Small banks are increasingly outsourcing the job of originating consumer loans, trading face-to-face customer contact for high-tech service.
The trend has taken off recently, spurred by competition from bigger banks. Last year outsourcers handled 2.7 million noncard, nonmortgage loan applications for depository institutions of all sizes, according to Michael J. McEvoy, senior analyst at Tower Group in Newton, Mass. He projects 55% growth this year and an average of 40% thereafter through 2002-to about 16 million applications that year.
The cost to the lenders was $91.2 million last year, Mr. McEvoy said, and will reach $220 million in 2000.
The great bulk of these originations will be handled for commercial banks, savings and loans, and credit unions with $300 million to $10 billion of assets, he said.
Reliance Bancorp. of Garden City, N.Y. is considering hiring AnyTime Access Inc. of Sacramento, Calif., to take over such originations. With the help it could "offer convenient 24-hour, seven-day-a-week service with no investment in technology and staff," said Paul Hagan, senior vice president and chief financial officer of the $2.2 billion-asset company's RelianceFederal Savings Bank.
Typically, outsourcers like AnyTime Access operate inbound call centers, answering calls as if they had been received by the lending institution. Outsourcers may make loan decisions on behalf of the bank, using its criteria, or may transmit the applications to the bank for processing.
The loss of direct contact with the loan applicant is a cause of anxiety, though, Mr. McEvoy said. The moment of applying for a loan "is a critical time," he said. "The applicant can be a new customer, and a lot of institutions are uneasy about outsourcing that part of the relationship."
But some are finding ways to combine outsourcing and personal interaction.
First Northern Bank of Dixon, Calif., signed a contract with AnyTime Access this month. Donald Fish, senior vice president of the bank, said that because of "concern about losing the face-to-face contact at the point of application," First Northern made sure its own bankers would close the loans-at bank branches.
"Our belief is that since the branches are closing the loans, they can do cross-selling and firm up the relationship at that time," Mr. Fish said.
He added that outsourcing can let loan officers at the $300 million- asset bank concentrate on more profitable businesses, such as corporate loans.
Other bankers noted that many customers prefer to apply for loans over the telephone, because it saves them a trip to the branch.
The increase in nonbranch originations may have less to do with the availability of outsourcing than with the rise of nonbranch delivery channels.
"Larger banks have lots of access channels"-like the Internet and call centers to originate loans-"that smaller banks can't afford," Mr. McEvoy said. "Outsourcing is a way of accessing those emerging distribution channels. It levels the playing field."
Outsourcing can double or triple a smaller institution's loan volume, he said.
Lowell G. Middleton is betting on growth in the business. Mr. Middleton left his executive vice presidency at BankAmerica Corp. in 1995 to start Outsource Financial Services, Phoenix. The company will soon open a loan origination center equipped with software from Credit Management Solutions Inc. and staffed by loan officers with an average of 20 years of lending experience.
Other outsourcers offer different kinds of services.
At Bisys Creative Solutions, a subsidiary of Bisys Group Inc. of Little Falls, N.J., consumers enter credit information into an automated system rather than speaking with operators.
At AnyTime Access and at Lending Solutions Inc. of Elgin, Ill., applicants talk to operators.
And Electronic Data Systems Corp. does not deal with customers at all; rather, banks transmit loan information to the Plano, Tex.-based company for processing.
Costs vary, but many banks pay a monthly charge plus a per-application fee. Cape Cod Bank and Trust Co. in Massachusetts, for instance, pays Bisys $420 a month plus $2.63 per credit report.
