How to Protect Against the Downside, Prepare for the Upside

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“If you’re left in a situation where you’re defending, where you’re shrinking your balance sheet, where you’re worried about your capital, where you’re continually cajoling shareholders, or clients to stick with you — you’re not focused on growing.”

Those are wise words from William Demchak, chief executive officer of PNC Financial Services Group. PNC is one of the largest banks in the U.S. and an OakNorth customer.

He said this in an interview with the Financial Times in May 2020 — a couple of months after the country had gone into lockdown under full force of the coronavirus pandemic. At the time, he was discussing PNC’s rationale for selling its stake in asset manager BlackRock, which was prompted in part by increasing concerns about the U.S. economy as a result of the Covid-19 pandemic.

But fast forward the clock two and a half years, and he could just as easily be speaking about the economic situation in the U.S. today. Increasing economic uncertainty and interest rates at their highest point since 2008, many commercial bankers are focused on protecting their downside risk. As a result, many are likely missing the upside opportunity.

Protecting Against Downside Risk

1. Granular data. Most banks tend to lump their borrowers into one of a dozen or so broad sectors: all restaurants, bars, hotels, golf clubs and spas, for example, will be classified as “hospitality and leisure.” This classification approach misses the fundamental differences between how these businesses operate and how their capital and operational expenditures may be impacted by changes in the economy. In order to quickly identify where the most vulnerable credits lie in their portfolio, banks need to get to much more granular industry view — even going as far down as 6-digit NAICS codes — in their analysis.

2. Forward-looking scenario analysis. Banks need to be able to run multiple macroeconomic scenarios on their loan book using forward-looking scenarios to explore how a borrower would perform at different financial and credit metric level. This gives them the ability to plan ahead for market changes such as rate rises and house price fluctuation by formulating targeted risk mitigation strategies that can reduce defaults and charge-offs and better manage capital requirements.

3. Proactive monitoring. Banks need to be able to identify potential credit issues faster and earlier, so they can take proactive steps to reduce the chances of negative outcomes during a downturn.

Effectively Navigating Upside Opportunities

1. Granular data. in an economic downturn, there are always winners and losers that emerge; more often than not, it’s specific businesses or sub-sectors rather than entire industries. As consumer confidence wanes and inflation tightens purse strings, it’s likely that budget retailers and discount stores will see increased demand while their high-end alternatives experience the opposite. Both are classified as “retail” but will have dramatically different experiences in an economic downturn. Banks need the right data and tools to identify businesses that may need additional capital to make it through the economic cycle from the businesses that need additional investment capital to pursue potential growth opportunities arising in it.

2. Forward-looking scenario analysis. Banks need to be able to create configurable scenarios that reflect their internal economic outlook by adjusting macroeconomic variables, such as interest rates and inflation, among others. This means they can make more informed decisions about high risk, high opportunity industries and borrowers in their loan book and adjust their activities accordingly.

3. Proactive monitoring. In times of turmoil, most banks tend to segment their portfolio from highest to lowest exposure, starting with their largest and working their way down. Not only is this approach incredibly time consuming, it also means a lot of team time is spent running analysis on credits that don’t end up presenting a credit issue. Banks need to be able to segment credits on a high to low risk spectrum within a matter of hours, so they can identify the credits that require intensive versus light touch reviews, freeing up resources to pursue new loan origination.

Strengthening Relationships With Credit Score Monitoring

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Customers want to improve their financial wellbeing and save money. Banks want to create sticky digital relationships.

Here’s something that can help both groups: credit monitoring.

Having a safe and easy way to keep an eye on their credit enhances consumer financial wellbeing in a variety of ways:

  • Makes it easier to find and stop fraud. According to the Federal Trade Commission, American consumers lost more than $5.8 billion to fraud in 2021, which was a 70% increase over 2020. When customers have a safe, convenient way to monitor their credit, they’re more likely to uncover and recover from fraud more quickly.
  • Helps uncover and correct credit report mistakes. Credit report errors are much more common than many people realize. According to a 2021 Consumer Report investigation, more than a third of consumers who participated in a voluntary credit report check found errors. And these errors are more than a nuisance. Negative impacts can include being uncorrectly charged higher interest rates on a loan or credit card or being turned down for a job or a place to live. 
  • Can improve credit scores and consumer financial wellbeing. Based on internal research SavvyMoney has conducted with partner financial institutions, we’ve found that consumers who monitor their credit data see strong improvements in their credit scores. Across all score ranges (except the 750 to 850 range), there was a 30% improvement in six months and a 39% improvement in 12 months. In the 300 to 649 score range, the improvements were even more dramatic: 32% in six months and 41% in 12 months.

Score improvement can mean significant savings for bank customers. Most importantly, consumers who improve their score can see a stark difference in interest costs on their loans. According to a study from LendingTree, borrowers with “fair” credit scores, which range between 580 and 669, could end up paying over twice as much interest on personal, auto and student loans, and 97% more on their credit cards.

Most consumers don’t currently monitor their credit. But that could change if they monitor it through your institution. Because credit monitoring is a soft pull, customers can check their credit data as often as they want without any impact to their credit score. That can help them get a better handle on their current financial health and areas where they could improve. And banks can add in personalized education and loan offers based on their score, creating a virtuous cycle of better credit, better lending rates and improved overall financial wellbeing.

Unfortunately, most people don’t monitor their credit. According to LendingTree’s annual customer survey, only a third of American consumers take that step. A big reason why: Consumers are understandably reluctant to provide their personal information.

This is where giving customers access to credit monitoring helps your financial institution too.

Consumers’ reluctance aligns with a key finding from SavvyMoney’s financial institution partners: 75% of users want to be able to check their credit score from inside their trusted financial institution. If their credit data is available through a single sign-on through your financial institution’s online or digital banking, they won’t have to.

Use a credit monitoring service that updates credit files more frequently — the best offer the option of daily updates — allows customers to track if they’ve moved into a new range and be alerted when their most up-to-date score qualifies them for lower rates.

Look for companies with solutions that integrate with your digital banking platform. That allows your customers to safely and easily monitor their credit score right from your online or mobile banking, driving engagement with your website or app. As the chart below captures, that additional engagement can drive an uptick in a wide variety of products and services, including checking penetration, which is often seen as a proxy for primary financial institution status.

Source: SavvyMoney partner case study

Credit monitoring is good for both your customers and your bank. If your financial institution isn’t currently making it easy for customers to check their credit with you, it’s a service worth investigating.