The coronavirus pandemic disrupted the entire world of banking and the consumer marketplace in an instant. Bank and credit union branches closed, paychecks stopped, loan payment deferrals became the norm and sources of new funding evaporated. While stimulus checks for consumers and government-backed small business loan options helped, they will be far from enough.
Because of the unique nature of the crisis, there are no rule books to follow or business models that can be applied to understand the eventual impact of the economic shutdown. As a result, many financial institutions have already announced tightening loan approval requirements or the complete shutdown of certain lines of business.
What has become abundantly clear during this unprecedented period is that many financial institutions were not prepared to respond quickly to the demand for loans, the desire for payment deferral or the potential for future small dollar loan demand. At no time in the past has the requirement for advanced analytics and digital processing been more important.
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Rethinking Credit in a Post-COVID World
Most financial institutions have not changed their basic lending processes in decades. From application to close, most lending platforms continue to be cumbersome and time-consuming for both the consumer and financial institutions. Even if an institution has created a way for the consumer to apply online or with a digital device, most steps and requirements from the past usually still remain.
What is required is a technology solution that provides a seamless experience for the loan customer from application to close. It must be easy for the borrower to complete an application, provide documentation and signatures, monitor progress and receive funds. Done well, digitalization reduces time and effort for the consumer, while increasing loan volume and reducing ‘loans in process’ for the bank or credit union.
COVID-19 has educated the consumer on how data, analytics and digital technology can simplify everything from purchasing products online, to getting groceries or meals delivered, to having video chats with friends, family or co-workers. The basics of digital lending in the future include:
- User-Friendly Interface – Most loan application processes are tedious and time-consuming. Winners in digital lending will eliminate steps using data pre-fill and intuitive design, and will evaluate legacy steps that can be modified or completely eliminated. The goal should be to move to single click assessment.
- Quick Initial Decisioning – The ability to provide immediate pre-approval decisioning pending required documentation stops the borrower’s shopping process, increasing the potential for positive outcomes for the consumer and financial institution.
- Cloud Integration – Use of the cloud enables integration with credit bureaus, alternative data sources, risk services and internal decision and underwriter rules for deeper insight and speed of decisioning.
- Advanced Metrics – With an advanced digital lending platform, more data can be processed faster, with advanced metrics used to better understand portfolio and process performance. Advanced warning systems around potential credit issues are invaluable as are insights regarding market and process improvement opportunities.
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Consumer Borrowing Needs Have Changed
The financial services industry has already seen significant drops in consumer and business borrowing outside of government sponsored programs. This trend is expected to continue as unemployment and short-term work increases, and as traditional credit ratings drop. At the same time, there will most likely be a rise in non-performing loans and default rates, putting additional pressure on available credit supply.
According to The Financial Brand article, “Understanding How Consumer Borrowing Habits Will Change Post-Covid“, the immediate impact will most likely be a curtailment in large item purchases combined with an increased need for small dollar loans that will provide a cushion during hard periods in both the consumer and small business markets. There will also be an increase in saving to help protect for the future.
Most consumers are also very concerned about how their credit score will be impacted by the coronavirus. The CARES Act provides some relief for consumers who need to defer payments, but many consumers are also seeking financial education to better understand how they can protect their credit rating.
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Financial Institution Credit Platforms Must Change
The financial services industry is on the cusp of potentially an unprecedented wave of credit decisions – both around existing borrowers who have deferred payments on current loans and new potential borrowers who will require funds to survive the crisis. According to McKinsey, identifying customers ‘without financial problems’, those ‘potentially in need of support’ and those ‘in trouble’ will be crucial.
What must be kept in mind by banks and credit unions is that the crisis was not caused by the consumer. In many cases, helping the consumer with loan payment extensions, bridge financing, small dollar loans, etc. will go a long way towards building loyalty while limiting credit risk for the financial institution.
According to Bain & Company, a structural rethinking of credit platforms and advanced technologies is required. The benefits include:
- A significant reduction in time allocated to credit analysis and decisioning possible through process automation.
- Identification of consumers and small businesses with a risk/return profile that provides long-term potential.
- Significant reduction in cost of risk and processing.
The Future of Digital Lending
According to the Boston Consulting Group (BCG), there are four fundamental drivers boosting activity in the digital lending space. First, consumer behavior is changing dramatically due to experiences offered by internet giants and the COVID-19 crisis. Second, rapid technological changes have occurred due to the proliferation of digital devices and the expansion of data. Third, the regulatory environment is becoming more favorable towards digital lending. And fourth, there has been significant innovation in the business models used by both traditional and non-traditional lenders.
Digital lending provides benefits to the consumer including ease of application, speed, convenience, cost and availability (inclusiveness). Digital lenders benefit because the cost of lending is lower and the scalability is greater. In addition, organizations can better serve digital consumers, while reducing risk due to utilization of traditional and non-traditional data sources.