Are You Losing Business to Alternative Lenders?


lending-10-2-17.pngEvery relationship manager assumes that their clients would never go to another lender for a loan. The reality couldn’t be further from the truth, and the data proves it. Banks are starting to notice a trend in their existing client base. Their customers are receiving more and more outside financing from alternative lenders with each passing year. In some cases, this has grown by 55 percent a year since 2014. Small business owners are doing this for two main reasons: Applying for a loan online is fast and convenient, and it’s the path of least resistance to acquiring the money they need to help their business succeed.

Here are a few questions to determine whether your clients are moving to alt lenders:

  1. Does your bank avoid small business loans because they can’t do them profitably?
  2. Has your institution pin-pointed the number of online defectors in its own client base? Has your team dug deep into transaction records to see what percent of small-business customers are making regular payments to online lenders?

Be prepared to see some shocking numbers, which leads to the next question: How will you stop the exodus? Better customer service and product awareness? Sure, letting your existing customers know you provide small business lending services is a great start but one thing alternative lenders have that most financial institutions don’t is a well-designed, quick and easy, self-service online application.

When financial institutions dig deeper into their own customer data, they begin to see that even the most credit worthy clients with highly successful businesses and great credit scores are using alternative lenders. They might need money quickly and know traditional banks take several weeks to process a paper loan application. Or they simply might not have the time to go to a bank during regular business hours and instead prefer (and are willing to pay more for) the convenience and flexibility provided by alternative lenders that offer a 24/7 omni-channel-accessible application.

Providing a better experience for your clients is becoming a must. This includes having an application available to clients at any time on any device. And the technology has to accommodate every client’s and prospect’s preference, providing the option to complete the application on their own, or sit down with their banker to complete the application together. The improvement in the customer experience “lift” from technology also needs to go beyond the application, to include streamlining and speeding up all aspects of the end-to-end lending process, from decisioning to closing.

Building technology into the lending process will stop your customers from looking elsewhere. However, the benefits of such a partnership don’t just stop with the customer experience enhancements. Banks using a technology-based, end-to-end lending platform will see a significant reduction in the cost-per-loan-booked, enabling the institution to make even the smallest loans more profitable. Banker productivity and engagement also are positively impacted by technology. With the right partner, front office bankers are freed up from the responsibilities of shepherding loans through the process and instead can focus on acquiring new relationships, or expanding current ones. Back office bankers spend minutes analyzing each deal instead of hours, enabling them to focus on deeper inspection into larger deals, or diving into a “second look” process to try to turn “declines” into “approvals”.

Technology, when leveraged appropriately, enhances the relationship between banker and client, enabling the banker to provide more value and deliver a much better customer experience. When that happens, clients will no longer need to explore alternative/online lenders because their financial institution will be delivering the convenience, speed and path of least resistance to the cash they need to grow their business. The institution benefits from reduced costs, increased customer and employee retention, as well as portfolio and overall growth in revenue-per-customer.

Should Banks Use Facebook to Offer Credit?


data-source-2-26-16.pngIs it time for banks to start using Facebook profiles to offer a loan? Or a person’s Gmail account to verify an identity? A growing number of fintech start-up companies say so.

Banks have traditionally relied on credit bureaus to supply information not only about a person’s FICO score, but also to verify identity with data such as addresses. But sometimes, these data sources come up short. Tommy Nicholas, one of the founders of New York-based startup Alloy, says he has a few banks trying out his company’s platform, which basically allows a la carte access to a variety of traditional and nontraditional data sources to verify a customer’s identity, including credit bureaus as well as services that scan social media profiles or email accounts.

The idea is to make it easier for a bank to verify someone’s identity when traditional sources fall short, for instance, the person moved recently and the new address isn’t showing up on the credit report. “You end up asking half your customers to go find a phone bill and send it to you, not to mention you have all this manual work to do,’’ Nicholas says. “It adds a lot of friction.”

Alloy is trying to get traditional commercial banks interested in the technology for verification purposes, although its use to approve loans may be a ways off. Nonbank lenders already are using a host of online and offline data to make credit decisions, especially micro-finance lenders in developing countries that lack functioning credit bureaus. Some lenders are going so far as to analyze behavioral data to make credit decisions. Smartphone data, for example, can tell a lender that you regularly use a gambling app, which could be a black mark on your alternative credit score. Customers have to agree to provide lenders with the smartphone and social media data before they can be approved for credit. Facebook recently applied for a patent to use data on its users for loan underwriting—if your friends’ average credit score met a minimum, that could be a sign that you were a good credit as well, because you associate with people who have good credit.

Lenddo, which typically works with banks in emerging markets but recently began offering its service to U.S. financial institutions, has an algorithm that assigns a non-traditional credit score based on a variety of data to predict your willingness to pay back your loan. It also verifies identity using non-traditional data, such as Facebook profiles and email accounts. Socure uses what it calls social biometrics, where it pulls data from sources such as email, phone and social media accounts to create a risk score for fraud detection. Customers have to opt in to share their data. Other companies, such as Puddle, allow people to build a trust network online to give small dollar loans to each other. Everyone contributes something to the pool, and the more people you add to your trust network, the more you are able to borrow. Paying back your loan on time increases your trustworthiness.

Advocates of the use of alternative data, like Daniel Castro, the director of the Center for Data Innovation in Washington, D.C., say the plethora of online and offline data on each person is actually making it easier to detect fraud because it’s very difficult to sustain a fake identity online that will pass scrutiny. For example, if you worked somewhere for years, you probably have LinkedIn contacts who worked at that same employer. According to Castro, it’s extremely hard to fake your connections to multiple legitimate people. “More data can be useful,’’ he says. “Long term, every bank will be integrating more data sources. It will just be malpractice on their part not to, because it will reduce risk. It will just take awhile before they figure out the best way to do that.”

John ReVeal, an attorney at Bryan Cave, says the new technologies raise questions about complying with existing banking laws. For example, the Fair Credit Reporting Act applies both to credit and deposit accounts, and consumers have a right to know why they were rejected for either type of account. That could turn some of the new data providers into de-facto credit reporting agencies, he says. Additionally, banks may have to answer questions from their regulators about how they use alternative data to make credit decisions, and ensure such decision-making doesn’t violate anti-discrimination laws.

Will the new technologies provide a better way to analyze credit and approve accounts? That remains to be seen. For now, banks and alternative providers are experimenting with the possibility of augmenting traditional sources, rather than replacing them.

Finding Opportunities in the Fintech Boom


The financial technology boom of the past few years will ultimately lead to opportunities for the banks willing to take advantage of them—either through partnership or acquisition. In November, 145 bank senior executives and board members shared their views on the fintech boom. The poll was conducted at Bank Director’s annual Bank Executive & Board Compensation Conference in Chicago. Additional respondents participated online. We’ve tabulated the results, which we share along with insights from leaders in the fintech space.

Questions about our Research? Contact Emily McCormick, director of research, at emccormick@bankdirector.com.