For loans, banks borrow from the fintech playbook

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For banking institutions, rising interest rates are both good and bad news: wider net interest margins provide a welcome boost to profitability, while at the same time higher borrowing costs are undermining demand for mortgages and business loans. There are also fears that monetary tightening by the Federal Reserve to fight inflation could tip the economy into recession, leading to more non-performing loans and defaults.

In the longer term, trends towards greater scale and increasing competition from non-bank players are prompting a greater focus on the cost side of doing business. Advances in technology are helping on this front, including in lending, which is the topic of this month’s BAI Executive Report.

Our lead article by contributing writer Ed Lawler argues that banking institutions are accelerating their shift to lending technology as a way to not only protect their NIM, but also provide a more streamlined customer experience.

He spoke with several bankers and other industry watchers about how they are embracing lending technology through their websites and mobile apps. Decisions on individual loan applications can now be made in minutes, meeting the speed and ease-of-use standards set by fintechs.

More efficient use of data underpins much of the success banks and credit unions are having in balancing the risks and rewards of lending through a digital platform. Data analysis can also generate rich and potentially profitable consumer insights.

In addition to deepening customer relationships, data can be used to expand the pool of potential borrowers. Some institutions do this by incorporating “alternative data” sources into their decision-making.

Editor-in-Chief Dawn Wotapka examines how financial services providers are using alternative data to increase access to loans for the millions of underbanked Americans. This is another area where enterprising fintechs have taken a head start, but traditional banks are starting to catch up by considering rent and bill payment history, usage credit cards, checking account cash flow and other factors to help determine the amount of credit. risk represented by a given borrower.

Among those invisible to the credit are many at the forefront of Gen Z, who are now in their early 20s and have only just entered the working world. Banks that can develop ties with them now, when their credit records are still thin, can position themselves to build strong, lasting relationships with this demographic.

My Q&A with Rajesh Shah of Citizens Bank and Bal Shukla of Infosys explores how loan products can be the best way to make initial inroads with Gen Z and millennials.

Also in this month’s Executive Report:

Digital experience vs customer journey: Temenos’ Kris Frantzen says banks need to understand the distinction between the customer experience of loan seekers and their overall journey, with the latter being the highest priority. Optimizing the journey, he says, means balancing human insights with technology to minimize inefficiencies along the customer’s journey to the loan decision.

Balancing consumer risk with transparent digital CX: Christina Luttrell of GBG Americas suggests that banks and credit unions focus on providing digital lending solutions to help consumers deal with the recent surge in inflation that is outpacing wage gains. A user-friendly loan origination process can attract borrowers, while robust identity verification can protect lenders.

Seven ways to showcase your lending strengths: Vericast’s Stephenie Williams summarizes the lending results of her company’s recent Financial Services Trends Study. Among these findings: Consumers are more open to applying for loans and credit cards from a non-prime banking institution, so relevant and personalized offers are key to keeping them in your fold.

Solving the mortgage retention crisis: Rebecca Martin of Total Expert tells us that new lending technologies can help financial institutions keep their customers close. Using relevant data, banks can engage customers seeking credit elsewhere, those with workable home equity, and more.

Easier and more accessible mortgages: Salesforce’s Geoff Green writes that a digital mortgage-as-a-service platform can alleviate the biases that have plagued minority-owned homebuyers due to the redlining and decline of minority-owned banks. The data can help create a dynamic view of a borrower’s history, and lenders can in turn conduct comprehensive risk assessments.

Terry Badger, CFAis the editor of BAI.

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