Right now, we are in one of the most exciting periods in the history of the lending market.
What is the future of lending?
Right now, we are in one of the most exciting periods in the history of the lending market. The confluence of technology, regulation, but also of demographic change and funding presents extraordinary challenges and opportunities for banks and for lenders.
It is a market that has long been dominated by a few large incumbents, but recent times have seen more and more challengers emerge with the aim of disrupting the status quo. Challengers do have some notable disadvantages when compared to established players with a smaller operating scale, less opportunity for distribution, less data and less investment funding. However, there are also huge opportunities. If these new specialist banks and lenders can focus on a number of key areas, they will be able to steal a march on market incumbents, close the gap and seize market share.
1. Designing propositions around consumer needs
Across financial services, the balance of power is shifting from providers to the consumer and expectations are rising. Lending has been run by the providers and products have been designed to suit them. Lenders need to rethink their approach to treasury, to pricing, to credit risk, to post-origination customer treatment strategies and provide customer-centric propositions.
2. Using non-traditional data sources to understand customers
The availability of data has ballooned at the same time that processing costs have shrunk. In that context, one would expect that lenders' approach to credit risk assessment and pricing must have transformed, but sadly it has not. There is growing evidence of increasing predictive power to assess the credit risk for prospective borrowers using non-traditional sources, such as social media and application form completion styles.
3. Target underserved customers
There are niches outside of the risk appetite of the big banks that are credit worthy. Non-homeowners have traditionally been avoided, but there is an increasingly large portion of society renting for the long term. Likewise, there is a growing population of people with thin credit files (eg millennials) who do not fit standard credit models. Within these segments there will be a lot of consumers who would be a perfectly good credit risk, but are currently underserved.
4. Understand existing borrowers
Incumbent lenders are making a disproportionate amount of their profit from their back books via existing borrowers. Many of these borrowers are on rates that are simply not justified by their credit risk. Whoever understands what their current customers' needs are could end up reaping the rewards.
Successful lenders of the future will need to be brilliant and differentiate on a number of fronts. A superb understanding of the financial behaviour in the target segments, a huge focus on data analytics, strong skills on pricing and credit risk assessment and being proactive on top-ups, renewals and restructuring will be vital as well as an understanding of what elements of the value chain they will keep in-house and what elements they will outsource. Once they know this, they can then dedicate their energy and resources to these, while working with a partner for areas such as the operational work. Getting this mix right will be one of the keys to successfully challenging the status quo and being at the forefront of lending in the future.
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