For financial institutions, there are few two-word combinations more powerful than “consistent returns.” Performing loans are the lifeblood of every financial institution, which makes the repayment experience an essential part of profitability.
While that may sound obvious, the repayment experience is about more than just the chance to make a payment — and can mean more than simply getting paid.
Delighting a Captive Audience
What is a borrower if not a captive audience? Once a loan is locked in, there is little incentive to modernize the repayment experience. To put it another way, if your favorite restaurant knew that you were obligated to patronize their business each month, it probably wouldn’t be long before the service got slower, and the food got staler.
Stagnation is a byproduct of obligation, which is why many financial institutions fail to prioritize the repayment experience. The trouble is, loans have terms. So a captive audience obligated to repay is only captive for so long. Once that final payment has been made, the borrower is free from their obligation to your institution. Repayment allows them to benefit once again from the free-market competition they enjoy in just about every other walk of life.
Food for Thought:
How confident are you that an ex-borrower will return as a new loan customer or full-fledged account holder?
Competition from All Corners
Compounding this issue is the fact that the lending landscape has changed drastically within the past decade. A white paper commissioned by Paymentus revealed that nonbanks and fintechs are winning a disproportionate amount of business compared to traditional financial institutions.
In the third quarter of 2016, fintech and finance companies originated 57% of unsecured consumer installment lending, according to data from Mercator Advisory Group. By the third quarter of 2021, that percentage jumped to 70%.
The top mortgage lender in volume in 2021? That would be Rocket Mortgage. In fact, only two banks even cracked the top ten: Wells Fargo (No. 4) and JPMorgan Chase (No. 6).
This story plays out in the auto loan category as well, with Ally Bank, a digital-only financial institution, checking in as the top auto lender with a 5.75% market share, per data collected by BizVibe. Forbes also lists OnDeck, Lendio and Kabbage — all nonbanks — as the best small business lenders.
This should be disconcerting for a number of reasons, the main one being that these lenders are still driven by market rates, i.e., they’re not winning with grand discounts or cheap money. What are these nonbanks and fintechs offering that’s so attractive to borrowers? The origination process certainly helps, but a simple, convenient, digital-first repayment experience also keeps customers coming back.
Creating a Modern Loan Payment Experience
The first thing to consider when revisiting your loan repayment experience is the consumer market seeking loans. Millennials are the generation with the fastest growing debt load, with an average of $27,251 in non-mortgage debt, according to CNBC. Millennials who own homes have an average mortgage balance of $232,372.
Chronologically, this generation is followed by the world’s first digital-native generation, Gen Z. If Millennials are driven toward — and more comfortable doing business with — digital-first, or digital-only, non-traditional lenders, imagine what Gen Z’s appetite will be.
That’s why the first step all financial institutions must take is not a technological one but a cultural one. Financial institutions must understand and acknowledge the opportunity afforded to them by loan payments.
“Consistent returns” is a great metric but only tells part of the story. What would your return on investment look like if just 5% to 10% of indirect borrowers became full-fledged customers or members? What would it look like if 25% did?
Gen Z and Millennials are tech-savvy, but the changes needed in banking have more to do with culture than technology.
This is the key differentiator between loan products and other products. Your borrowers have the chance to see and experience your offerings from an intimate perspective. It’s a test drive of sorts, and the financial institutions that understand this and work to exploit this opportunity will be the ones earning increased business beyond loans.
Naturally, this relies on an investment in technology. The ways today’s borrowers like to pay look nothing like what yesterday’s borrowers used. Checkbooks and branch visits are non-starters. What your borrowers want is convenience, choice and control at all times — something increasingly delivered by nonbanks and fintechs.
Not All Omnichannel Experiences Are Good
A streamlined, omnichannel experience should be the ideal state for all financial institutions. The problem is, simply giving your borrowers many disparate channels isn’t an ideal solution. Everything needs to work in concert so that no matter the payment type or channel, the borrower enjoys the same experience. Otherwise they’ll become frustrated or confused, resulting in late payments, missed payments and time-consuming calls to your call center.
If a borrower wants to use their debit card through your mobile app one month, and an ACH payment from your site the next, they should be able to easily navigate either without worry. If your experiences differ by devices or channels, your borrowers will feel hamstrung by their lack of choice and more than likely walk away once their debt has been repaid.
Speaking of choice, it is imperative that your borrowers be given options that go beyond the standard payment types of ACH and checks. Digital wallets, for instance, are becoming increasingly popular as a way to pay bills and send money. If a borrower wants to use Apple Pay to make their car payment, they’ll likely search until they find a lender that can accommodate this demand. The same goes for pay-by-text options, as well as simple debit cards.
A Profusion of Payment Choices:
Customers want more than just ACH and checks. Make sure your payment options include digital wallets, simple debit cards and pay-by-text.
Finally, the goal of any loan for both sides is to get it paid. It might seem like a no-brainer, but email and text notifications alerting borrowers that a payment is due is a bit of low-hanging fruit that can drive engagement beyond just on-time payments. No borrower wants to miss a payment and incur the fees that may come with it, so looking out for your borrowers in this manner is yet another way to place your institution on their side.
The upshot is that these reminders show you are a digitally savvy financial institution that knows how your customers like to be contacted. Plus, it gives yet another opportunity to cross-sell other products.
Rethinking the Lending Opportunity
Given the statistics surrounding the leaders in today’s lending landscape, banks and credit unions really have two choices: continue to cede ground to nonbanks and fintechs or adopt and improve upon the practices that earned these new competitors outsized market share.
But really, winning new borrowers should be just the start of a comprehensive strategy that views returns not as interest paid but as borrowers turned into full-fledged customers and members. The key question that should drive any loan payments initiative should be: Will this new process/technology/offering make the borrower more likely to become a depositor?
This is where finding the right payments partner pays off. Be sure to work with a team that understands not just the technology but also the opportunity.