For young bankers, who likely take for granted the digital muscle behind virtually all credit decisions today, the lending process of yesteryear would seem quaint, to say the least. Once upon a time ...

Up until the mid-1980s, a customer who wanted credit came to the bank, filled out a paper application and submitted it to a loan officer. The loan officer then pulled -manually, of course -a credit report from one of the major credit bureaus (there were more than three at the time); or, if the amount sought were large enough, a report might be ordered from more than one of the bureaus.

The loan officer reviewed the bureau report, evaluated the credit risk involved and made a judgment on the loan. For the bigger loans, this initial judgment normally was subject to approval by a supervisor or perhaps a credit committee. The process would take hours at best, days quite often, and sometimes a week or more.

With the introduction of computerized credit scoring, many of these loan officers felt victimized, recalls Kevin Scollard, senior vice president of sales and marketing for Atlanta-based Visionary Systems Inc., or VSI, a major player in today's highly competitive market for outsourced credit scoring and decisioning. A banker at the time, Scollard recalls that gains in loan productivity made possible by the early applications of credit scoring led to quick acceptance throughout the industry, even among those loan officers whose egos initially were bruised.

Credit scoring was taking much of the loan officer's judgment out of the equation, but it came to be seen as very valuable, says Scollard. Eventually, of course, credit scoring led to a complete decision, with only the risk-management guys chiming in on the tolerances -that is, the criteria (or rules ) used in the scoring models.

Among the complicating factors that slowed the lending process was lack of standardization among the credit bureaus. An entire industry was born out of the stubbornness of the bureaus, Scollard says. They each had an idea of what a credit report should look like-what should be on top, what should be on the bottom, the various codes that meant various things. Their customers were telling them, 'Hey, we'd like you to do it this way,' and the bureaus said, 'Thanks, but you'll get used to it.'

Not surprisingly, a new variety of financial services vendors began to spring up, touting systems that were capable of giving you this information in the way you wanted to receive it, says Scollard.

A colleague, VSI's vice president for business development, Tim Bates, picks up the history lesson from there: You also had vendors who were coming in and adding value to the bureau reports. In addition to making them uniform, or putting them in the form their clients preferred, these companies would gather information from a number of sources, rather than just the credit bureaus. It was another example of vendors stepping in where the bureaus missed the boat.

The credit bureau industry began to evolve quickly thereafter from a regional to a national focus, adds Scollard. Consolidation proceeded apace, narrowing the field to the big three on the consumer side: Equifax Inc., Experian Inc. and Trans Union LLC. On the business side, bankers look to Dun & Bradstreet and Experian Business for bureau-type information.

Among large and midsize banks, building in-house, proprietary credit scoring capabilities became a priority.

Notes Paul Adams, executive vice president of sales and marketing for Competix Inc., a provider of customized credit scoring to banks and other lenders, These systems were especially valuable because they helped take the no-brainers-the easy grant or decline-out of the equation. That way, your senior lenders didn't have to expend time and effort on the easy ones; they could focus their attention on the close calls.

The result, Adams says, was faster and better decisions across the board, coupled with significant gains in productivity. You could make the same number of loans with fewer people; or, better yet, you could keep the same number of people and make far more loans.

Decisions on loan applications were coming more quickly as this transformation took hold, to be sure, but it was the widespread adoption of Internet technologies that led to today's hotly competitive marketplace.

Bates says steady improvements in technology, rather than some watershed in IT development, has led to today's capability of offering virtually instant credit decisions. Because customer dishonesty on applications could skew automated credit scoring systems early on, the industry moved steadily toward today's environment, in which an applicant for consumer credit is seldom asked for more than name, date of birth and Social Security number. The data on applications eventually got crowded out by the predictability and consistency of the information you could obtain from the bureaus, he said.

Mike Grossman, chief executive officer of San Mateo, CA-based LiveCapital Inc., which provides instant decisioning capabilities for business-to-business e-commerce, says the Internet gave rise to direct access to credit among the borrowers themselves. Businesses, like consumers, can now obtain a credit decision within seconds without having to visit their banks with hat in hand.

It was the Internet that made it possible to apply for and get immediate approval of credit at the point of sale, Grossman says. And you have to remember that, historically, this has not been possible. Ultimately, I expect all credit decisions will be made in real time.

Vendor offerings continue to blossom, based on a combination of increasingly sophisticated credit scoring engines and high-bandwidth Internet connectivity, as well as manifold new business models aimed at putting the same IT to work for targeted marketing and customer relationship management.

The most straightforward example of the latter, says Grossman, is the use of the technology to avoid telling an otherwise valued customer that you can't say yes to his current request. Whether the lender is a bank or corporation, applications that may not meet your requirements can be automatically put out to several lenders, vastly improving the chances that the customer won't have to go away disappointed and the seller won't lose a sale.

There are many, many organizations out there that are interested in extending the credit process, Grossman says. While some are financial institutions, we're finding that many more are Fortune 2000 companies.

Rod Williams, vice president of advanced projects for Digital Matrix Systems, says the proliferation of credit-data aggregators has created a highly competitive marketplace.

The way to differentiate yourself from other credit aggregators is simple: You add value to the data. The key is not having more data but better data. The application of state-of-the-art scoring technologies, in addition to value-added delivery of the information to clients, is fundamental in today's environment, Williams says. And here again, the capabilities are used for more than the credit decision itself.

These models, if you will, are nothing more than rules-hundreds, or even thousands, of rules within the data-and mostly, you're looking for the negatives, he says. By offering our customers the most sophisticated capabilities out there, we give them the ability to do risk-based pricing, where you may get the loan instead of a rejection, but it's going to cost you more depending on the risk characteristics these systems generate.

The growth of sub-prime lenders-and the success of many traditional lenders in moving down market profitably-can be attributed to consistent improvements in automated credit-scoring technologies, Williams says.

Visionary Systems' Scollard believes the most significant trend today is toward outsourcing of these capabilities, even among institutions that once seemed determined to keep credit scoring forever in house.

At the same time, adds Scollard, proprietary systems are still everywhere. But, we're beginning to see a big change in this mindset. For a bank, the logic associated with making a risk decision is their core competency. Who they say yes to, who they say no to...that is their life's blood.

But, in reality, they're having to make those decisions on a machine inside their building. And that does not need to be a core competency of banks.

Clinging to such a model, he says, undermines many institutions' ability to tap their credit data for marketing.

If I have some monolithic mainframe in my bank and I'm a cutting edge marketing guy who's trying to get a campaign out the door, I shouldn't have to wait until the IT department can devote the time and energy to do it. That's where outsourcing carries such value. We can turn on a dime, so the risk managers or the acquisition teams don't have to be slowed down by technology needs.

A borrower who might have been denied outright by a conservative loan officer at his local bank in the early 1980s may well find a half- dozen lenders on the Internet who are willing to do business with him today. The loan will cost more, no doubt, but chances are the decision to grant it will take no more than a New York minute.

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