2020 Lending Market Prediction: Who Will Own the Marketplace
2020 is right around the corner, and it promises to be another dynamic year for the financial industry. Savvy lenders are already in full planning mode, strategizing new ways to overcome a variety of business challenges. We’re optimistic that digital lenders will find creative workarounds for their obstacles. And maybe even say, “Wow. That was a blessing in disguise.”
Over the past decade, the top trends in the credit industry have skewed heavily towards technology, cybersecurity, and regulatory compliance. However, we’re starting to see a noticeable shift from an internal, tactical, technology perspective to an external, strategic, consumer perspective. Successful lenders have adopted a customer-centric business model, and it’s paying back in spades.
They start by assessing human needs and wants, and then they use advanced technology as a delivery vehicle to serve up faster, better, custom solutions. It’s a sea change in the lending arena, but let’s not gloat. Most lenders are still playing catch-up compared to online retailers, where e-commerce giants like Amazon differentiate their brand with a superior user experience (UX) that nurtures a long-term relationship and optimizes lifetime value.
The alternative lending space has become crowded with a myriad of new online funding groups. It’s no longer feasible to use just online account access as a competitive edge, but don’t make the mistake of trying to compete on price. You’ll find yourself in a race to the bottom, where you do little more than erode your own profit margins when consumers are paying a premium price for speed and convenience.
As the autumn season approaches, it’s important to get out in front of 2020 consumer trends. Three areas you’ll want to consider are:
- Full-spectrum credit scoring
- Added-value credit tools that solve multiple consumer problems (notice the term credit tools instead of loans)
Full-spectrum credit scoring
Full-spectrum credit scoring can expand your program in two ways. It helps you dive deeper into your current pool of prospects, by approving more loan applications without additional credit risk. And it helps you go wider, by expanding your prospect audience beyond a limited number of people with established history at a traditional credit bureau. A bigger prospect pool with a higher conversion rate. It’s a double whammy in the best way.
E-commerce marketers are obsessed with conversion rate optimization (CRO). This is the process of constantly fine-tuning conversion from website visit to closed sale. You’re increasing the number of sales, without increasing the number of prospects. So you’re increasing profit and ROI, without increasing the marketing investment.
One of the key components of CRO in the lending industry is credit quality. Traditional bankers chase the sweet spot, a precise credit score that allows them to book a larger number of new accounts without increasing charge-offs from bad debt. Unfortunately, this approach limits their prospecting to a small pool of established borrowers with substantial, documented credit history. Savvy digital lenders take a full-spectrum view. They partner with decision-management experts to identify surrogate credit indicators with a high propensity to predict payback behaviors. These data sources can include checking and savings account balance trends, money management practices, spending habits, education, employment, mobile device activity, social media engagement, e-commerce buying patterns, and psychometric personality profiles.
Full-spectrum credit scoring harbors some hidden benefits. When we look in new places for new types of predictive data, we uncover pockets of high potential prospects just waiting to be mined. Plus, the information from these data sets can be used to personalize our products and services.
An advanced software system is required to aggregate multiple data files into one comprehensive customer profile. FinTech software or a lending-as-a-service (LaaS) platform can provide the automation and intelligence you need to deploy a full-spectrum credit scoring program.
TurnKey Lender is one system to consider. This award-winning platform integrates with traditional credit bureaus, leverages a proprietary credit surrogate scoring system, and constantly fine-tunes AI algorithms using machine learning and data analysis. It’s the most advanced credit scoring module available in the marketplace today.
Added-value loan products (let’s call them credit tools)
As marketing professionals, we need to think in terms of consumer benefit, which goes well beyond established product attributes like credit line, interest rate, and repayment terms. For example, successful weight loss products don’t promote chemicals that suppress appetite. They make their prospects experience at a visceral level the pride and confidence they’ll feel when their slimmer self is walking along a crowded beach, wearing next to nothing.
We need to help our own prospects experience the feeling of safety and security that comes over them when their loan is approved. The feeling of deep satisfaction when they see their wife and children so happy on a family vacation. Or the feeling of abundance and optimism when their son or daughter starts that first day of class in a better school district. As lenders, we spend our days analyzing dollars and cents, but for our borrowers, it’s not about the money. It’s not even about the things they can buy with the money. It’s all about the emotional payoff a consumer feels when they take possession of their purchase. Or a business director feels when they accept delivery of new, high margin inventory.
To accomplish this end, our loan products need to evolve from a one-time monetary transaction to an ongoing client resource. A tool that supports their long-term financial health, where the loan is just one part of a bigger package. There’s a positive side effect to added-value marketing. These credit tools by their very nature will nurture a long-term relationship, which means there’s an ongoing opportunity to sow the seeds for incremental products and services. These credit tools are a built-in retention vehicle that reduces attrition and maximizes lifetime value (LTV).
Here are a few of our favorite credit tools that can add value to an overall lending program.
Increase your access to credit
Credit Sesame lives by the tagline, Your Financial Growth Starts Here. The product tracks credit scores, and provides educational tools on money management. Then it uses customer insights to deliver personalized offers. The program improves the client’s credit score in the short-term, which allows them to take advantage of additional credit in the long-term. They enjoy the safety and security of knowing they always have access to extra money when they need it.
Advance your career
SoFi promotes student loans, but it specializes in the unique needs of university students and new graduates. The SoFi Career Advisory Group helps these young people manage their career path and income potential more effectively. They host happy hours, informational events, and local dinners where members can network and make valuable business connections. This group partners with young borrowers in order to prime the pump for upsell and cross-sell opportunities beyond the initial student loan.
Avoid adverse actions and penalty fees
Dave is a cuddly teddy bear in preppy glasses who can Outsmart Overdrafts. The program uses open banking APIs to flag upcoming payments that would cause an overdraft on the checking account. The red flag notice includes an optional payday loan (at 0% APR) to cover the payment. Dave’s clients stay current with their financial obligations. Plus, they avoid penalty fees on their checking account, and protect their credit rating. All without paying any interest on the overdraft protection. Not bad for a teddy bear in glasses.
One of the most important aspects of any product or service is user experience (UX). A number of research studies have found that the key to financial services brand differentiation is an improved customer experience with less friction. As you plan for 2020 you’ll want to make sure these three UX features are part of your foundation:
- Ensure your system is fast, easy, and safe, by automating application submission, credit scoring, account onboarding, and payments processing.
- Offer omnichannel communications and data transfers, so customers can choose how they want to access their accounts.
- Deliver a mobile-only banking experience, but provide the option for live customer service support when your client has a complex or urgent issue to resolve.
These features can be deployed easily and cost-effectively with an online lending platform. LaaS programs provide a fully managed, turnkey approach for small to mid-size banks (SMEs) who choose to buy technology, instead of building it from scratch. The top platforms automate processes and improve credit decisions. They provide alternative credit scoring, and machine learning that continuously refines the credit scorecard. And they stay current with new banking regulations. These platforms are cloud-based, so upgrades to credit algorithms and regulatory rules are automatic without additional user programming. Plus, lender employees and borrowers can access the system at any time from any mobile device.
Gen Z has entered the building
Millennials have replaced baby boomers as the largest consumer demographic. They’re younger and have more disposable income. But they’re also demanding, especially when it comes to digital delivery systems. Generation Z isn’t far behind. The leading edge of this emerging demographic cohort has already earned a university degree, and entered the workforce. They were born into a world already saturated with digital technology, so they’re the first generation of pure digital natives. Gen Z will outnumber millennials, and we can only guess at the technologies and services they’ll be demanding within the next few years. We’re betting on personalized, on-demand financial tools, plus voice-activated everything.
According to a McKinsey study, the Gen Z cohort values individual expression, avoids labels, and makes decisions in a highly analytic way. They consider themselves self-learners. They’re comfortable searching for information online, and integrating data from multiple sources in order to come to their own conclusion. There’s some early speculation that as curious self-learners they’re far more willing to listen to a variety of perspectives – quietly – before they formulate a personal opinion. Does this mean that screaming news pundits, talking over each other, could become a thing of the past?
Consumption in a Gen Z world means having access to goods and services, not necessarily owning the physical property. We see this trend in music and video streaming services, car-ride services like Uber, e-commerce selling platforms like Shopify, shared workspaces, credit cards with rewards, bank lines-of-credit with no annual fee, and the trend towards renting instead of owning.
Hyper-segmentation is a marketing technique that stalks the elusive customer segment of one. It drills down to the individual, and delivers a custom product based on personal requirements. In the credit world we would create the perfect product, and then use credit scoring criteria to determine the appropriate risk-based price.
We may never achieve this finite level of segmentation, but we can move in the right direction. A common approach is to take a broad category like a type of borrower or the use for the funds, and then identify niche segments. Examples of niche segments in the business borrower category would be a small organic produce farmer or a franchisee.
The farming niche in our example may sound too limited to be viable, but specialty lenders are already targeting this narrowly defined group with branded financial products. There are many examples in the use-of-funds category, because there are many distinct ways for borrowers to spend the money. For example, buy a home, make e-commerce purchases, cover a medical or dental emergency, make an out-of-pocket payment for an elective medical procedure, finance a car for personal use, finance that same vehicle for business use as a ride-share driver, consolidate high interest credit cards, consolidate student loans, sign a lease on a new apartment, plan a wedding, etc.
A great first step for a lender who’s developing a hyper-segmentation test strategy would be to take an existing loan product that has a broad appeal, and use different packaging and different messaging to target distinct niche prospects. There are many software packages that can automate the processes required for segmentation and custom messaging.
A more advanced approach would be to identify high potential targets, and then build a business that caters to the segment. This business model is based on generating maximum LTV from a small number of long-term clients. In order to jumpstart the conversation, the lender needs to engage with the prospect by way of an added-value credit tool. It must deliver value to the prospect, and consumer insights to the lender in order to tailor products and messages. In this way, the credit tool provides utility to the consumer, and a sales lead to the lender.
Consumer-centric strategies need cutting edge technology
As lenders, we often have more data than we can comfortably manage, especially when it’s housed in separate databases. It’s one of the downsides of the information age. An in-house database will contain customer profiles, account activity, and transactional information. We can enhance this data by accessing customers’ social media pages, and gathering additional behavioral and attitudinal information. And we can purchase supplemental information from proprietary databases like credit scoring agencies.
Our biggest challenge is harnessing the power of this incredible volume of data. It takes sophisticated software and trained analysts to translate these data points into actionable intelligence that supports consumer-centric financial tools, smarter credit decisions, and hyper-segmentation.
Fully managed, turnkey lending platforms are an efficient and cost-effective deployment strategy for any funding operation that’s evaluating whether their current technology stack can support the launch of customer-centric products and services. LaaS platforms can automate multiple processes, including hyper-segmentation and custom messaging. And deliver advanced credit scoring methodologies with machine learning capabilities that improve portfolio yield.
When we look back at 2020
In this article we identified three trends that should become foundational components in your 2020 Business Plan:
- full-spectrum credit scoring
- added-value credit tools that serve multiple consumer needs and wants
- hyper-segmentation that drives personalized products and services.
These trends may look very different on the surface, but they’re all grounded in a customer-centric business and marketing approach. We can learn a lot about this forward-thinking concept by going back in time to grandma’s dinner table.
Grandma didn’t plan her menus by wondering what kind of funky things she could do with kitchen equipment and cooking utensils. She envisioned a table that was warm, welcoming, and covered with mouth-watering dishes. A wonderful place for her family to come home to every evening. Then she focused on everyone’s favorite foods, and looked for creative ways to prepare and present those meals.
Grandma got it right. And it’s a great lesson for us to learn as marketers. Let’s not waste our time thinking about all the cool things we can do with cutting edge technology. It’s sort of like grandma brainstorming unusual ways to use a stove and a whisk. Let’s focus instead on how to create financial tools our customers can use to make their lives better. It wouldn’t hurt to treat our customers like family, and our war rooms like a test kitchen.
The TurnKey Lender platform automates origination and account management processes. It uses AI supported by data analysis and machine learning to qualify more accounts, more quickly. And it supports customer-centric strategies and tactics.