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For loans, banks are borrowing from the fintech playbook

This month’s BAI Executive Report outlines ways technology can help financial services providers reach the right customers with the right credit products and compete more effectively against nonbank players.

Aug 24, 2022 / Technology

For banking institutions, rising interest rates stand to be both good news and not-so-good news—wider net interest margins provide a welcome boost to profitability, while at the same time, higher borrowing costs are undercutting demand for mortgage and commercial loans. There’s also the worry that the Federal Reserve’s monetary tightening to fight inflation will trip the economy into recession, leading to more nonperforming loans and defaults.

Longer term, the trends toward greater scale and increasing competition from nonbank players are driving more focus on the cost side of doing business. Technology advances are helping on that front—including in lending, which is the theme for this month’s BAI Executive Report.

Our lead article by contributing writer Ed Lawler makes a case that banking institutions expedite their move to lending technology as a way to not only protect their NIM but also provide a more streamlined customer experience.

He spoke with several bankers and other industry watchers about how they are embracing lending technology through their websites and mobile apps. Decisions on individual loan applications can now be made in a matter of minutes, in keeping with the speed and ease-of-use standards set by fintechs.

More effective use of data underlies much of the success that banks and credit unions are having in balancing the risks and rewards of lending via a digital platform. Crunching the data can also generate rich and potentially profitable consumer insights.

Along with deepening customer connections, data can be employed to widen the pool of would-be borrowers. Some institutions are doing this by integrating “alternative data” sources into their decisioning.

Contributing writer Dawn Wotapka looks into how financial services providers are putting alt-data to work to increase loan access for the many millions of Americans who are underbanked. This is another area in which enterprising fintechs have gotten a head start, but traditional banks are beginning to catch up by considering rent- and bill-payment history, credit-card usage, checking account cash flows and other factors to help determine how much credit risk a given borrower represents.

Among those credit-invisibles are many in the leading edge of Generation Z, who are now in their early 20s and just getting situated in the working world. Banks that can develop ties with them now, while their credit files are still thin, may position themselves to build strong and lasting relationships with this demographic.

My Q&A with Rajesh Shah from Citizens Bank and Bal Shukla from Infosys digs into how lending products may be the best way to make initial inroads with both Gen Zers and millennials.

Also in this month’s Executive Report:

Digital experience vs. customer journey: Kris Frantzen from Temenos says banks should understand the distinction between loan applicants’ customer experience and their overall journey, with the latter being higher priority. In his view, optimizing the journey means balancing human knowledge with technology to minimize inefficiencies along the customer’s path to the loan decision.

Balancing consumer risk with seamless digital CX: Christina Luttrell from GBG Americas suggests that banks and credit unions focus on delivering digital lending solutions to help consumers contend with the recent spike in inflation that is outstripping wage gains. A customer-friendly loan origination process can entice borrowers, while robust identity verification can protect lenders.

Seven ways to showcase your lending strengths: Stephenie Williams from Vericast recaps lending-related findings from her company’s recent financial services trend study. Among those findings: Consumers are most open to pursuing loans and credit cards from a non-primary banking institution, so relevant and personalized offers are critical to keep them in your fold.

Solving the mortgage retention crisis: Rebecca Martin from Total Expert tells us that new lending technologies can help financial institutions keep their customers close. Using relevant data, banks can engage customers who are applying elsewhere for credit, those who have tappable home equity and more.

Easier and more accessible mortgages: Geoff Green from Salesforce writes that a digital mortgage-as-a-service platform may alleviate biases that have affected minority homebuyers as a result of redlining and the decline of minority-owned banks. Data can help create a dynamic view of a borrower’s history, and lenders in turn can make comprehensive risk assessments.

Terry Badger, CFA, is the managing editor at BAI.