By Vasant Ramachandran
A bon mot attributed to Jean-Baptiste Alphonse-Karr, the famous French critic of the 19th century, suggests that "the more things change, the more things stay the same." This assertion has largely been undisputed by observers of the lending and consumer credit industries -- particularly with regard to their cautious and slow adoption of new approaches or technological paradigms.
Low interest rates and the renaissance of the housing industry since the Great Recession have produced a windfall of consumer demand for mortgages, consumer loans and other financial products, but in a significantly more regulated environment. High demand for what's always worked and high regulation of everything that is sold is not a great recipe for trying something new.
However, 2016 has been a transformative year for the industry, with the ever looming prospect of an interest rate hike, political uncertainty, and market turbulence from the historical changes happening across the world. As a leader of a technology firm that works with several of the largest lenders, banks, and loan portfolio holders to help manage risk exposure, model uncertainty, improve origination, and transform the point-of-sale experience, I help our clients identify and take advantage of the major trends we see shaping the industry's response to customer demand today.
The first is a movement toward understanding -- rather than segmenting -- the customer as part of a unique and evolving sales relationship. The second is a paradigm shift toward technology as a tool to empower compliance management, rather than simply as a business segment that itself must be managed for compliance. The third is the increased shift "down-market," where new products can be offered using a high-volume, low margin strategy.
Understanding the Customer Relationship
While the vast majority of mortgage lenders and chartered banks have created marketing programs that segment their customers and target specific products to them, the customer has traditionally been viewed as a sum of a few static data points that are suitable for one or more mass marketing approaches: where you live, what you earn, and how credit-worthy you are.
Increasingly, however, the industry is embracing the idea of predictive marketing: The customer doesn't merely fall into one of several buckets, but rather provides a relationship-driven opportunity based on thousands of unique and evolving data points. Customer preferences are not necessarily dictated by any one data point, and they are constantly changing. After all, 2016 was the year that traditional statistical models failed catastrophically in understanding electorates both in the U.S. and abroad.
The same ambiguity applies to consumers as well. While downsizing their traditional head count, banks are robustly hiring for data and behavioral scientists -- not to simply get the right products to the right customer at any given time, but to "to do more with rewards programs, which data and behavioral scientists can refine." These relationships, in turn, can help predict the lifetime value of a single closed loan.
Harnessing Technology for Compliance Management
The use of a constantly evolving data set to manage the customer relationship, of course, leads to concerns about privacy and the compliance implications of a marketing model that may unintentionally use data in a way that runs afoul of fair credit and equal opportunity regulation. However, the second fundamental trend reshaping the industry is a direct result of the ability of technology to police itself. Just as technology can be used unlawfully, it can also be used to demonstrate disparate impact, improve transparency, and automate repetitive tasks. Electronic audit trails are conspicuous, and technology makes less mistakes than humans do.
This is particularly relevant in underwriting, where the automation of repetitive tasks traditionally subject to human oversight leads to significantly lower error rates (and the associated fines from federal regulators). For example, a significant increase in the mortgage industry's automation of scanned tax document and bank statement review is expected over the next five years: a job that human beings have always done but are notoriously error-prone at doing right. Compliance management is empowered by the use of new technology and increasingly utilizes it to guarantee, rather than merely to trust the results of a review.
Expanding Down-Market
Such a cost-effective improvement to compliance management is necessary in a world where "smaller is bigger." The financial industry continues to shift away from an emphasis on serving consumers "large ticket," value-added products to offering small loans and other high-volume products to down-market consumers. Businesses such as Goldman Sachs that exclusively facilitated large transactions for high-net-worth individuals have moved into the installment loan space.
Some of this is undoubted because technology advances and new sales channels make it possible to obey the economics of scale at high volume. But the ultimate motivator of this trend is the increased competition for customers by new market entrants, their use of disruptive technology, and the associated decline in perception and loyalty of traditional customers toward traditional brands -- an American Express card or Chase account simply do not carry the same connotation to a millennial anymore.
These trends are part of the natural evolution of the credit industry over 2017 and beyond. As lenders look to improve their bottom line over years to come, they may find that harnessing these trends will keep them at the forefront of customer demand and leaders in their verticals.
Vasant Ramachandran is CTO at Daric Inc., overseeing the company's technology roadmap to empower its clients worldwide.