Introduction
Lending is built on data, which means that if you can’t trust what you’re being given your entire operation will be on shaky ground. Unfortunately, many lenders and other financial institutions find themselves in this position for one reason for another. It’s called shadow accounting, and it’s when teams within a financial institution keep a separate set of records alongside their official accounting or reporting system. This is usually because they can’t access, don’t trust, or can’t verify the accuracy of what’s on the primary system.
In financial services, shadow fund accounting takes the form of investment fund managers maintaining parallel books to verify a third-party administrator’s calculations. Individuals and teams also may track their own data because the primary systems they use are error-prone, deliver data too slowly, or are too opaque. For lending operations, borrowers may practice shadow accounting by keeping their own manual payment logs. Lenders also partake in this practice by maintaining spreadsheets because they aren’t getting the real-time data they need from their loan management systems.
Whatever form it takes, shadow accounting is a symptom that indicates something is seriously wrong with the foundation of data financial institutions rely on to make decisions. Vergent LMS was built specifically to address the conditions that lead to this practice, including opacity, manual processes, and unreliable data outputs. With more than 160 years of combined lending experience, the team at Vergent knows the limitations of legacy lending systems and develops solutions aimed at overcoming them.
When Borrowers Stop Trusting Your Numbers — Shadow Accounting in Consumer Lending
Some borrowers keep their own records out of a sense of responsibility, but many others do so because they don’t feel like they can trust their lenders. This happens when they receive statements that are confusing, inconsistent, or otherwise difficult to reconcile with their own experiences. They keep their own records as a means of protecting themselves against disputed charges, tracking payoff progress, or preparing for a conflict with the lender.
Borrowers who engage in shadow accounting are an early warning sign for CFPB complaints, BBB disputes, and enhanced regulatory examiner scrutiny. Every complaint means borrowers essentially have to become their own accountants to understand the terms of their loans. Lenders who continue to use manual processes or legacy loan servicing systems are at disproportionate risk due to the higher instances of batch-processing statement delays, late payment postings, and inconsistent fee applications. All of these erode borrower confidence and lead directly to the creation of shadow records.
One of the most important features of Vergent LMS is its multi-channel borrower communication system. This enables the automated, timely, and accurate delivery of statements via email, text, and phone. It serves to close the communication gaps that drive borrowers to create their own parallel records in the first place.
The Productivity Drain Hiding in Plain Sight — Why Your Staff Are Building Shadow Systems
Shadow accounting isn’t only a risk to the lender-borrower relationship. It also creates issues internally when lenders don’t have the proper infrastructure for loan management. When systems don’t provide real-time, accessible data, branch managers, analysts, and operations staff may fill their gaps on their own. This means each department may have its own set of spreadsheets through which the bulk of the work gets done, creating an organization-wide problem that can bog down every aspect of loan management.
Finance professionals can spend as much as 80% of their time on reporting and manual transactions, which means any productivity cost due to shadow accounting compounds at scale. The hours staff spend on keeping shadow records are a direct operational loss that could be redirected to customer service, loan production, and/or risk management. It also creates audit and compliance exposure, because regulators who find staff members making decisions based on their own records instead of the official system of record have serious doubts about the organization’s data integrity and internal controls.
Vergent LMS is built to prevent these risks. With more than 400 configurable reports and real-time visibility into portfolios, it delivers access to accurate, up-to-date information and eliminates the conditions that drive employees to practice shadow accounting.
What Makes Shadow Accounting Inevitable — and the Root Causes Lenders Can Actually Fix
Distrust in the primary system is the leading cause of shadow accounting. Most legacy systems operate on batch processing models and overnight work instead of continually updated data streams. This means practically all decisions are made using outdated information, forcing borrowers and employees to keep their own records. This also leads to data silos in departments that prevent a single unified view from coming into focus. Parallel records and redundant work become the norm. Built on the more than 160 years of combined lending experience of its creators, Vergent overcomes these root-cause failures. It provides real-time data access, unified origination-to-servicing workflows, and automated reporting to close the information gaps.
What Shadow Accounting Is Really Costing Your Lending Operation
Shadow accounting leads to duplicated work, added reconciliation time, and decisions made based on inaccurate data. Poor data quality on its own can cost a financial institution an average of $12.9 million each year, and the drag from shadow accounting can cost lenders with multiple branches or high loan volume even more.
On top of the raw cost it represents, shadow accounting also introduces unnecessary and elevated compliance risks. It also can result in a loss of talent and institutional knowledge, as experienced staff forced to keep their own records become disengaged and move on, taking their knowledge with them.
Vergent’s platform is SOC 1, 2, and 3 certified, providing configurable compliance workflows and a complete audit trail. This ensures official system data is the accurate, real-time system of record, which cuts down on regulatory exposure.
How Real-Time Loan Management Eliminates Shadow Accounting at the Source
To eliminate shadow accounting from your lending operation, the root causes need to be addressed. You need to provide accurate real-time data to borrowers and staff, transparent borrower communications, and a single system of record for the full loan lifecycle from origination through payoff.
Vergent’s end-to-end loan management solution combines origination, servicing, collections, and analytics on a single configurable system that features more than 80 integrations. Real-time portfolio reporting gives your teams instant access to the data they need in the moment, making spreadsheet workarounds unnecessary. The Vergent platform gives lenders and borrowers needed clarity to make shadow accounting a solvable problem, rather than a permanent condition.
7 Things to Look for in a Loan Platform That Makes Shadow Accounting Obsolete
When looking for a loan platform that can alleviate concerns about shadow accounting, lenders should look for one that provides the following:
- Real-time data access
- Deep and configurable reporting
- Multi-channel borrower communication
- Unified coverage of the full loan lifecycle
- Reporting depth
- Integration breadth
- Security and compliance certifications
Fortunately, Vergent LMS provides all of this and more. Our platform offers more than 200 configurable, ad-hoc reports available on demand or on automated schedules. It also includes more than 80 pre-built integrations with Plaid, Experian, Equifax, and others to eliminate manual data bridging. In addition, it features SOC 1, 2, and 3 certifications to ensure it serves as an authoritative system of record that stands up to regulatory scrutiny.
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