“Have it your way” has been Burger King’s slogan for over 40 years. It got me thinking that it could also be an excellent motto for banks getting into the digital unsecured lending business. We’re living in a time when customers have increasing amounts of information and alternatives at their fingertips, giving them the upper hand when shopping for a commodity like a personal loan. Customers seek personalization, transparency and effortless interactions, and are increasingly favoring fintechs and peer-to-peer (P2P) lenders when they need cash in a pinch.
So, how can traditional banks let customers have it their way? Based on our experience creating strategies and building and launching digital unsecured lending products for large regional and multinational banks, here are five distinct lessons to get started:
1. Jump-start a winning position by partnering with fintechs.
Banks don’t have to compete with fintech companies; they can partner with them. With zero to minimal upfront investment, banks can make the most of fintech’s modern, agile software technology-driven product offerings to quickly go to market with their own digital lending solutions.
I’m particularly proud of our recent work with a large multinational bank. Our client wanted to offer an unsecured personal loan product via a new digital channel. Capco helped the bank move quickly and efficiently into the market by partnering with a fintech. The fintech’s third-party software-as-a-service (SaaS) solution provided a modern, agile platform for the bank, without it having to invest heavily in infrastructure or technology. The bank can now offer a branded end-to-end digital lending solution to customers while maintaining full control over the origination process.
2. Mitigate fraud risk with digital identity systems.
Despite progress in underwriting using data analytics and new kinds of data, unsecured lending remains exposed to fraud, especially via digital platforms. A critical step in identifying and addressing potential vulnerabilities is to change the bank’s operating structure to ensure the credit risk and fraud teams are working collaboratively and not in silos.
It’s imperative to have a defensive strategy to detect and preemptively strike against malicious activities to mitigate fraud risk across threat vectors, including online synthetic identity fraud. As a proactive measure, create a playbook of ‘what-if’ scenarios for breaches and lay out the corresponding protocols for each. By thinking through scenarios in advance, a bank can implement procedures, for instance, to quickly defeat a bot attack on its website or to clean up after a mail scam.
3. Implement a digital experience from end to end to improve customer experience.
Many traditional banks offer some form of digital capability around lending, such as loan status, loan payments and basic account information. However, most banks’ lending processes—including the online application, onboarding processes, underwriting and funding, have yet to be overhauled through technology.
This means there is much room for improvement in productivity, closing more loans and increasing revenue per loan with cheaper, faster and automated services. That’s what customers expect and non-bank lenders are eager to please them, but most traditional banks aren’t there yet. In fact, most can handle just seven percent of products digitally from end to end, having only digitalized fragments of the process for marketing, selling and servicing loans.
4. Use big data and predictive analytics to target the best borrowers.
Fintech and P2P lenders have made inroads into banking markets by harnessing advanced analytics and nontraditional data to automate and finetune underwriting processes. Using big data analytics increases the chances of getting better returns and enables more aggressive pricing, giving these upstarts a marketing edge against traditional banks while allowing them to maintain a less burdensome administrative process and provide the quick decisions borrowers have come to expect in the online environment.
Capco helps banks match fintechs and online lenders with data strategies that enable rapid decision making and more accurate insights on borrowers and loan performance. The biggest advantage of big data and predictive analytics is enabling banks to set more accurate borrowing terms and offer competitive loan pricing to customers with low-risk profiles.
5. Don’t dismiss cannibalization; done properly it propels results.
In financial services, many initiatives fail to make it to market because the benefit stream for the projects has already been allocated to other projects. We refer to this as cannibalization of business case benefits.
To overcome this, banks must carefully manage the key performance indicators of their projects and think strategically about how to bundle enhancements to deliver the most value from their deployments. And while cannibalization may seem very negative, we have found that truly innovative banks are willing to sacrifice or cannibalize their prior investments to defend themselves against the competition.
With this preparation, traditional banks can accelerate entry into the digital unsecured lending market or enhance existing offerings to improve customer experiences, expand business with current customers, and increase profitability.
To find out more, download our white paper Accelerating Entry Into the Digital Unsecured Lending Market.
You can also reach out to Evan.Pliskin@capco.com to discuss how we can help accelerate entry into the unsecured lending market or enhance an existing lending offering.