In the “Next Normal” for Consumer Lending, Cloud-first Platforms Offer a Silver Lining | Blog
The post-pandemic world has created a disparate consumer landscape, with many finding themselves with more disposable income from stimulus checks while others struggle financially. What does it mean for consumer lending?
The consumer lending industry is poised to see tremendous growth post the pandemic, but most lenders’ credit risk appetite has shrunk, given the economic uncertainty.
With consumer expectations and behaviors continuing to change, cloud-first consumer lending platforms will play a key role in driving growth in this new era.
Let’s take a look at what’s changing and what innovative solutions lie ahead. Loans delivered through mobile apps, banking without humans, and consumer banks offering more lifestyle experiences are all trends to watch for.
A new market
The lending industry has been battered by a series of challenges over the last year as COVID-19 caused a significant decline in economic activities and consumers across the globe braced for a recession.
With economic hope in sight and consumers ready to release their pent-up demand and make up for lost spending, demand is now rising. Although it is important for lenders to take caution, they must take care of their shrinking book size by targeting the right set of customers with the right products.
But today’s consumer is different than in the past. They demand different experiences and loan products. As a result, lenders must rethink their product, experiences, and channel strategy and adapt to changing consumer expectations.
Changing consumer behaviors and new consumer segments
The fundamental tenets of Secured, Ubiquitous, Personalized, Easy, and Responsive (SUPER) lending experiences have not evolved; however, the relative importance of these tenets has changed. As we are seeing everywhere, customers have become more comfortable with digital transactions and expect to shop for loans through an end-to-end digital lending process with minimum assistance from humans.
Consumers also have grown increasingly concerned about their financial health and credit standing during these times. This has increased demand for small-ticket loans for financing short-term requirements versus large long-term loans.
Also, expect new consumers to join the market for the first time who have limited or no credit history. These include the digital-savvy, well-educated Generation Z segment and financially-distressed consumers who are seeking loans as a result of government economic revitalization programs during the pandemic.
Both of these groups will be crucial in driving growth in consumer lending, especially in personal loans. According to research by Experian, while the overall growth in personal loans in the U.S. has declined 6 percent in 2020 compared to 12 percent the prior year, Gen-Z consumers saw their personal loan balances grow 33 percent compared to less than five percent for other age groups.
How lenders should prepare
We are moving from a “low demand, low supply” state to a climate of increasing demand while the supply side struggles to keep pace. Besides their conservative approach, lenders also face challenges to manage consumer behavioral change and provide the right products and experiences.
To cater to this new demand pattern and tap into the new customer segments to revive their shrinking loan books, lenders must leverage data and technology thoughtfully in their loan origination process. Here’s how:
- Understand and adapt to the new consumer behavior: Lenders must equip themselves with a modern data stack and the right technology such as behavioral AI, which will enable a comprehensive view of a consumer’s situation and provide insights. New initiatives like video-based customer service and the use of bots for assistance will resonate well with customers and deepen relationships and trust
- Nudge consumers towards low-cost, digital-first channels for acquisitions: While traditional marketing and referral sources remain important, digital channels are becoming mandatory for lenders wishing to compete across all consumer segments. Digital acquisition channels increase efficiency and provide a rich source of digitized data that can further be used to assess the customers and push customized product notifications
- Offer integrated experiences by introducing lending as part of regular buying processes: Lenders must look to integrate their products as sub-sets of consumer’s home, auto, and other buying processes. An ecosystem approach by partnering with local businesses, e-commerce players, educational institutions, and other relevant parties and leveraging their consumer bases will be key. Next-generation customers will shift towards a mobile-based super-app ecosystem for all their lifestyle and financial needs, and lenders must not miss that opportunity to be an integral part of that ecosystem
- Offer contextualized products for evolving consumer needs: In today’s scenario, it has become extremely important to be able to create lending products that are flexible enough to meet evolving customer needs without significantly changing the operations side. To successfully grow their consumer loan books, lenders must be able to identify financial issues consumers are facing and support them while also protecting their portfolios. One example of this would be providing advisory services for their existing customers to acquire hardship loans as a result of the pandemic
- Create a unique experience for each hyper-segment: Lenders should reimage their product portfolio to cater to micro-segments of customers. As consumers become more value-conscious, offering a unique lending product, providing a real-time, hyper-relevant, and personalized experience for each customer will be important
The solution: cloud-first, platform-based operating models
As banks and financial institutions shift towards a digital lending culture with new products, new channels, and new experiences to meet consumer demands, they must have the right level of agility to respond to the continuous changes in the demand side.
A platform-based operating model, which is flexible enough to accommodate the changes, will be essential to react to these evolving demands with speed as well as scale. Cloud technology is the infrastructural element that will enable the agility, flexibility, and scalability of the platform.
At the same time, lenders must reimagine their traditional data value-chain with future-ready data exchanges, enabling real-time data analytics and decision support to provide deeper customer and channel insights. Cloud allows lenders to utilize the data and AI technology that hyperscalers and cloud technology vendors offer to make the best use of internal and external data.
Many banks and financial institutions already rely on third-party digital loan origination platforms to modernize their processes, reduce operational costs, and improve customer acquisitions and revenue. Such platforms deliver enhanced omnichannel customer experiences and operational efficiency through AI or machine learning as well as analytics-rich solutions to enterprises by enabling fraud mitigation.
The consumer lending industry will only evolve further and a pragmatic approach to adoption of cloud, data and analytics, and exponential technologies will help lenders realize value from technology buzzwords and impact customer experience and business performance objectives. Innovative solutions from product vendors across the lending value chain will enable lenders to close the gaps in their current systems.
If you would like to better understand how a platform-centric approach can transform your consumer lending business in this dynamic environment, please reach out to [email protected] or [email protected].
You can also download our complimentary viewpoint Consumer Lending on the Cloud.