The coronavirus pandemic has impacted every aspect of financial services, moving transactions to digital platforms, and forcing organizations to rethink back-office processes that have been in place for decades. While disruptive to ‘business as usual,’ this transformation has modernized outdated products, policies, and procedures while improving the customer experience.
Leveraging new forms of data, advanced analytics, and modern technology, financial institutions of all sizes can reduce the cost of delivering products and services and serve a much more comprehensive array of consumers with innovative products and services. In no product area is this more evident than in digital lending.
In a post-COVID world, financial institutions must deliver innovative credit options, on-demand, in an almost instantaneous manner (think POS microcredit offers). To accomplish this feat – which had previously only been offered by fintech firms – traditional financial institutions will need to rethink back-office processes that currently hinder the speed to deliver digital credit.
The most significant opportunity to build a lending portfolio in the near future will be to move beyond the support of consumers buying cars, houses, vacations, and appliances to supporting everyday needs as people just want to make ends meet. This will require the rethinking of everything from an organization’s origination process, to credit checks, to the operation of approvals, focusing on being able to use data to reduce costs, improve speed and expand the potential marketplace.
This year’s Digital Lending and Account Opening research, sponsored by MeridianLink found that the ability to apply for a loan online has increased, but the banking industry isn’t keeping up with consumer expectations or fintech capabilities. Less than half of banks and credit unions allow end-to-end loan application on a mobile device, even though COVID greatly accelerated consumer demand for digital service.
The timing of this year’s report provides a perspective on all that has changed as a result of COVID and how much still needs to be done by an industry that has dragged its collective feet for decades in providing credit across demographics at the time of need. The research conducted by the Digital Banking Report has enabled us to create benchmarking of the expansion of digital lending solutions in banking and understand the consumer’s impact better.
I was very fortunate to be granted an exclusive interview with Christopher Maloof, chief product officer at MeridianLink, as part of the Banking Transformed podcast. His perspective on the results of this year’s research is a great overview on what banks and credit unions must do to succeed in the future. The following is an excerpt from the podcast, along with some insights from the report.
What are some of the changes you’ve seen as a result of COVID-19?
Chris Maloof: We’ve seen a fundamental shift in how consumers are looking to engage with financial institutions. Getting a little more specific, large banks, credit unions and community banks were near 40% on digital lending and account opening at the beginning of the pandemic. After just the last few months, it’s now near 50%. What’s been clear is, this shift was already happening … and now it’s happening even faster. I also think it’s made financial executives realize that digital is not something you can do at your own pace – it’s something organizations have to do as a matter of survival.
Our research found differences between the biggest banks and the rest of the industry. What has MeridianLink seen?
Chris Maloof: The larger institutions are about five or 10 years ahead in terms of how much they’re investing in internal IT. Many are building much of their capabilities in-house. All of the biggest banks are pushing towards mobile from an investment perspective. It’ll be interesting to see how consumers engage with those new mobile apps. Institutions of all sizes are finding that the most effective way to engage in that channel is through building in a way that works seamlessly both at a desktop and on a mobile device.
What are the biggest hurdles to implementing digital lending that delights consumers?
Chris Maloof: We’re getting to the point that fast is the way you win and consumers expect fast – and fully digital is fast. For most institutions, the biggest hurdle is usually a combination of cultural and internal policies. This is because there’s a major shift between trusting an automated underwriting decision vs. having a loan officer talk to a potential client face-to-face and applying tested legacy underwriting procedures.
This requires the ability for an institution to embrace change. This requires a shift in organizational culture.
There are a lot of individuals in different silos within a financial institution making decisions that define how effective the digital experience will be. It’s all about risk, right? Financial institutions, and leadership within financial institutions, need to get better visibility into how they’re performing against underwriting standards in real time, because it is a big leap. I think it’s a long step for most organizations to take a jump to digital without clear visibility as to the final result.
I think this challenge is solved with a visual data. This way they can see in real-time, whenever they want, a dashboard of how they’re performing from a funnel perspective.
How do organizations speed up their digital lending processes?
Chris Maloof: The research this year showed that there are different speeds to close a loan between desktop and mobile. As a general sense, mobile products were built more recently. Most modern UX design or user interface design is mobile first. Part of the rationale for that is if you can fit all the features into the mobile product, it’ll make your desktop product better. The biggest barrier to solving the speed challenge is banks and credit unions want to add too many incremental fields. The more fields you add, the more steps, the more pages, the higher your abandonment rate on the app.
Organizations need to analyze where in the application process most prospects drop off. And how does that abandonment impact your ROI per customer and cost to acquire a customer. The reason why Rocket Mortgage or American Express are able to proceed with a minimal amount of up-front data, is that they’re then integrating with third parties and spending money to get additional insights on applicants.
If that additional consumer insight costs less than your cost to acquire or your value to acquire, then you should market against those people who have touched your platform. In simpler terms, and I think that’s advanced, I would say capture the most important information first and make it as seamless as possible. Then, market the most relevant products you can, based on that data to those consumers via text and email.
The challenge to this pared down process is fraud. Organizations need to leverage a number of fraud check services and use data analytics to determine weaknesses in the systems and processes they use.
How important is the ‘save and resume’ functionality?
Chris Maloof: Saving applications and flow has been a major customer request of ours and something we’re delivering right now because it’s so important. This requires a high level of security around third party vendors. Even outside of saving the app, the process requires significant PII information. Remember, with a ‘save and resume’ functionality, you’re trying to define your customer’s buyer journey … and these journeys are complex.
The journey starts all the way back in the education phase. With an auto loan, they’re going to start looking for the type of car they want, what they can afford, and where they may find financing. They will visit websites, logging into a few different apps and then maybe even visit a branch. It’s going to be different by your specific demographic that you’re serving.
Is the marketplace moving to a universal app?
Chris Maloof: When I think about helping institutions compete for consumers – about digital convenience and speed – a single digital application for all forms of credit provides consumers a more holistic experience. So when I think single app, I think a consumer comes in with a loan or an interest in mind, and you don’t get in the way of that.
By leveraging traditional and third party data combined with an ability to underwrite across all loan types, you can provide consumers an optimized offer.
What is the future of microlending?
Chris Maloof: Microloans are a hot business. The best example is Goldman Sachs and Marcus. They are partnering with a software vendor to provide services to Amazon. That’s a big win from Goldman Sachs and also couples with their recent investment to compete in savings accounts with Marcus.
I think you’re going to see other big banks follow suit. And this also provides the same opportunity to community banks and credit unions. I have a number of customers that are doing merchant lending at scale for rather large retailers within their communities. This is what consumers want. Organizations can provide a really great service to a customer, while also gaining that relationship. So I see it as an opportunity that big banks are going to go after. But, there’s no reason why midsize institutions can’t also be successful.
What changes in digital lending and consumer credit do you see in the near future?
Chris Maloof: Forbearance is going to become a front and center issue for all financial institutions very soon. I think 7% of mortgages out there are under forbearance. That’s a very large amount, even if not all of these loans have had delayed payments because of an inability to pay. The good news is that many of the properties are equity rich.
As the Cares Act rolls off, you’re going to see a drop in credit scores across the board as debt to income goes up. This will lead to an uptake in collections. Without future stimulus packages there is going to be a significant increase in defaults, which can be showcased in the reserves that the big banks are presenting on Wall Street. They’re all putting up big dollars to absorb losses associated with collections.
On the positive side, during a downturn, people need more personal loans and credit cards. During an upturn, people buy more auto loans. The Fed will give the economy a lot of runway, but we must counterbalance that with the fact that unemployment is still fairly high.