Personalized Lending For The Digital Consumer

Financial institutions are ready to lend and consumers are ready to borrow, creating a perfect storm of lending opportunity. But, traditional loan acquisition programs often miss the mark due to lack of alignment with consumer needs, consumer fear of rejection and outdated marketing techniques. New, data-driven lending solutions break down these barriers with substantially better results.

By Jim Marous, Co-Publisher of The Financial Brand and Publisher of the Digital Banking Report

The loan marketplace is finally gaining steam after years of low demand. According to American Banker, loan portfolios at banks with less than $40 billion in assets increased an average of 15% in third quarter 2014 from the previous year, and net interest income rose 11%. The loan-to-deposit ratio for these banks averaged 85.3% for the period, an improvement from 82.4% two years earlier.

An analysis of the market from the consumer side shows aggregate household debt balances up one percent from third quarter to fourth quarter 2014, with increases in mortgage, auto loan, student loan and credit card balances. Credit card limits, mortgage originations and home equity line of credit (HELOC) limits all increased, while overall delinquency rates were down. The number of credit inquiries in six months, which indicates consumer credit demand, rose four million during the period.

The challenge for financial institutions is how to take advantage of this positive lending environment in ways that satisfy consumers’ immediate needs – and make money.

Traditional loan acquisition programs that send relatively untargeted communications to consumers during peak demand periods (spring home buying season, for example) don’t take advantage of the data insights currently available. Now more than ever, consumers expect marketing messages to be tailored to them, on their terms and timing. And, while there’s better news on the economic front, consumers continue to be afraid they won’t qualify for loans, leaving the offers that are tendered unanswered.

The Consumer Lending Disconnect

Fear of loan rejection keeps about half of potential homebuyers out of the market, according to a national survey by loanDepot, the nation’s third largest private, independent retail home loan lender. Almost 90% of Americans who will need financing to buy a home in the next two years haven’t done anything to see if they qualify, partly because they overestimate how hard it will be.

Another obstacle seems to be lack of understanding of FICO credit scores. Fully half of all Americans have no idea what score is needed to qualify for most loans. Nearly 20% believe they need a score of 680 to 770 or higher, while in reality, 33% of all loans closed in February 2014 had an average FICO score under 700.

“In the past, a consumer’s credit score was similar to Santa Claus. It came around maybe once a year, and it knew if you were naughty or nice, but absolutely no one could figure out how it got the job done or where it really came from,” says Sam Maule, emerging payments practice lead, Carlisle & Gallagher Consulting Group.

“Times have changed. Now, credit card companies, banks and credit unions routinely provide consumers with credit scores and advice on how to improve them. However, that still isn’t proactive enough, since it requires the typical consumer to access multiple links and educate themselves on what they are viewing,” Maule added.

Fear of the numbers may not be the only disconnect between consumers and the borrowing process. Traditional banking loan policy still treats lending as an isolated, standalone service instead of a reward that considers an account holder’s total banking relationship. Consumers, on the other hand, think their banks or credit unions should know them and reward them for their loyalty when they need loans.

“Consumers have long held unfulfilled expectations that their financial institutions would take a proactive and holistic approach to risk assessment, underwriting and pricing. While this is often true for larger commercial and wealth management relationships, the reality is that most financial institutions are reactive and transactional in their responses to most retail loan requests despite technology that could close that gap,” says JP Nicols, president and COO of Innosect, an innovation and advisory and analytics firm that works with banks and credit unions.

The lack of a holistic relationship view can cost financial institutions valuable loan business and primary financial status with their existing account holders. For loans to help grow share of wallet, they should be viewed as a part of the total relationship.

Moving Lending to the Digital Age

Conventional loan acquisition programs work, to a point. Trigger programs, for example, tell financial institutions when the credit bureaus get an inquiry so they can follow up with a prequalified offer. They’re effective but, many times, don’t offer enough volume to satisfy institutional goals.

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