October 15, 2018
A Seismic Shift
The banking industry is undergoing tremendous change, forced along by consumer demands and rapidly changing technology. The digital landscape is evolving every minute. In an effort to understand how and if banks are going to adapt to this digital revolution, the American Bankers Association (“ABA”) recently conducted a survey of nearly 200 banks.
The banks that participated in the survey do not currently offer consumer loans, and the survey gauged their interest in expanding into this market if they could access cost-effective technology that would allow them to be competitive in this arena. Specifically, the survey examined whether the banks are willing to partner with digital lending technology partners to originate small business and consumer loans.
The survey results show that these banks are interested in such partnerships, as 31% of respondent banks indicated that they want to partner with a digital lender to originate and service consumer loans.
Digital Lending is the Future
New, fast-moving financial disruptors are lapping banks when it comes to giving consumers, particularly Millennial consumers, what they want. Despite this fact, many small traditional banks have not yet started to adapt to new technologies.
By 2021, half of all adults worldwide will use technology to access financial services, an increase of 53% from 2017. The potential for digital lending through banks will increase substantially in the upcoming years. In 2015, online loan origination volume was only at $25 billion. Digital lending, mortgages excluded, has a potential value of $1 trillion, and loan origination volume is predicted to reach $90 billion by 2020.
By 2020, digital lending is estimated to account for more than 10% of the US market. Banks are well positioned to court customers with thin credit files and non-traditional forms of income. By enabling technology with a seamless user experience and instant decisioning tools, banks will greatly expand their market for borrowers, particularly younger Millennial customers.
By limiting the variety of assets provided, banks continue to limit their digital lending potential. Digital disruptors, (soon-to-be joined by Amazon Bank), are filling that gap by offering student loans, mortgages, home improvement loans, and small to medium-sized enterprise loans.
Companies like Lending Club, SoFi, and CommonBond are as familiar to Millennial borrowers as Chase, Wells Fargo and Citibank.
The banking industry is increasingly aware of the explosive growth of online and mobile banking for everyday things like checking account balances, paying bills, and transferring money.
Digital lending continues to see similar growth and banks that are reluctant to accept the digital evolution of banking are losing consumer revenue and longer term relationships to emerging digital competitors.
The Customer is Always Right
Consumers demand instant, online gratification whether they are ordering dinner or paying a bill online. The lending process is no exception. The user experience of physically visiting a branch to apply for a loan is frustrating for some consumers. The lack of borrower experience taken into consideration during physical transactions can be astounding. Successful transactions require speed, predictability, and transparency – all of which are oftentimes missing from in-branch processing.
Digital lending, on the other hand, provides the user experience and instant gratification customers expect. In the time it takes to print out the forms required for a traditional loan, a consumer can have a loan offer from a digital lender.
When dealing with traditional lenders, 45% of consumers complain about long processing times for credit decisions, and 42% believe the in-person application process is too difficult.
By comparison, digital lending experiences only 17% of consumers complaining about long processing times for credit decisions, and less than 26% of consumers believe the application process to be difficult.
Credit unions of all sizes can utilize advanced, user-friendly digital lending solutions. Borrowers can apply for loans with a few clicks and view a marketplace of loan options instantly with no impact on their credit score. Required documents can be uploaded in minutes and a credit decision can be made in less than 24 hours.
The digital lender provides final rates, terms, and disclosures through a secure electronic channel accessible any time on any device. The borrower agrees to the terms, e-signs the promissory note and the loan is completed fully online.
This digital lending process does not require any physical paper. Borrowers do not have to speak with anyone on the phone or in-person, or even leave the house. Loan decisioning is delivered just as easily as a scheduling a flight or booking a show online. Millennials and Generation Z consumers are digital natives and demand these instant, simple user experiences.
Adaptation Brings Benefits
Banks reported efficiency as the leading concern when entering into the consumer lending space, with over 72% of banks stating they do not believe they can efficiently enable profitable consumer lending at their institution. Cost was the second biggest concern for avoiding consumer lending at 61%, with staffing third at 57%.
Due to these concerns, many traditional lenders have turned their backs on consumer lending and thus have turned a blind eye to consumer needs – leaving prime capital opportunities as well as potential long-term banking relationships behind. Happy, loyal customers are forced to look elsewhere for the loans they require, presenting an opportunity for a primary financial institution relationship to be hijacked by another financial institution. Enabling digital lending allows institutions to provide a broader range of products not only to attract new customers, but also to help retain existing ones.
However, despite reservations banks might have about consumer lending, 31% of respondents are interested in partnering with a third party to facilitate an increase in these loans, and 80% want to use financial technology to support these loans. By partnering with compliant, consumer friendly technology solutions, banks can capitalize on this growing consumer lending market quickly and cost-efficiently.
Operating expenses as a percentage of outstanding loans are approximately 6% at banks that use traditional lending processes while it’s less than 2% for digital lenders. A traditional loan that costs $3,050 to originate in-branch costs only $750 to originate online and is processed in a much shorter period of time. Digital automation reduces the amount of time staff spends on underwriting loans, enabling banks to originate more loans across a broader spectrum of assets with higher yields.
Financial technology companies have perfected end-to-end digital lending platforms, and banks are starting to partner with these companies to offer white-labeled solutions to customers. A select number of these partners allow banks to enable digital lending without the need to invest in infrastructure while still maintaining full control over the underwriting guidelines.
Proper due diligence of FinTech companies offering digital lending solutions is key to a successful partnership. Ensure that your future partner supports customization and real-time program adjustments to suit branding, balance sheet, and underwriting needs. Technology partnerships should also offer features which allow banks to swiftly adapt ever-evolving lending technology while remaining fully compliant as the regulatory environment continues to shift.
Don’t Go It Alone
71% of banks surveyed expressed interest in partnering with a third party digital platform for consumer loan origination. The number jumped to 79% for banks with assets above $1 billion.
It’s a brave new world and banks do not have to navigate it alone. Banks who have waded into digital lending on their own by building or buying an in-house solution often find it to be far more complex than they thought. Cobbling together a series of systems and a technical team has proven to be both inefficient and expensive.
By partnering with technology solutions, banks do not have build or upkeep new technology that is evolving by-the-minute. The right technology partners provide all the elements for implementing a digital lending program, from applications and decisioning through disbursements and servicing. Partnerships enable seamless digital lending for banks to grow their asset and customer base.
Through a partnership with LendKey, WSFS Bank grew its student lending business by nearly 60% in just 18 months without adding any additional staff. Originations increased by about 50% in a little over a year. This is just one of several technology partnership success stories the ABA found in its report, as banks use partnerships to drive significant new loan volume across new asset classes over the last few years.
LendKey puts the WSFS brand and customers first, enabling their trusted partnership to thrive. LendKey’s platform and services take care of demand generation, online credit decisioning tools, originations, and servicing for nearly 300 partner lenders. With an NPS score of 53, LendKey has achieved one of the highest customer service ratings in the industry. This ensures that high standards of customer service will be seamlessly upheld for every customer.
The implementation process is seamless on both the front and back-end. The program starts by collaborating on, and integrating with each lending partner’s unique parameters, underwriting, and balance sheet choices that are right for their institution. Banks can begin originating white-labeled digital loans in 4-6 weeks after partnering with LendKey with minimal upfront cost and no additional staff.
Risk Management
Banks need a partner who is fully compliant and who knows how to navigate a strict regulatory environment. Proper compliance and security protocols not only apply to banking regulations, but also ensures that customer data won’t be compromised.
Established FinTech companies understand these concerns and have knowledgeable and seasoned compliance control teams. LendKey incorporates having a regular cadence with bank regulators as part of its administration processes. Their quality security and audit teams are fully dedicated to implementing the highest security measures possible with regular internal and external auditing in place.
Heading Into the Future Together
Technology is not going to slow down, and digital lending continues to grow daily. Digital lending has shown a year-over-year growth of 93% in 2015 and 58% in 2016. By 2020, non-bank digital lending is forecast to reach $122 billion, a ten-fold increase in just six years.
Banks must get on board now or they will continue to lose high-yield assets to lending disruptors. Banks have much to gain by partnering with LendKey. The cost reduction automation provides open new business opportunities for banks to attract the type of consumer lending they have neglected fearing they weren’t profitable.
This partnership allows both parties’ strengths to come to the fore. Banks have the ability to build customer relationships, maintain compliance, and mitigate risk while LendKey’s digital platform provides the technology and innovation customers demand.
Banks are not giving up control when they partner with LendKey. White-labeled branding and underwriting guidelines are established by the bank, allowing for future opportunities to cross-sell to the consumer. LendKey works directly with bank regulatory and compliance personnel to review new regulations and continually enhances its platforms to maintain compliance.
LendKey’s partner lenders are well placed in the new, high growth digital lending space. By starting a digital lending technology partnership today, banks can keep pace with continuing changes in technology for tomorrow.