms), a custom-built solution might be more suitable. This ensures smoother data flow and avoids compatibility issues.
6. Greater control and compliance
Developing a custom Loan Origination System offers convenience, efficiency, and innovation, but it also entails substantial responsibilities in terms of compliance with regulations and standards.
Ensuring adherence to regulations and compliance standards is not merely optional; it is essential. Despite this, some may be tempted to take shortcuts or overlook compliance requirements in pursuit of short-term gains. However, the repercussions of such negligence can be profound and severe, impacting not only the financial well-being of businesses but also their reputation and legal standing.
Custom-built Loan Origination Systems (LOS) can be designed to integrate seamlessly with compliance-related APIs, which play a critical role in maintaining regulatory compliance and staying abreast of evolving requirements. These compliance-related APIs offer real-time access to regulatory updates, ensuring that the LOS remains current and aligned with the latest standards and guidelines. By leveraging these APIs, organizations can automate compliance checks, monitor regulatory changes, and implement necessary adjustments promptly.
7. Utilisation of inhouse development team
Utilizing an in-house development team for custom building a Loan Origination System (LOS) can offer several advantages and considerations for lenders looking to tailor their software solutions to specific business needs.
One of the primary advantages of using an in-house development team is the level of control and customization it provides. The team can design the LOS from the ground up, ensuring that it aligns perfectly with the lender's workflows, processes, and unique business requirements. This customization allows for flexibility in accommodating complex lending scenarios and evolving regulatory demands.
The development team can quickly address emerging requirements and refine features based on user experiences. This agile approach ensures that the LOS remains aligned with evolving business strategies and market dynamics.
The in-house development team possesses deep domain knowledge of the lender's business operations and lending practices. They understand the intricacies of loan origination processes and can incorporate industry-specific best practices into the software design. This expertise enables the team to develop a robust and efficient LOS tailored to the lender's specific needs.
In a Nutshell- The Comparison Table
Begin your LOS Development Journey with Wizergos Low-Code! Low-Code emerges as an invaluable tool for constructing your Loan Origination System (LOS), offering a rapid development environment that empowers organizations to swiftly build and customize LOS solutions with minimal coding expertise, thereby accelerating time-to-market and fostering innovation in the lending landscape.
Author
Sudapalli Jaya Prasad Rao
Vice President - BFSI, Wizergos
For a conversation on how you can begin your LOS Development Journey, reach out to:
Sandeep Sharma
Vice President- Business Development
+91-7045403638
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