With inflation rearing its head in major markets around the world, businesses in sectors as diverse as retail, health, auto, and capital equipment are wondering how best to handle this sobering development. For enterprises thinking of providing in-house “buy now, pay later” consumer financing on an installment basis, it’s vital to understand the impact of inflation.
Like other economic concepts, inflation is a double-edged sword. It allows some borrowers to repay lenders with money that has less purchasing power than when it was originally borrowed (good for the borrower), the higher prices that accompany inflation may increase demand for credit from consumers keen to curtail sticker shock, pulling interest rates higher (to the benefit of lenders, who can lock in higher rates in periods of inflation that may still be in force as inflation recedes). In addition, in times like these, consumers may scramble to secure credit now at relatively favorable terms.
Prices rose sharply in October 2021, 6.2% higher than in October 2020. The latest October saw the largest single month-over-month increase since the pre-Clinton nineties, with energy, shelter, food, and cars — things whose prices affect ordinary consumers most — clocking significant increases.
If you take out volatile food and energy prices — supposedly because they’re too volatile to track consistently without creating “distortions” — the inflation growth in the 12 months through November 2021 was 4.6%, which is cold comfort to those frightened by rising prices.
How and (maybe) why costs have headed north
So what’s going on, and how does it affect you, the business owner?
While experts aren’t completely sure, there are several possible contributors, and they’re not mutually exclusive.
- The so-called base effect kicks in when prices rise off an unexpected drop — precisely what occurred for many business sectors in the first year or so since the pandemic started in early 2020. In this view, the “inflation” in evidence is simply a reversion to the norm.
- Meanwhile, the global supply chain has been stretched taut by the pandemic. To take just one example, cars are harder to get because of a shortage of computer chips. And this shortage is compounded by competition, as consumers who put off purchasing new vehicles in 2020 jumped back into the market, driving prices higher. Additionally, car rental companies that cut back on inventory early in the pandemic aren’t now selling used vehicles and buying new ones at the usual rate, making for-sale cars and trucks harder to find and driving up their prices.
- Labor issues have also welled up during the pandemic. In an apparently ongoing process, Americans lost or quit their jobs at unprecedented rates during the pandemic, and employers are having trouble enticing people back now that, in some places and sectors, business has picked up considerably. Compounding the issue, stimulus and higher unemployment payments over the past two years seem to have kept some from returning to the job market. The result? Demand for labor is outpacing supply, and some businesses are cutting hours of operation as a result, creating additional challenges around profitability, and adding yet more helium to the cost of doing business.
Meanwhile, buyers are borrowing more, fueled by uncertainty about when (rather than if) the Fed will raise rates. A year from now? Six months? Sooner? Nearly half of banks covered by investment bank Keefe, Bruyette & Woods saw at least 5% annual core-loan growth in the third quarter, American Banker reports — and that’s not counting loans from the Paycheck Protection Program.
Also excluding PPP loans, OceanFirst, a community bank in Red Bank, N.J., tells the same source it saw 7% year-over-year loan growth in the Q3 this year.
Bankers are also keen to cozy up to industries — like cars, fuel, and staples — because people need them, whatever the price. Banks see these and other industries putting more money into “expansion efforts,” and they want to help finance these investments, further increasing loan demand.
Automation applies to tech updates as well
Overall, banks see a new inflation cycle as a chance to put customers’ deposits — fatter than ever thanks to earlier stimulus payments — to work for them and their customers in a higher-rate environment. The same holds true for businesses, and those with in-house, software-as-a-service type financing will insulate themselves from the worst effects of inflation.
“Working with a SaaS means your provider leads with the technology — understanding, assessing, and implementing improvements to loan automation and functionality on an ongoing basis,” says Dmitry Voronenko, CEO and co-founder of lending-technology provider TurnKey Lender. “We get to work on innovations and improvements immediately because our clients expect it. Some banks and third-party providers can take years to make an update.”
Lenders who have to work without the latest in technology have no way to harness artificial intelligence, which helps lenders uncover more about applicants than forms and credit-bureau scores ever could. Inputs on specific, individualized, real-world financial behaviors — spending and bill-pay habits, for example — allow lenders to make better loan-origination decisions and lay the foundation for healthier loan portfolios.
Lenders stuck in manual processing are left out of game-changing innovations like AI. Far from advancing capabilities around due diligence and risk mitigation, lenders who can’t look to automation must scramble to assemble documents involving third parties.
Artificial intelligence and straight-through processing
Where integration isn’t present, staff must repeatedly enter the same information for disparate systems, wasting time and risking costly data-entry errors. Eliminating data re-entry is a top priority for institutions eager to control risk factors.
An online application that’s integrated with the lending-system configuration is the starting point for “straight-through” processing that includes automatic “field inputs” for third-party forms, ongoing loan management, and internal analytics and reporting.
To benefit from greater operational efficiency into borrower pipelines, lenders are using CRM technologies that aggregate customer information into a complete view of each customer and each loan. This technology helps lenders centralize all customer engagements, accurately report on the institution’s lending pipeline, and track all open opportunities.
When you don’t have to assemble, match and then double-check information that may have to be retyped at each step, third-party responses tend to come in faster, and in formats the lender can handle with ease.
“State-of-the-art technology means lenders can merge loan pricing, loan analysis, and risk assessment to save time, improve efficiency, and inform pricing decisions,” says TurnKey Lender’s Voronenko. “Automation helps companies price loans strategically, so that loan operations in retail or B2B settings are competitive and profitable.”