Online lenders’ share of consumer credit markets continues to grow, but banks and credit unions can fight back. There’s nothing stopping traditional financial institutions from playing the same game that newer players do, but they can also capitalize on their unique strengths and product bandwidth — two things the newcomers lack.
“Banks and credit unions hold powerful cards in the lending game,” says the Harland Clarke eBook A New Paradigm In Loan Marketing. “For one, they can build deep, lifetime account holder relationships across a range of products and services. Relationships can’t be bought.”
Technology, on the other hand, can be bought, with many tools used by online lenders being available to anyone willing to make the investment. According to Harland Clarke, other technologies can be used to build on traditional institutions’ strengths, allowing them to more effectively target loan promotions and tailor credit offers to individuals’ needs.
“Financial institutions that can deliver a more personalized and efficient borrowing experience via a dynamic blend of digital and human service can win in today’s — and tomorrow’s — loan marketplace,” says Harland Clarke.
The dread that new players’ growth instills at some banks and credit unions should actually be replaced by optimism, the report suggests.
“A transformed consumer lending process driven by fintech developments doesn’t have to be a threat to financial institutions,” the authors of Harland Clarke’s explain. “Instead, it can help them better serve their account holders, reduce costs, and improve profitability, both by emulation and collaboration.”
Leveling the Digital Lending Playing Field
Many of the digital-only newcomers in the online lending market have enjoyed two fundamental advantages. First, the Great Recession and its aftermath left traditional bank and credit union consumer lenders under practical or regulatory constraints. While they de-levered their balance sheets and tightened their standards, Harland Clarke says newcomers were able to pounce on both consumer and business credit needs. These startups focused on narrow product lines, and necessity persuaded borrowers to think beyond their traditional reliance on a single, primary financial institution for all their needs.
“The crisis helped open the door for smaller companies to serve borrowers who may not have previously trusted startups with their money,” the report says. An important impact on attitudes of this period is that Millennials grew up feeling “spurned” by traditional lenders — both economically and technologically.
Newcomers’ second advantage? They were able to start from scratch. Without the burden of legacy systems, they could apply a fresh set of tools and techniques on the back end, and responsive, 24/7 availability on the consumer-facing side. This was the right recipe for consumers, who were quickly falling in love with the experiences they received from the likes of Amazon and Netflix.
“Incumbent lenders are not on the verge of mass extinction.”
There was much hand-wringing in the traditional banking sector, with many wondering how they could keep pace and compete. But that was then. Now it’s pretty clear that “incumbent lenders are not on the verge of mass extinction,” as the report says. Harland Clarke’s eBook points out that predictions about new lenders inevitable domination of consumer lending markets, and — conversely — forecasts that disruptors’ would eventually disappear, have both been proven wrong.
Against this backdrop, traditional lenders must find fresh approaches, says Harland Clarke.
“For financial institutions to succeed in today’s consumer lending marketplace, the answer is mass adaptation.”
But what does this look like?
According to Harland Clarke, financial marketers must embrace new models, using the latest in technology and data analysis to automate, target and assess risk. This allow retail banks and credit unions offer “the right value proposition for the right audience at the right time.”
The days of mass market seasonal credit advertising have passed. And, as the report points out, even traditional mailings pre-screened for creditworthiness mean little now. Imagine a food truck with gourmet burgers and beer showing up in an office park at 8:00 A.M. — bad timing. Now imagine a food delivery service that texts or emails tempting specials of the day keyed to the last time-of-day that someone ordered lunch — and promising delivery in 30 minutes or less.
“Successful lenders are adopting new fintech tools that allow them to segment existing and targeted borrowers and design a customer experience suitable to each,” the report explains.
“In-the-moment” promotion and “ready-when-you-are” positioning apply to consumer lending now. The eBook covers tools, techniques, and best practices that banks and credit unions can build on. Here are four of them.
1. Use Their Own Weapons To Fight Them
How can banks and credit unions improve the lending experience, better manage credit risk, and increase loan originations, all while improving margins? According to the eBook, fintech partnerships are one path, but not the only one.
“Fintechs may come and go, but the tools they use are here to stay,” the report states. “These and other alternative lenders can help banks and credit unions rethink how they compete. Understanding and adopting how fintechs deploy data and technology to provide consumers with best-in-class credit products can go a long way toward making financial institutions less vulnerable to future competitive threats.”
The best news for banks and credit unions is that size no longer dictates how well you can compete, according to the report. Digital lending solutions are available in all sizes.
2. ‘Hey, This Auto Loan Looks Just Like You’
Any guy who has gone shopping for a suit lately knows that even the off-the-shelf rack stores can now offer custom-tailored suits and custom casual/social wear.
“The road to profitable loan growth starts with a focus on the consumer, not the product.”
According to Harland Clarke, financial institutions’ road to profitable loan growth starts with a focus on the consumer, not the product.
“A one-size-fits-all approach to lending does not work in today’s market,” the report says. “Successful lenders are adopting new fintech tools that allow them to segment existing and targeted borrowers and design a customer experience suitable to each.”
Data analytics play a major part here. There are all sorts of data streams that institutions can tap that can yield rich insights: loan data, transaction data, credit data, for starters. And then there are newer sources of data, such as social media data. All can help match the offer to the prospect.
Beyond allowing lenders to customize their credit offerings to the individual, the report adds, digging into data can enable better overall underwriting strategy.
3. Think Financial Tranquility, Not Financial Literacy
“Financial literacy” carries all the appeal of cod liver oil — might be great for you, but who wants to take it?
Yet making credit less stressful for consumers must become a high priority.
“Consumers on the whole are wary about the lending process,” the report states. “They don’t have the knowledge they need to step forward into the loan marketplace with confidence.” Many of them don’t really understand such credit basics as FICO scores, the report points out.
“Investment in online is good. Investment in mobile is even better.”
Banks and credit unions can address this — they have to — or lose out to others that do. Into the current vacuum have stepped third parties like Mint and Credit Karma that provide education and tools. The danger lies in their partnership with financial providers of various stripes that make tailored credit offers to site users based on the data they input there.
Traditional lenders who find ways to reduce consumers’ stress over credit can succeed. The report notes that reducing uncertainty helps — a popular mobile feature, according to Harland Clarke, is the ability to calculate how large a loan the consumer can afford.
“Investment in online is good,” the eBook states. “Investment in mobile is even better.”
4. Intersect With Consumers When And Where They Need Credit… And Earlier
Wrinkles on credit continue to evolve. Players like Affirm offer point-of-sale installment credit. American Express has turned charge card purchases into credit flexibility, with its “Pay It, Plan It” option that can convert a charge to an instant debit transaction or a small installment loan.
The report suggests that banks and credit unions don’t have to match those innovations, necessarily. Much more important for them are two factors: timing and targeting.
Timing hinges on hitting consumers with attractive, pre-screened credit offers that synch with their current needs. Such a service would scan credit inquiries to bureaus. A subscribing lender could use the service’s “tip” to send the consumer a ready-made credit offer.
The report illustrates this with a car purchase example. Typically, consumers devote considerable time to researching what they want to buy, and less time to how to pay for it.
Then the anxiety kicks in. The consumers “endure the car-buying experience itself, which is fraught with high-pressure sales tactics, lack of pricing transparency, and often misleading verbal and written agreements. It’s no wonder the typical consumer has little energy left to search for the best financing option, often going with the dealer’s recommendation instead.”
“Financial institutions can step up by presenting car shoppers with a prescreened offer via multiple channels, reducing their stress.”
Financial institutions can step up by presenting car shoppers with a prescreened offer via multiple channels, reducing the stress of that part of a wearying process. “Timely” and “personalized” can serve the consumer well, and win the loan for the bank or credit union making the offer. This ultra-rifle-shot approach can prove much more effective than simply mailing out a shotgun announcement of a sale on auto loans, in case the recipient just happens to be looking for a car when the message arrives.
Similarly, financial institutions can use technology to pre-screen consumers and present a variety of types of loans, teeing up consumers with solid offers they can use when they are ready. Screening would include cutting out offers that don’t relate, such as for home equity lines for people who don’t own a house.
“The result is a personalized set of preapproved offers — typically six to eight — that are unique to each account holder’s financial profile, and the institution’s risk tolerance and product portfolio,” the eBook says. “Consumers can review their loan options and click to accept without fear of rejection.”
You could call this “always-on” credit. The eBook suggests that this rewards consumers with credit-worthiness by ensuring they have relevant loan offers on tap when they are ready. This sets up their bank or credit union as their “go-to” lender. And that can beat even a 24/7 online lender who still has to decide if an applicant qualifies.