Can banks compete in a digital-lending world?

When it comes to lending, competition has never been fiercer.

The traditional banks and credit unions, which once dominated the market, are increasingly battling cash-rich tech giants like Amazon, Apple and Google, not to mention nimble fintechs that got an earlier start and are rapidly expanding services. By one estimate, these innovators have a staggering 80 percent of financial services providers feeling jittery.

“Commercial banks are averse to risk and slow to innovate, but the pandemic has changed that mindset,” says Milan Bhatt, global head for healthcare, insurance and cloud at Hexaware Technologies, an automation-led service provider offering IT, BPO and consulting services.

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What should the industry do? The first step “starts with the understanding they are in the process of being disrupted,” says Rich Edwards, CEO of Mindspan Systems, a software and systems integration company.

The next step is to get moving. Here are a few tips:

Redefine the space

The traditional definition of a lender is blurring, so big tech companies and smaller startups are jumping into the game in ways that are new, different and creative, says Alex Armitage, CEO and founder of Nectarine Credit, a fintech software company managing business credit applications. “Companies can be a lender without being a bank. What this means is tech companies, for example, can offer credit terms on payments, without the headache of being a lender. All they need to do is have the buyer fill out a credit application or a quick sign-up form.”

Embrace technology

Technology is essential to staying in the game, and inaction is not an option. “Not only do customers expect efficiency and access right from their smartphone, but streamlined automation also allows lenders to scale up by processing those applications more efficiently,” says Jorge Sun, CEO and co-founder of LendingFront, an operating system powering small business credit for community banks, credit unions and others.

Segment the audience

Because many banks aren’t segmenting effectively, upstart organizations are using technology to win business, says Fred Soller, chief revenue officer of DataOceans, a technology provider for companies seeking to communicate with customers. “The passive, branch-focused approach to their customers that traditional banks and credit unions continue to follow leaves them exposed to more active and engaging disruptors,” he says. “Traditional banks and credit unions need to improve their ability to target profitable customer segments and personalize their message.”

Remember younger users

Research from BAI shows that, while older consumers prefer to open deposit accounts at physical branches, younger consumers see things differently. The segment of Generation Z are comfortable with digital banking and want service 24-7. Among millennials, 85 percent would bank with a nontraditional bank, while 79 percent have opened a deposit account online. Even baby boomers are getting on board with digital banking, at least to some degree—nearly a third of this older (but comparatively well-off) demographic have opened an account online.

Provide value

Traditional banks and credit unions are needed in a digital world, says Richard Dedor, marketing communications director of GreenState Credit Union, based in Clive, Iowa. “Data shows that . . . people want to go to a local office to conduct business,” he says. “While mobile banking adoption increased significantly in 2020, foot traffic is up and the personal touch for mortgages, auto loans and financial wellness advising continues to increase.”

Ann Martin, director of operations with CreditDonkey, a personal finance website offering reviews and tips, agrees that traditional financial services provers are far from doomed. “While they do need to get up-to-date with better websites, apps, and mobile banking, I believe there will always be a market for them.”

Whether you’re setting up a new account for a family member, cashing out a big check or pulling out change to do your laundry, there are some kinds of bank activities that are best conducted in person, she explained. “Banks and credit unions need to play up the human connection they offer and emphasize their reputations as trustworthy locations for your money.”

Dawn Wotapka is a BAI contributing writer.

Learn more about where lending opportunities lie in the BAI Executive Report “Where banks fit in the new world of lending.”