How consumer trends are shaping loan decisioning models
Accelerated changes in the lending industry are reshaping the competitive landscape of loan origination. Borrowers have come to expect the same immediacy in applying for a loan as they do when online shopping for goods or entertainment.
by Brandi Hamilton, Director Marketing Communications, Equifax
Financial institutions (FIs) of all sizes are working diligently to adapt to new customer expectations of speedy and efficient transactions, as well as a fair chance in the lending approval process. Incorporating automation and cloud technology into the lending process will allow FIs to gauge loan repayment propensity more efficiently and allow lenders to say “yes” to more loan applicants.
There are four lending trends that will help FIs create a frictionless loan origination experience for borrowers, while also asserting themselves as industry leaders.
The very meaning of having a job is changing
The workforce has become more mobile, embracing the concept of employees working from home — allowing leeway for traditional employees to take on freelance work or start small businesses to earn additional income. Some have left the traditional workforce altogether and are pursuing solopreneurship full-time. People with jobs are quitting them en masse, and for the 30 to 45 age group — the largest cohort of homebuyers — resignation rates were up more than 20 percent from 2020 to 2021. Many workers simply do not want to return to the office. They may also be quitting for various reasons: to look for a new job, join the gig economy, or forge their path as an entrepreneur. The shift was perhaps triggered by the coronavirus pandemic and the resulting move to remote work, but it is here to stay. The unpredictable nature of their income complicates these consumers’ financial capacity and how FIs can measure their ability to repay loans.
With potential borrowers diverting away from multi-year histories of job stability and high credit scores, FIs must expand the scope of creditworthiness. Lenders should consider that changes in the way people work do not always equate to loan affordability issues. Borrowers with complex employment profiles should not be denied financial equality due to outdated methods for an individual’s propensity to repay loans.
Many Americans who are entering the workforce for the first time face a Catch-22: they can’t get credit because they don’t already have credit. Others are seeking to recover from damage to their credit records because of an extended period of unemployment, family changes, or other life events. By considering alternative data for determining creditworthiness, lenders can foster greater financial inclusion.
Financial inclusion leads to FIs attracting diverse groups of borrowers across all generations, regardless of their credit file. “Thin file” or “credit invisible” applicants face higher rates of denial amongst underserved demographics.
FIs embracing alternative data will allow expanded access to credit inclusion through tailored digital experiences that better serve marginalized communities and those with unique circumstances. Ensuring underserved consumers aren’t continually left without access to credit and capital can be a critical step to financial inclusion.
Fortunately, there are a few easy ways for lenders to address more financial inclusion for all — while reaping the benefits along the way. And it all starts with data.
Alternative data and APIs
Historically, consumers had less access to credit and data information. But today, collaboration and access technologies enable third-party access to personal account data through application programming interfaces (APIs). This open data exchange allows fintechs, banks, and third-party providers to share financial data through a digital ecosystem that requires little effort. These instant and seamless data transfers enable consumers to get loans faster and more efficiently.
APIs and the use of alternative data also create opportunities for potential borrowers by narrowing the space between traditional banking and lending and the evolving fintech category. For example, FIs can expand their use of data to capture more accurate financial strength indicators, resulting in lenders having the ability to say “yes” to more applicants while reducing risk and default rates and improving operational efficiencies.
This holistic view potentially enables an untapped demographic of quality borrowers to get approved for loans, establishing security and wealth development for underserved communities.
Low friction lending could mean improved customer experience
When it comes to lending, many borrowers demand the same speed when applying for a loan as they do when they make purchases with large online retailers. Automating loan origination tasks and processes allows for a fast, flexible, low friction lending process that feels easy and convenient. In addition, evolving consumer trends and preferences mean lenders should continue to streamline processes and leverage data to meet consumer expectations. Banks leveraging these and other technologies can reduce the number of steps consumers may encounter applying for a loan – filling out a cumbersome application, contacting employers to provide proof of income and employment, or providing sensitive banking log-in or payroll credentials to share data.
Having automated and secure technology solutions integrated during decisioning can reduce the need to request sensitive banking log-in credentials or outdated paper-based processes. As a result, some applicants may walk away from business transactions that inconvenience them. Adopting a digital lending process that attracts diverse borrowers across all generations, regardless of their credit file, and providing exceptional lending experiences is key to surviving the evolving lending landscape.
Keeping up with these consumer trends will better equip FIs to serve their borrowers’ unique circumstances better. A positive and fast borrower interaction without friction is critical to FIs reaping success. Lenders that meet the demands for a digital-first, frictionless experience and incorporate open data will become preferred lenders of the future.
May 17, 2022
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