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How to grow confidence in growing loans

Jan 14, 2020 / Consumer Banking

Almost by default, large legacy financial services organizations still command the strongest hand when it comes to consumer lending.

It often boils down to the fact that those large organizations — by a nearly 3-to-1 margin — are considered a consumer’s primary financial services provider. BAI Banking Outlook: Trends in 2020, a recent BAI survey of consumers who use both a traditional bank and a direct bank, found that 52 percent still consider a large traditional bank to be their primary institution versus only 19 percent who consider their direct bank to be their primary institution. Regional banks, community banks and credit unions constituted the rest.

But traditional financial services providers should not take their primacy for granted because direct banks are outperforming them on technology and innovation. According to McKinsey’s 2019 Global Banking Annual Review, traditional banks have earmarked 35 percent of their IT budgets for innovation and reinvention. By contrast, fintechs are setting aside 70 percent of their IT budgets for innovation.

Loan processes at direct banks are often quicker and more convenient. Customers are noticing. For example, in the BAI Banking Outlook on Direct Banks, 47 percent of consumers said direct banks have cutting-edge technology versus only 13 percent who thought the same of traditional banks. By a similar margin, 46 percent said direct banks had better apps versus 14 percent who said traditional banks hold the edge.

Traditional financial services providers, hamstrung by their stove-piped legacy systems, need to improve their lending processes in 2020, particularly when there’s an economic tailwind at the backs of all lenders.

While trade issues and the possibility of a slowing economy have raised some concerns, consumers in this era of full employment have jobs and still remain confident about spending and borrowing. 

But it’s the fintechs and the direct banks that have been driving the recent growth in consumer lending. Their consumer loan growth rates are higher than the consumer loan growth rates of the larger, more traditional providers, although the direct banks’ lending base is much smaller. The neobanks have been aggressively collecting deposits in recent years, and they’re now increasingly eager to lend.

Personal loans have become a strong suit for the direct banks, thanks to the sharp growth in online loans. Personal loan balances in 2018 grew to a record $138 billion — an increase of $21 billion over the previous year, according to a research report by TransUnion, the credit reporting agency. Direct banks originated 38 percent of all unsecured personal loan balances, up from only 5 percent five years ago.

Meanwhile, banks’ share of personal loans fell to 28 percent in 2018, down from 40 percent five years earlier. And credit unions’ share of personal loans fell 10 percentage points to 21 percent during the five-year period. Consumers use personal loans, often less than $10,000, to help pay for debt consolidation, home improvements, vacations and the like.

Loan competition will intensify in 2020 as consumers continue unbundling products offered by their primary financial services organizations as they seek best-of-breed offerings in the financial services marketplace. Bankers’ relationships with their customers are no longer as sticky. Consumers may be content to keep their deposits such as checking and savings accounts, CDs and money market accounts in their primary institutions, but they’re now more apt to look elsewhere for credit products.

That point is underscored by BAI Banking Outlook: Trends in 2020 research that finds that 32 percent of consumers plan to give all of their future deposits to their primary financial services organization. But only 18 percent of the consumers say they plan to give all of their future loan business to their primary institutions. That gap suggests traditional institutions have room for loan growth by improving technology and better leveraging the relationships they have with their depositors.

Here are three key steps traditional financial services organizations can take to drive organic loan growth, which bankers identified as a top-three business challenge in 2020, according to the BAI 2020 Outlook.

1. Simplify the loan process. Because many financial services organizations have yet to sufficiently streamline their omnichannel experience, customers often feel like they’re starting over each time they apply for a new product at their primary financial services organization. That’s not how a loyal customer should be treated. In the digital era, it goes without saying that a loan application should be mobile friendly. Consumers should be able to complete a loan application in a channel different from the one in which they started it. To help applicants along, for example, provide an on-screen progress bar, and let them return later to complete the task. Far too many loan applicants abandon the process because of a negative customer experience. 

2. Integrate customer data systems. Too often, a financial services organization’s deposits system is separate from its loan system, as well as from other operational systems like risk and compliance. By combining the systems, customer data and intelligence is centralized, allowing for the frictionless authentication of loan applicants across all products and channels. A centralized data system provides a broader view of the customer base and the ability to recognize and leverage trends.

3. Convert more depositors into borrowers. As noted in the BAI Banking Outlook research, there’s a substantial gap in the percentage of customers who say they plan to put all of their future deposits in their primary financial services organization versus those who say they plan to give all of their future loan business to that organization. Financial services providers should not assume that because they are their customer’s primary institution that the customer will approach them for a loan. Consumers now have a wealth of new loan options beyond their primary financial services organization. Rather than become complacent about their primacy, financial services leaders should close the gap by more aggressively leveraging their inherent advantage and continuously innovate and market new credit products that offer a positive customer experience.

The key to loan growth in 2020 and beyond is simplicity. Make the investments in technology to integrate customer data from disparate systems. Reducing the friction will create a better online loan experience. Financial services providers’ frustrations will be reduced as well. They will finally have a 360-degree view of the customer, enhancing the ability to take full advantage of their primacy.

Karl Dahlgren is managing director of BAI.

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