If you're involved in construction lending, you already know the process functions almost the same today as it did 30 years ago. From the largest financial institutions in the world to the smallest local community banks, the origination and management of construction loans currently requires heavy loan administration staffing, duplicative data entry, complex and inconsistent spreadsheets, phone calls, emails, and even faxes. This antiquated nature of managing construction loans creates information disparity between key stakeholders and usually results in all participants operating in the dark.
The principles of transparency, simplicity, speed, reduced risk, reduced cost, and enhanced user experience are being applied to all aspects of financial services
Meanwhile, the way we experience the world is almost entirely online as digital innovation has exploded across all industries. The intersection of financial services and technology is seeing more investment than ever before as people recognize that the financial services industry is ripe for disruption. The principles of transparency, simplicity, speed, reduced risk, reduced cost, and enhanced user experience are being applied to all aspects of financial services, creating transformative businesses that have re-imagined how to solve industry problems. In fact, it’s estimated that 20-60% of annual bank profits will be at risk of disintermediation by 2025.
But what about construction lending?
Not surprisingly, construction lending has not experienced the innovation that other areas of lending have. Post Global Financial Crisis, many lenders stopped offering construction loans altogether, so the pain points experienced during the construction lending process have been far less prevalent over the last decade than those of more active areas of lending. Given that construction lending left many financial institutions teetering on the brink of failure – with some falling over the edge – it is concerning to think that these same institutions are getting back in the game without pausing to ask how it could be done better.
The irony is that construction lending could use more help from technology than most other types of lending. Increased focus on this niche is warranted not only because of its profitability as a product type for lenders, but also because of the associated credit and collateral risk that requires constant attention.
Traditional lenders have a real opportunity to remain the lifeblood of the construction industry because of their understanding of the local market and the deep relationships they have in place; however, they need help innovating to keep up with customer demands, better manage risk, maintain compliance, and capture huge operational efficiency gains. Using technology, lenders can take a historically reactive process and allow for much greater proactive management, further reducing risk for the lender and transforming the borrower experience in the process.
These two trends are on a collision course and their impending impact will be the most profound improvement the construction lending industry has seen in the past century.
After sitting on the sidelines for years, those lenders that survived the Great Recession are cautiously tiptoeing back into the profitable construction lending space to capitalize on pent-up demand. By 2025 financial institutions are expected to fuel the growth of the construction industry to $1.5 trillion in the U.S. and $15 trillion worldwide.
Whether you’re a lender, a homebuilder, a commercial developer, or, simply someone paying attention to the headlines, two important events are currently taking place that will change everything about the way the world is built: Capital for construction is becoming more readily available, and, as Marc Andreessen famously stated, “software is eating the world.” These two trends are on a collision course and their impending impact will be the most profound improvement the construction lending industry has seen in the past century.
Financial institutions will be able to leverage the power of technology to make better decisions, mitigate risk, simplify and expedite processes and improve the client experience.
By embracing the collision of these two worlds, we can look forward to letting the old ways of construction lending die along with the unnecessary risk and inefficiency those poor practices created. Financial institutions will be able to leverage the power of technology to make better decisions, mitigate risk, simplify and expedite processes and improve the client experience.
How many of us would still work with our bank if they hadn’t adopted online or mobile banking? Are lenders investing enough into the future of construction lending to ensure that they don’t repeat the mistakes of the past and get left behind?
This is part one of a three-part “Changing The Way The World Is Built” series. Part two further explores the impact of technology on construction lenders. Part three further explores the impact on borrowers and builders.