Retail lending and leasing have grown dramatically in the decade following the financial crisis, mostly powered by non-bank financial institutions. These institutions leveraged technology to improve speed and access to steal market share from the more traditional sources of credit. However, increasing competition in the space and the demands imposed by younger, more tech-savvy consumers are driving further innovations in the lending lifecycle. An attractive APR and terms are no longer sufficient to attract new borrowers.
It is increasingly apparent that the lending game is won and lost at the front-end (originations) and the back-end (collections) of the lending process. The middle — a compliant servicing platform is now table stakes.
Key Loan Origination and Collection Trends
1. “Digital honey”. Indirect lending still relies on old-school methods of establishing partnerships with dealers and other intermediaries to ensure a steady stream of applications. However, in the direct space, attracting potential borrowers to a lender’s site in sufficient numbers is critical to business success. In order to accomplish this, lenders are employing digital marketing techniques like paid advertising (e.g. Google Ads) and “canvas fingerprinting” (tracking web searches to target ads) to drive traffic to their sites.
2. Engage and capture. Once a prospect lands on the site and is sufficiently enticed by the offer(s), the next big challenge is to engage the prospect and ensure that they complete their application. Most retail lenders experience high rates of application abandonment. To mitigate this, many of them are employing a two-pronged strategy:
- Employing educational videos and chat bots to keep prospects engaged; and
- Implementing easy to navigate applications that allow prospects to either drag and drop or scan and attach relevant documents to streamline the application process.
3. Instant decisioning. Gone are the days when 24 hours-plus for a credit decision was the norm. Borrowers want a decision in seconds — or at least in minutes — once an application has been entered. The ability of a lender to meet this requirement depends on the following factors:
- The completeness of the application and document capture process;
- The ability to pull and incorporate bureau data in real time; and
- Employing a sophisticated auto-decisioning process
As auto-decisioning has become more of a standard practice, data-science is playing a larger role, often injecting alternative data into the decision process, such as rent and cell phone payment history.
4. Multiple payment options. Once a loan or line of credit is funded, or the leased equipment is installed, ensuring regular payments becomes the focus. The trend is to support as many payment methods as possible to give borrowers choices ranging from wiring money to credit cards. A new payment option is for the lender to use applications like Plaid to pull the payment from the borrower’s bank account on the due date. This is particularly true with lenders in the merchant cash advance business.
5. Delinquency management. Lenders are employing new techniques that have been proven through research to improve collections efficacy and efficiency. The two major innovations being employed are dynamic queue management and text communication.
Dynamic queue management allows collections managers to set up queues based on a variety of conditions rather than just account aging, and then to assign these queues to either individual collectors or a team of collectors. This has dramatically improved collections.
Similarly, it has been shown that borrowers more readily engage with a collector through text messaging than through phone calls or other channels. The text interface helps the borrower shield their embarrassment and the collector from the awkwardness of discussing a difficult situation with the borrower.
Keeping current with these innovations is going to be critical to any retail lender’s success in growing their portfolio, managing risk, and maintaining profitability.