This insight discusses how cultivating an engaged, educated, and responsible borrowing community can allow financial institutions to maximize lending potential while minimizing credit risk.
Like most banking transactions, lending has historically been an in-person experience. Financial institutions increased revenue by attracting individuals and businesses to the branch and offering lending services to meet their financial needs. This in turn also evolved into a very relationship oriented business.
As digital banking evolved, so did the lending process. Financial institutions began to drive revenue through their website rather than branches. Branch month-over-month traffic has decreased and digital channels are now the main way most customers interact with their financial institutions. Lending has also become very commoditized, with rates and terms taking priority over any pre-existing relationship(s).
Lastly, the emergence of peer-to-peer and niche online lenders, collectively known as marketplace lenders, has disrupted antiquated lending practices. These companies emerged during a time of historically low interest rates, making borrowing more attractive to consumers and driving investor yields. Marketplace lenders combine data-driven analysis, targeted online marketing, and consumer-focused technology platforms to attract customers. Technology-adept marketplace lenders have heightened consumer expectations for banking technology, motivating traditional financial institutions to enhance their digital offerings.
American consumers are continuing to borrow, with average household debt at approximately $90,000. While borrowing for housing has been relatively steady, the portion of debt allocated to both unsecured products and student loans has increased in recent years. Interest rates have remained low, which has further incentivized consumer borrowing and put pressure on lenders to grow their loan portfolios in order to remain profitable.
Generating organic loan portfolio growth is increasingly challenging. In order to acquire new relationships and retain existing ones, financial institutions are prioritizing a customer-focused business model. With the understanding that loan products have become largely commoditized, lenders must compete on the usability of their platforms rather than the terms of their products. Customers expect straightforward, user-friendly platforms, and are beginning to show preference for mobile rather than online services.
Digital engagement describes the relationship between consumers and an institution’s online and mobile platforms. Because consumers are increasingly making choices based on the quality of their digital experience, it is necessary to tailor digital products to consumer needs. In practice, financial institutions personalize the digital experience by using data to offer timely, customer-focused products based on an individual’s attributes and financial situation. Additionally, institutions offer targeted educational content, such as personal finance guidance and interactive tutorials, to further their commitment to the customer experience.
User-centric platforms enhance digital engagement and facilitate customer acquisition and retention. Institutions that offer simple, informative, and streamlined online and mobile platforms can create a positive experience for their customers, which in turn incentivizes loyalty and further borrowing.
Financial institutions should focus on building an engaged, educated community to ensure that their customers will be in the best position to repay outstanding balances and to continue to borrow in the future.
Customers expect their institution to provide a straightforward, streamlined digital platform in order to support their lending needs. As demand for mobile grows, financial institutions must enhance their mobile offerings in order to make digital a sustainable revenue producing channel.
Websites and mobile apps should be consistently designed in order to enhance usability and reduce any confusion for customers utilizing multiple technology platforms. An integrated digital approach represents a commitment to a user-centric business model, and improves engagement by fostering multi-platform use.
Financial institutions can generate engagement by continuously educating their customers. Building education into the digital framework through simple tutorials and interactive lessons further generates trust and loyalty, as consumers will feel that their lender cares about their overall financial state.
Offering value-add products such as a personal financial management (PFM) tool is another key component of educating borrowers and building trust. Customers with access to these resources are more likely to understand their finances and make more responsible financial decisions.
Putting available data into action can improve the customer experience and drive profitability. For instance, financial institutions can identify customers that may benefit from a new loan product by analyzing demographic and account data. Additionally, financial institutions can refer to advanced criteria outside of credit applications in order to better understand an applicant’s creditworthiness. As technology continues to evolve, data analysis has become an essential part of consumer lending.