1. AI-Powered Consumer Lending
Fintech lenders are making inroads into banking markets by harnessing advanced analytics and non-traditional data as they automate and fine-tune underwriting processes, notes a report by CAPCO. There’s no reason traditional lenders can’t follow suit, using artificial intelligence and data analytics to find prospects, evaluate creditworthiness, and monitor and manage the loan portfolio.
One caveat is regulatory scrutiny.
While not intending to interfere with marketplace forces bringing evolution of financial services, regulators have concerns as AI, often a “black box” for many, assumes a larger role, according to Federal Reserve Board Governor Lael Brainard. She says regulators will be expecting to see the appropriate controls in place to be sure that AI doesn’t produce unintended consequences for lenders or borrowers.
On one hand, according to Brainard, AI has the potential to expand the availability of consumer credit by evaluating factors that go beyond traditional credit metrics. “AI also has the potential to allow creditors to more accurately model and price risk, and to bring greater speed to decisions,” Brainard notes.
The Fed Governor also flagged a potential dark side: violating fair-lending laws.
“It should not be assumed that AI approaches are free of bias simply because they are automated and rely less on direct human intervention,” said Brainard. “Algorithms and models reflect the goals and perspectives of those who develop them as well as the data that trains them and, as a result, AI tools can reflect or ‘learn’ the biases of the society in which they were created.”
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2. Tap Home Equity to Replace Slumping Mortgage Lending
Rising home prices and rising interest rates have depressed mortgage applications and originations in the last couple of quarters, according to TransUnion figures, but that translates into more opportunity for home equity lenders.
CoreLogic reports that U.S. homeowners with mortgages have seen their home equity increase by 9.4%, year over year, as of the third quarter of 2018. That comes to $775.2 billion that can be tapped via home equity lending. CoreLogic says that the average homeowner gained about $12,400 in equity in the first three quarters of 2018.
“We have a half-generation of consumers who have little knowledge of home-equity credit.”
— Joe Mellman, TransUnion
HELOCs and home equity loans are a business that institutions can build on top of their mortgage portfolio, making it easier to find prospects. For those who can qualify, home equity credit is typically the lowest-rate way to borrow.
However, one result of the past financial crisis, according to Joe Mellman, SVP and Leader of TransUnion’s mortgage line of business, is that “we have a half-generation of consumers who have little knowledge of home-equity credit.” Between lower levels of equity and tightened credit standards, for many, he explains, home equity borrowing wasn’t an option.
So herein lies a challenge — and opportunity — for bank and credit union marketers. “There’s a ten-year gap in education about home equity credit,” says Mellman, “and it’s going to take a while to get filled.”
3. Auto Lending: More Informed, Less Understanding?
A mix of economic trends will impact auto lending, according to TransUnion. On one hand, rising tariffs and a preference for SUVs and hybrids will bump up pricing and impact affordability. On the other hand, the company’s analysts believe low unemployment and rising Gross Domestic Product will support continued growth and positive credit performance.
Overall, “the auto finance market continues to show signs of health and growth in many ways,” says Brian Landau, SVP and Leader of the auto line of business for the firm. “We anticipate used vehicle sales and auto refinance to be potential possibilities for consumers who cannot afford to buy new vehicles.
Landau says the auto shopping and auto lending processes have grown more transparent as more and more resources can be accessed on the web. But he adds that some of the information consumers think they are armed with is misleading or plain wrong. For example, he says the credit score methodologies used by auto lenders and auto dealers differs from many of the scores that consumers obtain from websites. This confuses the process. Clearing up that confusion is another job for bank and credit union marketers.
Another new factor is alternative credit data — tapping nontraditional sources of payment information to help judge creditworthiness. Landau says the use of utility bill payment patterns and the like is becoming more common among lenders, especially non-bank auto finance companies.
4. Unsecured Personal Loans in Digital Channels
Unsecured consumer lending has had growing appeal to banking providers, and more of it may be executed through fintech partnerships. In late October 2018, for example, HSBC Bank announced that it would use Amount, a tech platform from online lender Avant, to lend to consumers digitally.
“The U.S. unsecured personal loan market is growing at 20% annually, surpassing $125 billion in balances,” says Pablo Sanchez, Regional Head of Retail Banking and Wealth Management for HSBC for North America.
Sanchez says that millions of consumers need loans for unexpected expenses, debt consolidation, or home improvements. The Avant platform can get funds to approved borrowers as soon as the next day.
TransUnion predicts that unsecured personal loans from all types of lenders will rise to an all-time high of $156.3 billion by the end of 2019.
“Originations will remain at healthy levels across all risk tiers due to more lenders participating in the personal loan market,” says the credit bureau.
“We see the continued benefit of lighter-touch regulation,” says Jason Laky, SVP and Leader, Consumer Lending. “Personal loans have reemerged as a staple of the American consumer’s financial portfolio.” Laky says that many of these unsecured loans are offered by non-bank fintech lenders that make it much easier for consumers by offering an online application processes.
Lane Martin, Partner at CAPCO, who recently headed a report on the subject, says the speed of obtaining credit also appeals to consumers. In addition, unsecured loans can sometimes be cheaper than credit cards. For traditional lenders, using digital lending to build connections to consumers can pay off in later cross sales, the report points out.
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5. Point-of-Sale Lending
Building a marketing plan for digital lending has multiple facets. One early decision that Martin says lenders must make is who their ideal personal loan candidate is. Another key aspect is building repeat customer business. For that, attention must be paid to the post-approval digital experience.
According to Martin, another wrinkle is that traditional lenders are exploring ways to put their products right at the point of sale, embedding them in some fashion with the purchasing process. A model being looked at is that of Affirm, which makes installment loans for purchases at the digital point of sale. (Affirm works with fintech ally Cross River Bank, which books the loans.)
Martin says additional firms have started up in this space. One is Bread, which also works with Cross River Bank. Another is GreenSky Credit, a fintech which specializes in point of sale home improvement and healthcare finance, among other needs, in partnership with multiple banks.
“Co-branded deals like that are hot,” says Martin.
6. Plastic Just Keeps On Going
“More consumers than ever before are carrying a credit card, as issuers provide greater financial inclusion,” TransUnion reports. Card credit saw seven quarters of significant growth into 2018. Part of this reflected a balancing by issuers, according to Paul Siegfried, SVP and Leader of the credit card line of business. The lenders were granting cards to more subprime borrowers, but managing the credit limits more tightly. In 2019, TransUnion expects more emphasis on issuing cards to prime consumers, to fine-tune credit quality.
Marketers will have their work cut out here, both in promoting cards as well as other kinds of consumer credit that can compete with cards.
Today’s card product designers can twirl pricing, rewards, and payments dials to vary the offers made for new card accounts. As a result, “consumers have more choices today than they have seen in a couple of decades,” says Siegfried.