For loans, the banks borrow from the fintech playbook

For banking institutions, rising interest rates are both good news and not so good news – wider net interest margins provide a welcome boost to profitability, while higher borrowing costs undercut demand for mortgages and commercial loans. There is also the concern that the Federal Reserve’s monetary tightening to fight inflation will send the economy into recession, leading to more bad loans and defaults.

In the longer term, the trends towards greater scale and increasing competition from non-bank players are driving more focus on the cost side of doing business. Technological advances are helping on that front – including in lending, which is the subject of this month’s BAI Executive Report.

Our lead article by contributor Ed Lawler points to banking institutions accelerating their transition to lending technology as a way to not only protect their NIMs, 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 within minutes, in line with the standards of speed and ease of use set by fintechs.

More efficient use of data is the basis for much of the success banks and credit unions have in balancing risk and profit when lending via a digital platform. Crunching the data can also generate rich and potentially profitable consumer insights.

Along with deepening customer relationships, data can be used to widen the pool of potential borrowers. Some institutions do this by integrating “alternative data” sources into their decisions.

Contributing writer Dawn Wotapka takes a closer look at how financial service providers are putting alt data to work to increase loan access for the many millions of Americans who are underbanked. This is another area where enterprising fintechs have gained a head start, but traditional banks are starting to catch up by considering rent and bill payment history, credit card usage, cash flow in checking accounts and other factors to determine how much credit. risk a given borrower represents.

Among these credit-invisible, many are at the forefront of Generation Z, who are now in their early 20s and have just entered working life. Banks that can develop ties with them now, while their credit files are still thin, can position themselves to build strong and lasting relationships with this demographic.

My Q&A with Rajesh Shah of Citizens Bank and Bal Shukla of Infosys digs into how lending products can be the best way to make initial inroads with both Gen Zers and millennials.

Also in this month’s management report:

Digital experience vs. customer journey: Kris Frantzen of Temenos says banks should understand the distinction between loan applicants’ customer experience and their overall journey, with the latter a higher priority. In his view, optimizing the journey means balancing human knowledge with technology to minimize inefficiencies along the customer’s path to the loan decision.

Balance consumer risk with seamless digital CX: Christina Luttrell of GBG Americas suggests that banks and credit unions focus on providing digital lending solutions to help consumers cope with the latest surge in inflation outstripping wage gains. A customer-friendly loan origination process can entice borrowers, while robust identity verification can protect lenders.

Seven ways to showcase your lending strengths: Stephenie Williams of Vericast summarizes lending-related findings from the company’s recent financial services trends study. Among these findings: Consumers are most open to applying for loans and credit cards from a non-primary banking institution, so relevant and personalized offers are critical to keeping them in the fold.

Solving the mortgage crisis: Rebecca Martin of Total Expert tells us that new lending technologies can help financial institutions keep their customers close. By using relevant data, banks can engage customers who are looking elsewhere for credit, those who have withdrawable equity and more.

Simpler and more accessible mortgages: Geoff Green of Salesforce writes that a digital mortgage-as-a-service platform could alleviate biases that have affected minority homebuyers as a result of redlining and the decline of minority-owned banks. Data can help create a dynamic view of a borrower’s history, and lenders can in turn make comprehensive risk assessments.

Terry Badger, CFAis the managing editor of BAI.