Construction financing: responding to the crisis with customer centricity and efficiency

All-time lows in construction financing

Due to higher lending rates and great uncertainty on the real estate market, consumers remain reluctant to engage in construction financing activities. According to the latest data from the European Central Bank and the German Bundesbank, German banks’ new business in real estate loans to private households fell by 43 percent in December compared with the same period a year earlier, thus marking the fourth consecutive all-time low. In relation to the record volume of EUR 32.3 billion in March 2022, this even amounts to a decrease of almost 60 percent.^[1] And the situation is not going to improve any time soon.

The lending business is the most important source of income for around two-thirds of banks. Growing competition, technological innovations and increasingly well-informed customers are some of the causes of the increased margin and cost pressures that institutions need to withstand. This requires banks to ensure efficient operations throughout the lending process and to increase their adaptability.

Despite the challenges, the outlook is positive. Institutions can leverage their greatest untapped potential in their core business. The lending business offers numerous opportunities to increase income on a long-term basis. In sales, offers should be simplified to enable faster decision-making processes despite the individual customer approach. In operations, opportunities arise from improving efficiency in recurring processes.

Disbursement processes not in the center of attention

In recent years, many banks have already introduced measures to make their lending processes more efficient. Mostly, however, the focus has been on processes for new loans. Processes for existing loans have been neglected for years due to the large number of individual process steps. But from an institution’s point of view, this is precisely where it commits a great deal of its own resources. As a rule, 50–60 percent of all capacities of the back-office units are tied up in the handling of processes for existing business.

Against this backdrop, disbursement processes in particular are of great importance for banks, as they represent the most common processes in lending. They are particularly complex when financing new construction projects or purchasing from a real estate developer, since the financing amount is disbursed according to the progress of construction. Typically, private construction financing involves between 5 and 25 disbursement processes per financing, depending on the bank’s individual conditions. Although these processes are carried out frequently, they are often insufficiently optimized and tie unnecessary resources – both for banks and their customers.

In many institutions, sales staff conduct the first review of disbursement requirements and initiate the process on the part of the bank. The back office manually compiles lists of the disbursement progress and of still missing documents. The institutions’ core banking systems lack a sufficiently effective tool for monitoring, so checklists, activities or third-party applications remain rather inadequate. Often, the way the use of funds is monitored is also not very customer-oriented. Customers frequently need to substantiate any request for disbursement by submitting invoices, even though the supervisory authority leaves banks ample room for designing their monitoring processes.

Workflow support in complex processes: disbursement as an example

One way to improve complex processes is to reduce the number of internal interfaces and to externalize them toward the customer. This requires a thorough analysis of the contact points and the implementation of intelligent software, as can be seen with the workflow tool “Auszahlungslösung” (in English: disbursement solution), which has recently been developed to optimize disbursements. Customers can submit their disbursement requests directly on the bank’s website without having to use online banking services and receive individual push messages on the further stages of the process. The disbursement orders are then checked automatically to ensure that all conditions for disbursement have been satisfied. The amounts are then disbursed manually or (partially or fully) automatically in accordance with the bank’s individual specifications. This way, each institution can decide in view of its individual risks to what extent automation should be implemented (see Figure 1).