When the Federal Reserve will slow its rollout of interest rate hikes is the subject of endless speculation.
For now, the outlook for mortgage lending doesn’t look pretty. In fact, banks and credit unions could struggle for the foreseeable future to grow their loan portfolios — especially if their processes are slower or less efficient than other institutions. Already there have been major layoffs among mortgage lenders.
It’s not all gloom or doom, however. In fact, some forward-looking financial institutions are taking the opportunity to upgrade their technology and streamline their backend underwriting processes to meet changed consumer expectations. The financial institutions that couple strong financial marketing with digital transformation are the ones staying ahead of the curve during this rocky time.
An executive report from BAI showcases how banking technology can continue pushing the lending ball down the right road. Experts from all over the industry weighed in to offer not only gems of advice, but warnings for what banks and credit unions should avoid.
Think of Lending like Buying an Airplane Ticket
It’s a cliché to recommend that bankers ‘think outside the box’. But, sometimes, the best method for seeing where banking is broken is to compare it to other industries. What lessons can be pulled from leaders in other sectors?
Kris Frantzen, VP of Product Strategy at Temenos, says he thinks of lending as akin to purchasing an airplane ticket: the purpose isn’t the flight itself, but the destination. Obviously, the customer is most concerned with their end goal. They know they want to go somewhere, and the quickest way to get to their destination is to take a plane.
If you want to picture how frustrated customers get with bank technology, picture dealing with arduous airport processes.
It’s the same with a loan. People want a house (or a car, etc.), and they often turn first to their bank or credit union.
It’s a great opportunity — until it is executed poorly. In the airline business it only takes one bad flight attendant, one canceled flight handled poorly, or even a slow website load time when finalizing the purchase for a customer to ‘feel off’ about the entire experience.
Similarly, a customer will look elsewhere for a loan if the hiccups in the digital loan application are greater than from a competitor, such as a digital bank or a nonbank provider like Rocket. Such companies spend a great deal of time and resources mastering loan technologies.
The aim of a loan applicant is not to complete the mortgage application, but rather to buy a new house, Frantzen explains. “For many consumers caught between the bumpy economic recovery from the pandemic and rising prices, access to loans can have even higher stakes.”
Technology Isn’t Evolved Enough in Bank Lending
Loan application problems are still very present in banking, and they can quickly dissuade a consumer from using a traditional financial institution — especially if they are still a prospective customer. People want speed, and they expect the underwriting process to move much quicker than it currently does.
Mortgage lending can no longer be something that takes six to ten days to complete, argues Teresa Blake, a partner in KPMG’s financial services practice. “Consumers are pressed for time.”
Speed Is The Name Of The Game:
Customers don't want to wait up to a week (or longer) for loan approvals. They want instant notice.
As soon as banks and credit unions can integrate artificial intelligence and machine learning into their loan tech stack, they’ll have a much higher success rate, Blake emphasizes. So far, however, traditional players are still very much behind in applying AI.
“Gen Z is a generation that is digital-native, and they absolutely expect an instant digitized qualification.”
— Rajesh Shah, Citizens Bank
Gen Zers (even more than Millennials) are incredibly attracted and accustomed to speed in every facet of banking. Rajesh Shah, Senior Vice President, Director and Head of Engineering at Citizens Bank, says there are two approaches he takes to ensure younger audiences stay engaged with the bank: transparency and optionality.
The first is critical, he says, right from the start of the origination of the loan to the disbursement of the funds. Gen Z wants to know what they’re signing up for and what the options are, from the get-go. They don’t want the offer marketed to them, only to initiate the loan process and find their interest rate is markedly higher, Shah states.
The optionality plays into the different personas of these younger customers. One, he says, might want to save money in the long-term and another might prefer a lower monthly payment. Both customers deserve options.
“This is a generation that is digital-native, and they absolutely expect an instant digitized qualification,” says Shah, referring to Gen Z. ” We build our experiences so that we are able to get to the multiple dimensions of personas.”
Improving Processes in The Mortgage Market
Blake, who used to work at Bank of America, leads KPMG’s lending transformation team. She says fintechs are pressing banks further and further into a corner in the mortgage space more than anywhere else.
“There are so many new entrants in the market,” she says. “On the mortgage side, many of our clients have developed new origination systems. They are also rethinking everything from the point-of-sale to their paper-management systems to their pricing engine.”
This is an optimal time for banks and credit unions to be able to determine when their customers are going to need a mortgage, observes Rebecca Martin, CMO of Total Expert. Therefore, new leads can crop up organically, simply with a better integration of technology.
Before, banks couldn’t solve their low mortgage retention issues or predict when someone would need a home loan. Martin says no legacy financial institution can use that as an excuse anymore.
Backed Into a Corner:
Nowhere else in banking is a financial institution pressed by competition more than the mortgage market.
“Banks can know and engage customers who are applying to other institutions for credit, who list their home for sale or have tappable equity, or whose rates are high enough for a refinance,” Martin says.
Mortgage-as-a-service options are growing in popularity to accommodate the lack of home lending technology at traditional financial institutions. Instead of attempting to build out basic technologies that neglect the nuances of a prospective loan applicant, banks and credit unions can enlist a fintech partner to build out a more capable system.
It eliminates the need for other expenses, argues Salesforce’s Geoff Green. “In many cases, institutions can offer loans without the need for underwriters, processors, compliance or closing teams.”
Be Wary Of Technology’s Gaps
It is tricky to add new digital technologies into traditional banking. There are fears of fraud and litigation. If a bank isn’t naturally tech-savvy, who’s to say a hacker couldn’t easily defraud the system?
Or, worse yet, what if the technology doesn’t hold up to a regulator’s sharp eye?
There are also concerns that segments of the population could be left out of the mix and disregarded because a computer program lacks emotional intelligence and an ability to perceive subtleties.
“The trick with using algorithms instead of human judgment for mortgages is that, in many cases, borrowers from historically underserved communities are bad bets on paper,” argues Martin Orefice, CEO of the listing site Rent to Own Labs. “They’re likely to have worse credit scores, lower incomes and less savings.”
It is important that bankers raise such concerns with fintech providers or even their own internal tech teams. Oftentimes, these worries can be addressed with more innovation. For instance, KPMG’s Blake suggests using advanced AI systems that can be customized to dig deeper into the customer qualitatively, not just quantitatively.
“Banks could be using AI in much more complex underwriting scenarios by moving from rules and logic to evaluating a borrower based on additional data and factors,” Blake says. “Using AI in the underwriting decision allows you to look at factors beyond a borrower’s FICO score.”
She says too that these technologies have evolved drastically in the last several years to detect fraud — arguably more so than a human underwriter.