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Consumer Lending In The Digital Age

Katie Jensen
Feb 17, 2022
tech

The pandemic has left its mark on nearly every industry, either for better or for worse, and consumer lending is no different.

KEY TAKEAWAYS
  • Ecommerce was the biggest beneficiary to come out of the latest economic crisis, and established new purchasing pathways that are here to stay.
  • Although the unemployment rate remains slightly higher than pre-COVID levels, forbearance programs have made it harder for lenders to interpret credit-scoring data in underwriting and collect on defaulted loans.
  • 40% of consumers have been using digital channels more frequently while 60% say they conduct the majority of their financial transactions on mobile apps. 
  • One in three consumers are now engaging with their financial institution multiple times a week via their mobile devices, while about two out of three are using these digital platforms at least once a week.

The pandemic has left its mark on nearly every industry, either for better or for worse, and consumer lending is no different. Despite challenges like the suddenly high volume of forbearance requests in 2020 or the long-term changes in consumer behavior, the pandemic created substantial opportunities for lenders in the mortgage industry, whether they’re just entering the market or expanding their footprint. 

According to L.E.K. Counseling, a global strategy consultancy, COVID-19 reshaped consumer lending in a much different way than the previous economic crisis in 2007-08. During the pandemic, consumers cut spending amid layoffs, while the government pumped billions of dollars back into the economy through stimulus checks and forbearances for many types of mortgages and most student loans. Ecommerce was the biggest beneficiary to come out of the latest economic crisis, and established new purchasing pathways that are here to stay.

"Lenders across the board have reconsidered their participation in consumer lending, and some, led by prime lenders, have significantly reduced their exposure by tightening their criteria for new lending. In some cases, they've even stopped new lending completely until a sense of normalcy returns," said Robert Haslehurst, L.E.K. managing director and co-author of “COVID-19 Recovery Opportunities in Consumer Lending.”

Although the unemployment rate remains slightly higher than pre-COVID levels, forbearance programs have made it harder for lenders to interpret credit-scoring data in underwriting and collect on defaulted loans.  

"More new loans will go to lower-risk consumers as lenders put a greater emphasis on customers' repayment history and take a more conservative approach to assessing loan affordability. Many consumers who do get loans will be charged higher rates. That said, lenders, especially unsecured lenders, will eventually need to reassess their lending criteria and increase their risk appetite to prevent their books from going into runoff and their incomes from falling too low," said Peter Ward, a Partner at L.E.K. and co-author of the report.

The pandemic forced many lenders in the industry to get with the times. Many needed to adapt new technologies to stay competitive, because consumers’ use of digital platforms surged — 40% of consumers have been using digital channels more frequently while 60% say they conduct the majority of their financial transactions on mobile apps. 

More importantly, one in three consumers are now engaging with their financial institution multiple times a week via their mobile devices, while about two out of three are using these digital platforms at least once a week.

Point-of-sale (POS) lending lets consumers make purchases with incremental payments, and has become much more common during the pandemic as consumers increase online spending. In return, lenders have been working to streamline their online application process with quicker access, flexible borrowing limits, and no credit history requirements.

"With vaccines continuing to be administered around the U.S. and businesses taking steps to reopen permanently, the good news is that financial institutions and their investors can employ numerous strategies to make the most of those opportunities. Strategies, of course, will differ by bank type and lending class, but specialist lenders and those with complex, data-driven underwriting capabilities are likely to be the big winners," said Gigi Wong, L.E.K. managing director and report co-author.

Key Strategies For Every Kind Of Lender: 

Big banks should use machine learning and big data tools to augment credit reports with real-time income or cash-flow data to help capture the roughly 70% of Americans who say they'd switch to a financial institution with more inclusive lending practices. Big banks should also continue their accelerated shift to online channels, as all lenders will need to keep investing in seamless engagement, underwriting and servicing experiences.

"Large financial institutions that prioritize digital innovation to optimize their consumer interactions are likely to see the most competitive upside over the long term," said Ward.

Small banks, against a backdrop of increased interest in lender trustworthiness, intuitive digital application processes, personal loans for new entrants and omnichannel digital lending experiences, should position themselves to meet changing consumer demand.

Specialist lenders should actively position and market themselves to newly nonprime borrowers, which will help them capture customers that the larger prime banks have turned away. They should also continue to offer tailored solutions through open banking for those with complex and nontraditional financial needs. This will help streamline the mortgage approval process — and also help the specialist lending sector deliver solutions to this growing segment of the market with greater speed and efficiency.

Subprime lenders — to meet the evolving preferences and needs of consumers — should also actively position and market themselves to customer groups that have been newly rejected by mainstream lenders. They may also offer point-of-sale financing as an alternative to credit cards.

"For subprime lenders, presenting line of credit financing as personal loans to consumers who make frequent, small-dollar transactions will help combine the strengths of personal loans and credit cards to target initial consumer transactions. They should also invest in automation to better assess risk profiles. By leveraging AI and machine learning, lenders will be able to scale up without increasing their team size," said Wong.

"Economic shocks and downturns can also create opportunities. Unlike the great financial crisis, the federal government has provided a significant amount of fiscal relief during the pandemic to help Americans meet their financial obligations. Banks, specialist lenders and investors need to embrace strategies that make the most of their capabilities while also directly addressing the needs and changing behaviors of their target customers," said Haslehurst.
 

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