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.
SIGN UP TO OUR NEWSLETTER TO RECEIVE MORE NEWS LIKE THIS STORY
Arbuthnot provides working capital facility to shower company
Arbuthnot Commercial Asset Based Lending (ABL) has provided a working capital facility to Majestic Shower Company...
Metro Bank names new NED
Metro Bank has announced the appointment of Catherine Brown as an independent non-executive director...
FP Show confirms Zopa co-founder as keynote speaker
James Alexander, co-founder and former CEO at Zopa (pictured above), has been named as the keynote speaker at the forthcoming Finance Professional Show...
Metro Bank provides £4m invoice finance line to healthcare business
Metro Bank has provided a £4m invoice finance line to medical insourcing specialist 18 Week Support Group...
Modulr to create over 30 new jobs in Scotland
Modulr has completed its latest funding round led by digital venture builder Blenheim Chalcot, which takes the latter’s total investment in the payments fintech to £10.5m...
Specialist banks answer need for products that ‘reflect the reality of today’s society’
Better service and products are the main reasons why a broker would use a specialist bank, according to the latest poll by Specialist Banking...
Leeds Building Society cuts rate on retirement interest-only mortgage
Leeds Building Society has reduced its five-year fixed rate on its retirement interest-only mortgage...
60% of people want to know where their money is invested
Six out of 10 people (60%) want to know where their money is invested, according to the latest research published by Charity Bank...
Why commercial banks are in danger of being left behind
Harnessing a customer-first, technology-led approach, retail banks are paving the way with innovation...
Aldermore supports Quba Solutions with £10m facility
Aldermore has provided a £10m finance facility to Dorchester-based Quba Solutions...
TSB announces new SME banking leadership team
TSB has revealed its new SME banking leadership team as it prepares to launch its business banking proposition later this year...