Fintechs, banks and builders as a funding triad for home projects

With many people spending more time at home, they are seeing the need to spruce up kitchens, bathrooms, paint and more – more than half of homeowners have taken on a home improvement project, according to recent data by the Consumer Specialists.

How can banks ensure they are leading loan activity for these transactions and competing against finance companies to gain market share?

Traditional methods of home improvement lending have changed. COVID-19 has led many lenders to pull back on home equity lines of credit and cash-out refinancings, which has created a void for consumers in desperate need of financing and a roadblock to growth for home contractors.

Banks and fintechs winning in the home improvement space are working together to provide more accessible financing to consumers. The combination works when a fintech partner can embed the bank into the customer experience of a home improvement project, lowering the customer acquisition cost for the bank and reducing friction for the consumer.

A big reason banks aren’t already top of mind for consumers for home improvement lending is their inability to reach customers where they are to service their smaller needs. The cost to acquire lower dollar loan amounts, especially in this very low interest rate environment, can be difficult for banks to justify. A fintech partner can help bridge that gap, enabling banks acquire customers at a much lower cost.This new bridge to customer connections is even more valuable as customers continue to shift to fully digital banking relationships. In the last five years, the FDIC reports a decline of more than 6,500 bank branches, which have been closing at a steady rate each year. That trend may accelerate due to the pandemic, as social distancing has driven growing demand for digital services and banking, and banks have proven they can operate with some staff working remotely.

Just as financial institutions have leveraged online and mobile banking to reduce frictions for customers in the past, the future will see banks leveraging fintechs to embed financial services into the daily activities of customers to enhance experiences and touchpoints further.

However, the pandemic brings yet another challenge to lending: measuring creditworthiness. The way consumers would have secured funds for materials and services related to contractor-led projects has changed, and now the challenge is to introduce them to an even faster, more secure and more efficient way of getting a loan.

Fintechs are leveraging alternative data, machine learning and AI to make more informed decisions on a borrower’s creditworthiness than a bank typically would with simple FICO decisioning. With introductions of new technology in credit decisioning, fraud detection, and payments, loan approvals and funding can happen instantly.

Take this consumer scenario for example: Bob wants to get his kids out the house during the pandemic. He thinks creating an outdoor living space, with a new deck and covered patio, would be a welcome addition, so he contacts his local contractor. After costs are estimated, Bob must decide how he would like to pay. Ten years ago, he may have visited his local bank. Now, he chooses to apply online for a loan from a third-party finance company he has never heard of before. He gets the loan, but it isn’t an embedded experience.

Now embed the fintech/bank/contractor triad into Bob’s experience. The contractor could present him with a digital self-service process to manage the full experience, from application to funding that would take him minutes to complete. Within a matter of minutes, he would know if he was approved, the amount of the loan, interest rate and other details of the loan. And the home contractor wins, too, because Bob can only spend his line of credit with their business, which helps drive demand for their services.

Fintech’s role in the triad does not compete with the bank, but rather acts as a vehicle for businesses to offer point-of-need financing to their consumers, backed by a network of lenders ready to finance that need. This offers a more modern approach to lending that generates a smoother experience for all involved parties. It’s a strategy for how to win over relationships in the booming home improvement space and generate new revenue opportunities.

Chris Johnson is the head of bank relations and compliance at Artis Technologies.

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