In one survey of bank executives, nearly all said they believe a recession is just around the corner and tougher economic headwinds are ahead for 2023. What that will mean for loan portfolios and for loan demand remains to be seen, but it’s a certainty there will be an impact.
Financial institutions that cannot make the most accurate lending decisions run the risk of lending to those that may have a higher propensity to default if a recession occurs.
This is especially important as smaller institutions need to expand and diversify their lending portfolio to be able to withstand the defaults that accompany recessions. At the same time they need to be able to meet consumer expectations for quick loan decisions, given the inroads made by fintechs providing real-time, digital lending services such as buy now, pay later.
When it comes to the availability of instant digital lending products, smaller banks “don’t have the option of sitting this one out.”
— Vivek Jetley, EXL
A new solution designed to enable banks and credit unions to offer turnkey digital lending products aims to help traditional institutions weather an economic downturn and survive and thrive in the future by making better lending decisions.
The risk-decisioning-as-a-service platform is a collaboration between data analytics firm EXL, workflow automation provider Corridor Platforms and global consulting firm Oliver Wyman. Some big-name financial services heavyweights are involved: former Citigroup CEO Vikram Pandit serves as chairman of EXL and Ash Gupta, the chairman of Corridor Platforms, was formerly the chief risk officer at American Express.
The cloud-based solution leverages advanced analytics and AI to deliver instant credit decisions necessary to support such digital lending initiatives as point-of-sale financing, digital mortgage approvals and real-time credit limit changes. It is already being used at some larger institutions, but the companies’ leaders recognized that the need for such capability is even greater at midsize and community banks and credit unions.
The companies have demonstrated the platform to some of the largest credit unions, credit union service organizations and core banking solutions providers, according to a spokesperson for the companies.
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The Challenge for Traditional Lenders
“Credit recessions” typically come in a regular cycle and the last decade or so credit losses have been historically low, so “another one is due somewhere down the line,” observes Manish Gupta, the founder and CEO of Corridor Platforms.
Banks and credit unions using manual or out-of-date credit processes are at greater risk of lending to people or companies who may struggle to pay back loans when a recession arises, which can be devastating for small institutions. Yet they must lend to stay in business.
“This is a bigger issue than everyone comprehends,” says Gupta. “The vast majority of smaller banks have to build their assets.”
Beyond that, smaller institutions need to be able to meet changed consumer expectations. This is especially important considering the increasing competition from fintechs providing real-time, digital lending services such as BNPL, says Vivek Jetley, EVP and head of analytics at EXL.
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The Power of Digital Lending
The new solution enables banks and credit unions to take advantage of both external and internal data sources and have access to a dedicated team of industry experts from EXL and Corridor. This will put them on the same playing field as the most advanced lenders, not only by allowing them to offer trendy new lending services such as BNPL, but by having a more robust digital presence in general, says Gupta.
Consumers want a real-time decision on all lending products, not just BNPL.
“The consumer does research for everything digitally now,” Gupta states. “They use the internet to discover what loan offers are out there and they apply and then expect an instant reply. This is not just for BNPL; it goes for credit cards, mortgages, auto lending — a whole range of products.”
“The old ways of manual reviews no longer work anymore,” he concludes.
Risk Decisioning Beyond Lending
To make decisions, the platform uses traditional credit risk measures, including credit scores, purchase and payment histories and bank statement data, along with non-traditional data, real-time fraud screening and risk rating tools based on data generated from each new transaction.
Jetley stresses that the service is customizable — a bank or credit union can use it in whatever way they determine is the best.
“The institution can look at the algorithms and the entire process and make changes to it or work with us to refine it,” he says. “We don’t just take the data and then send you a decision back. The bank is in control of everything, while maintaining full control of compliance and governance.”
Beyond just lending decisions, the decisioning data can be used for things like customer relationship management and fraud detection, says Jetley.
“Decisioning is a core function,” he adds.
Ultimately, banks and credit unions need to take advantage of real-time data in order to make the most compelling offers to consumers, says Gupta.
“Anytime you are competing against multiple players and the consumer has choice, you have to provide the most attractive offer to win,” he says.