Thriving in a higher-rate environment

A faster migration to digital can help financial services providers better cater to customers while protecting margins on lending products.

Rivermark Community Credit Union has no control over the rising federal funds rate or the yield on a 10-year Treasury note, both of which have a sizable impact on would-be borrowers. But the Beaverton, Oregon-based institution can control the borrowing experience of its 90,000 members with its smart use of lending technology.

“Our technology speeds the process by digitalizing the experience for our borrowers,” says Aben Hill, chief lending officer of the $1.3-billion-asset credit union. “It allows members to borrow anywhere at any time with a mobile app or on a website. An application is approved within minutes versus days or weeks.”

Teresa Blake, a partner in KPMG’s financial services practice, says the mortgage lending market is especially competitive with the entry in recent years of fintechs. “Many of our clients have developed new origination systems. They are also rethinking everything from point-of-sale to their paper-management systems to their pricing engine.”

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All the elements in a digital lending ecosystem must work in harmony—and they have to work fast to meet consumer expectations. Echoing Rivermark’s Hill, Blake says financial services organizations must not only offer competitive loans but also do so fast—almost instantly.

In a cooling lending environment, organizations need to economize. Hill says Rivermark leverages artificial intelligence and machine learning, fueled by data, to improve lending efficiency. “Data and analytics help manage pricing, making it more predictable. It manages risk more accurately because algorithms help authenticate the loan applicant.”

He adds that data helps Rivermark understand consumer buying patterns and interests. “If you have an individual interested in a mortgage, it may signal their interest in a credit card or auto loan. Analytics creates opportunities to cross-sell and get a larger share of wallet.”

Banks and credit unions that invested in their technology stack, including digital lending platforms, while interest rates were low will enjoy a competitive advantage in the higher-rate environment, Blake says.

“But banks still trying to figure out pieces of their digital journey are going to struggle,” she says. Organizations saddled with antiquated technology have a significant amount of work ahead them. So do those that have yet to migrate to the cloud and are still wrestling with a self-service strategy. Overlaying a new digital lending platform over disjointed legacy lending systems won’t solve the problem.

Simplifying the borrower’s experience is key. “Providing more self-service options and making it easier to find the right person to complete that transaction is essential,” Blake says. “Are you easy to do business with? Can I look at your mobile app or website and understand the next steps?”

AI and machine learning will advance lending efficiency, Blake says. “But we have only just skimmed the surface. Banks could be using AI in much more complex underwriting scenarios by moving from rules and logic to evaluating a borrower based on additional data and factors. Using AI in the underwriting decision allows you to look at factors beyond a borrower’s FICO score.”

Although their size and complexity may make mortgage loans seem like a tempting target for fraudsters, Blake believes the digitalization of mortgage lending does not pose extraordinary risks.

“There have been advances in the tools and ability to detect fraud. New tools can raise red flags and detect fraud, stopping suspicious account openings,” she says. “Bankers are making the initial credit decision more quickly. But on the back end, when it comes time to actually send money, controls are in place that protect the lender.”

But, she adds, “You have to be super diligent in the mortgage space not only to protect the consumer but to protect your institution from someone trying to crack the code. Technology will continue to close loopholes and outsmart the fraudsters.”

Innovation in all phases of digital lending will carry the day. “Lenders must think about their innovation strategy in the same way they think about protecting their regulatory health,” Blake says. “Innovation is critical at a time when a lot of lenders are still dealing with regulatory scrutiny. If they are innovating and thinking about products in a new and exciting way, then that is good for all of us.”

Edmund Lawler is a BAI contributing writer.

Explore ways technology can help financial services providers reach the right customers with the right credit products and compete more effectively against nonbank players in the BAI Executive Report, “Technology is pushing lending in new directions.”