3 Considerations for Implementing Digital Lending Solutions
by Keith Riddle, CEO/President, Sherpa Technologies
The explosive growth in digital engagement is contributing to the rise of another critical financial service: mobile/digital lending. And it makes sense, considering all of the paper that is involved with a loan application. Who wouldn’t want the opportunity to complete it digitally?
Think streamlined workflows, automated data-gathering routines, the ability to upload documentation and integrate seamless verification services. Once the loan is established, members could then review loans digitally and set up one-time or recurring payments. Sign me up.
But don’t just take it from me. Current industry research indicates digital lending is the next feature consumers are expecting to be added to the suite of intuitive digital banking experiences. For innovative financial institutions rising to meet consumers’ digital expectations, big opportunities exist. For those financial institutions content with the status quo and willing to disregard the digital trends, there’s a lot to potentially lose. Take into consideration the following three trends:
1. Implementing digital lending and complimentary micro-services offers big opportunities.
Traditionally, all products and services a customer used would have been supplied by the financial institution’s platform itself. Now, there are many alternative products and services customers can use that are not specifically part of the financial institution’s platform but can be enabled as a micro-service. This industry “disruption” is also known as the unbundling of financial services.
For innovative credit unions willing to take the plunge and implement financial digital lending solutions, there are big opportunities upon which to capitalize. One of these opportunities is the huge potential audience. For example, last year the Financial Brand reported that 81% of consumers are likely or at least somewhat likely to apply online for a home, auto or personal loan. This is a pretty big number that deserves our attention.
Perhaps this number is so high because the current success of electronic mortgage payments has sort of paved the way. According to a report by Aite, “U.S. Home Mortgages: How Consumers Pay Their Bills”, the success of electronic mortgage payments is creating opportunities in other areas of lending.
“Home mortgage is the largest retail loan portfolio by value,” says Aite, “and a growing percentage of U.S. homeowners are setting up recurring mortgage payments. How can financial institutions leverage this good start to improve borrowers’ satisfaction, increase the home mortgage portfolio’s profitability, and decrease operating costs? Are there opportunities to expand this strong performance into other high-balance loan portfolios?” Good questions, all.
Another opportunity exists in the potential for massive profit. According to recent studies by both Goldman Sachs and Ernst & Young, financial institutions stand to earn $30 billion in the next eight years by utilizing digital lending technology. Also, since credit unions only hold 6% of share in mortgage loan applications (as of 2017), the opportunity to develop and grow an appropriate digital engagement plan for mortgages would yield significant revenue opportunity.
2. Offering efficient, convenient mobile/digital solutions not only meets consumers’ expectations but also increases their engagement with their financial institutions.
Of course, the primary catalyst for these big opportunities is the increased growth of digital solutions that offer efficiency, convenience, and meet consumers’ expectations, which, in turn, leads to more engagement.
Digital Banking Report’s recent “Improving the Customer Experience in Banking” outlines that allowing the consumer/member to engage with their financial institutions on the channels they prefer at the times they want is a high priority for financial institutions. It’s easy to understand that 24/7 account access is a powerful tool for not only improving member engagement but also increasing the use of services/products.
Even preeminent Wall Street firm Goldman Sachs is harnessing financial technology to increase lending growth and positively impact the consumer-lending experience. Founded nearly 150 years ago, Goldman Sachs obtained a bank charter in 2008 during the financial crisis and recently entered the consumer lending business with the introduction of Marcus by Goldman Sachs.
Marcus is an online lending platform that offers unsecured, personal loans to consumers ($30,000 or less) and allows them to bypass interaction with an actual staff member. A customer can get approved or denied for a loan without having to speak with anyone. At the writing of this article, Goldman Sachs had generated more than $1 billion in loans through the Marcus platform and projected over $2 billion by the end of 2017.
For innovative credit unions willing to take the plunge and implement financial digital lending solutions, there are big opportunities upon which to capitalize. The Financial Brand recently reported that 81% of consumers are likely or at least somewhat likely to apply online for a home, auto or personal loan. This is a pretty big number that deserves our attention.
3. The financial stakes are high for financial institutions that can’t or won’t compete.
So what’s the big deal if our credit unions don’t keep up with the innovative Fintech and digital experiences consumers expect? Is there really that much to lose?
Yes, there is. According to the Mortgage Bankers Association, large banks are losing market share in mortgages, mostly to non-depository lenders. For example, in the first nine months of 2016, Rocket Mortgage funded more than $5 billion in loan volume, according to Quicken Loans. Further, McKinsey & Company declared that financial institutions that do not adopt a digital lending solution could lose 60% of their retail and small business profits to non-bank entities in the next five years.
Fortunately, our industry is recognizing that the stakes are high. According to data from Ernst & Young in May 2017, investing in new customer-facing technology (i.e. the user experience for mobile) is one of the top three banking growth priorities. This is because consumers are interested in services that eliminate friction points. For example, when it takes too long to complete an online application, a consumer is likely to abandon the process. Or, if information provided by a financial institution is too hard to understand, a consumer may just go do business where it’s easier.
Credit unions must assemble a plan to evaluate the functionality of digital lending applications, supporting a variety of loan types, as part of their digital services strategy.
If your credit union is offering first mortgages, the ability to offer a streamlined, digital user experience to compete with the Rocket-Mortgage phenomenon will be crucial to long-term success. Credit unions have had such a small share in the loan market thus far that platforms like Rocket Mortgage haven’t really taken away from credit unions’ earnings, so to speak. Going forward, as credit unions become bigger competitors in this arena, it will definitely impact their earnings.
So it’s time to develop a plan for success, which can start with three simple steps: evaluate, strategize, and create.
First, your credit union should evaluate the functionality of its digital lending applications (if it has any) and how those applications can enhance the service delivery and efficiency of your loan operations.
Next, strategize how to leverage baseline analytics to enhance the digital lending experience. Credit unions can use the basic member data they currently have on hand to help them strategize their next steps.
Third, create a path to digitize the user experience as you review your lending-services priorities.
The anticipated rewards are great, the potential consequences greater. Continue to leverage technology to offer consumers a better user experience and watch the exciting growth of specific services, like lending.