Five opportunities and challenges in digital lending
November 15, 2017 1:49 PM
Despite the rapid growth of online and mobile lending in recent years, many banks are still just getting started.
That was evident from speakers at a recent Digital Lending and Investing conference in New York, where players from across the industry talked about potential opportunities and pitfalls.
Hint: if a bank's idea of digital lending is to post a pdf of a loan application, it has a long way to go. “It’s not enough to just digitize the application or even digitize the process," said Youa Yang, the digital banking program director at Barlow Research. "We have to transform the experience.”
Following are some of the insights shared by fintech players (like OnDeck's Noah Breslow), lenders operating in both traditional and digital ways (Movement Mortgage's Mary Vaca) and researchers (Yang among them).
The lessons they have learned can help inform a digital approach to a variety of loans – from mortgages to small business.
“If you’re a bank and think this is not for you," just look around, said Karen Mills, a senior fellow at Harvard Business School and the former head of the U.S. Small Business Administration. "Some of your colleagues are deep into this with great success.”
Mills held up Eastern Bank in Boston as a role model. “Eastern Bank is a 200-year-old bank, as old-fashioned as anything. Everybody wears a dark suit," she said.
Eastern hired Dan O'Malley to lead its innovation lab in the spring of 2014. O'Malley, a former Capital One executive and a data scientist by trade, did a deep dive on Eastern's transaction records and discovered that about 5% of its small-business customers at the time were making regular payments to online lenders.
A survey of these Eastern customers revealed that many just needed fast infusions of cash — something they didn't think the bank could provide.
So Easterndeveloped an online lending platform and rolled out a product called the "Express Business Loan" to better serve its customers and take on the fintech competitors.
"It’s a very interesting way for community banks to get in front, marketing to their own customers," Mills said.
Read on for five key takeaways from the conference.
That was evident from speakers at a recent Digital Lending and Investing conference in New York, where players from across the industry talked about potential opportunities and pitfalls.
Hint: if a bank's idea of digital lending is to post a pdf of a loan application, it has a long way to go. “It’s not enough to just digitize the application or even digitize the process," said Youa Yang, the digital banking program director at Barlow Research. "We have to transform the experience.”
Following are some of the insights shared by fintech players (like OnDeck's Noah Breslow), lenders operating in both traditional and digital ways (Movement Mortgage's Mary Vaca) and researchers (Yang among them).
The lessons they have learned can help inform a digital approach to a variety of loans – from mortgages to small business.
“If you’re a bank and think this is not for you," just look around, said Karen Mills, a senior fellow at Harvard Business School and the former head of the U.S. Small Business Administration. "Some of your colleagues are deep into this with great success.”
Mills held up Eastern Bank in Boston as a role model. “Eastern Bank is a 200-year-old bank, as old-fashioned as anything. Everybody wears a dark suit," she said.
Eastern hired Dan O'Malley to lead its innovation lab in the spring of 2014. O'Malley, a former Capital One executive and a data scientist by trade, did a deep dive on Eastern's transaction records and discovered that about 5% of its small-business customers at the time were making regular payments to online lenders.
A survey of these Eastern customers revealed that many just needed fast infusions of cash — something they didn't think the bank could provide.
So Eastern
"It’s a very interesting way for community banks to get in front, marketing to their own customers," Mills said.
Read on for five key takeaways from the conference.
Mobile and mortgages go together
Think mortgages are too complicated for a mobile app? Movement Mortgage begs to differ.
Movement, of Indian Land S.C., is the seventh largest purchase originator in the country, and it began offering the “Easy App” as a mobile option for borrowers about a year ago.
“In the last five months, over half of the volume we’ve originated has started in Easy App,” said Mary Vaca, the director of innovation execution at Movement, which operates in 47 states. “That tells you right then and there, the customers, they do expect it.”
The benefits Movement has experienced from the growing use of mobile include less processing time for applications, Vaca added.
“Speed has always been a big thing to us,” she said.
“Now that I know that the files coming through the shop are spending an entire half day – four to six hours – less in our processing department than those that come in the old-fashioned way, that’s huge.
“And the reason behind that is because the data we’re collecting up front, that connectivity we’re giving to our borrowers, is producing a more complete, thorough and, frankly, accurate package right from the get-go.”
Movement, of Indian Land S.C., is the seventh largest purchase originator in the country, and it began offering the “Easy App” as a mobile option for borrowers about a year ago.
“In the last five months, over half of the volume we’ve originated has started in Easy App,” said Mary Vaca, the director of innovation execution at Movement, which operates in 47 states. “That tells you right then and there, the customers, they do expect it.”
The benefits Movement has experienced from the growing use of mobile include less processing time for applications, Vaca added.
“Speed has always been a big thing to us,” she said.
“Now that I know that the files coming through the shop are spending an entire half day – four to six hours – less in our processing department than those that come in the old-fashioned way, that’s huge.
“And the reason behind that is because the data we’re collecting up front, that connectivity we’re giving to our borrowers, is producing a more complete, thorough and, frankly, accurate package right from the get-go.”
Susan Young Photography
Don’t count out banks
Though fintech players have a head start in speedy online lending, banks could overtake them yet. Some banks are moving quickly to develop their own technology, and a few are already busy selling their technology to others.
Eastern Bank in Boston isone example . Its innovation lab – which has been spun off into a startup called Numerated Growth Technologies – created an online lending platform to make small-business loans of up to $100,000. The decision time for letting applicants know if the loan is approved is minutes. Numerated is now licensing the technology to other banks.
“Pretty soon I think this will be ubiquitous,” Karen Mills, senior fellow at Harvard Business School and former head of the U.S. Small Business Administration, said, referring to banks like Eastern being able to do online lending with the same speed and ease as their fintech competitors.
“The dinosaurs are moving a lot faster than people think.”
Related story:How banks can beat digital lenders at their own game
Eastern Bank in Boston is
“Pretty soon I think this will be ubiquitous,” Karen Mills, senior fellow at Harvard Business School and former head of the U.S. Small Business Administration, said, referring to banks like Eastern being able to do online lending with the same speed and ease as their fintech competitors.
“The dinosaurs are moving a lot faster than people think.”
Related story:
The need for simplicity is paramount
Just having something available online or on a mobile phone is not enough. Whatever it is – from an app to automate savings to a small-business loan application process – has to be so easy to use that people don’t have to put effort into figuring out what to do.
Millennials might want help with saving money or other financial tasks, but if you want them to use your app, you need to automate the process rather than require some action on a regular basis. You are the one who has to put in the effort – not expect them to.
“We did a lot of research about millennials and what they want from a bank and how they think about banks,” said Colin Walsh, co-founder and CEO of Varo Money.
“One big insight we pulled out of that was that three-quarters of the people we were talking to we would describe as hands off: They want to just live their lives. We asked one survey question, ‘Would you rather build a spreadsheet or throw up?’ They said, throw up. They want a solution that's really simple.”
Millennials might want help with saving money or other financial tasks, but if you want them to use your app, you need to automate the process rather than require some action on a regular basis. You are the one who has to put in the effort – not expect them to.
“We did a lot of research about millennials and what they want from a bank and how they think about banks,” said Colin Walsh, co-founder and CEO of Varo Money.
“One big insight we pulled out of that was that three-quarters of the people we were talking to we would describe as hands off: They want to just live their lives. We asked one survey question, ‘Would you rather build a spreadsheet or throw up?’ They said, throw up. They want a solution that's really simple.”
Small businesses care about digital too
Barlow Research regularly surveys small-business customers to learn how they interact with banks. It defines small businesses as those having between $100,000 and $10 million of annual sales.
About 46% are digital users without an assigned account officer. “That’s why those digital channels are so important, because they’re the face of the bank,” said Youa Yang, Barlow’s digital banking program director.
Barlow tracks 10 different bank channels, and its research shows small-business customers interact with their bank an average of 20 times a month across those channels.
Yang said 58% of those interactions are online or mobile, a percentage that increases every year, and 25% are at the branch.
The average age of small-business owners is 60, according to Barlow. “Ownership transactions are going to start accelerating, so as we get a new generation in here,” digital channels will become even more important, Yang said.
About 46% are digital users without an assigned account officer. “That’s why those digital channels are so important, because they’re the face of the bank,” said Youa Yang, Barlow’s digital banking program director.
Barlow tracks 10 different bank channels, and its research shows small-business customers interact with their bank an average of 20 times a month across those channels.
Yang said 58% of those interactions are online or mobile, a percentage that increases every year, and 25% are at the branch.
The average age of small-business owners is 60, according to Barlow. “Ownership transactions are going to start accelerating, so as we get a new generation in here,” digital channels will become even more important, Yang said.
The fintech charter is meh
Bankers and state regulators have been vehement about how much they don’t like the fintech charter under discussion by the Office of the Comptroller of the Currency.
But perhaps more surprising is that it is not exactly inspiring a lot of enthusiasm from online lenders either.
Though Noah Breslow, the CEO of OnDeck, conceded that there’s some value to having a federal regulator, rather than dealing with each individual state regulator, he seemed ambivalent when discussing whether his company would apply for a charter.
“For fintechs, the challenge of the OCC fintech charter is that you get the overhead of being regulated but you don’t get to collect deposits,” Breslow said.
“Ultimately, if you’re going to go through the overhead of being regulated that way, that’s the thing that’s most desirable for companies that have lending business models and are otherwise reliant on the wholesale funding market.”
But perhaps more surprising is that it is not exactly inspiring a lot of enthusiasm from online lenders either.
Though Noah Breslow, the CEO of OnDeck, conceded that there’s some value to having a federal regulator, rather than dealing with each individual state regulator, he seemed ambivalent when discussing whether his company would apply for a charter.
“For fintechs, the challenge of the OCC fintech charter is that you get the overhead of being regulated but you don’t get to collect deposits,” Breslow said.
“Ultimately, if you’re going to go through the overhead of being regulated that way, that’s the thing that’s most desirable for companies that have lending business models and are otherwise reliant on the wholesale funding market.”
