In 2023, lenders are facing significant challenges as interest rates continue to rise and the cost of capital becomes expensive. To remain competitive, lenders must find ways to increase profits. The good news is that there are clear paths to success. From leveraging new technologies like machine learning and open banking APIs to expanding product offerings and optimizing lending processes, there are many innovative approaches that will drastically improve lending profitability. This article will explore the top 10 ways lenders can increase their profits in 2023 (and beyond).
To make informed decisions, lenders need a comprehensive view of their return on investment (ROI) across the entire lending process. Full-funnel reporting helps lenders quickly identify areas for improvement and optimize their processes to increase profits.
Full-funnel reporting involves tracking and analyzing data from all stages of the lending process, from lead generation and origination to collections and account management. By collecting data on metrics such as lead conversion rates, loan closing rates, and collections performance, lenders can identify where they are succeeding and where they need to improve.
This data will help optimize lending processes and improve the customer experience. For example, suppose a lender notices that a large number of borrowers drop out of the application process at a certain stage. In that case, they can investigate why this is happening and make changes to improve the process.
"Full-funnel reporting allows lenders to see the big picture and make data-driven decisions that can improve their profitability," says Dave Sarett, Director of Product Marketing at FICO (FICO). According to a survey by the Economist Intelligence Unit, "81% of respondents believe that full-funnel reporting is important for optimizing their lending processes" (EIU).
For many lenders, late payments and defaults are the top factors that negatively impact their profit. By improving visibility into collections processes, lenders can identify potential issues early and take proactive measures to minimize the impact on their bottom line.
Collections visibility involves tracking and analyzing data on borrower payment behavior and identifying trends and patterns that may indicate a risk of default. For example, if a borrower consistently makes late payments, the lender can work with the borrower to prevent the loan from defaulting.
Lenders can also use collections visibility to identify high-risk borrowers and proactively mitigate their risk. For example, a lender may offer a borrower a payment plan or deferment option to help them avoid default.
According to TransUnion, "Collections visibility can help lenders reduce their loss severity rates by up to 40%."
Machine learning is a type of artificial intelligence that enables lenders to learn from underwriting data and improve processes without explicitly performing corrective actions (the system handles it). It uses advanced algorithms to analyze data and helps lenders identify high-quality borrowers to reduce the risk of defaults.
Machine learning can be applied to a wide range of tasks in the lending process, from credit scoring and risk analysis to fraud detection and collections. For example, machine learning algorithms can analyze borrower data such as credit scores, income, and employment history to make more accurate credit decisions.
Using machine learning, lenders can improve their closing rates and reduce their risk of defaults, leading to increased profits over time.
"Machine learning algorithms can help lenders make more accurate credit decisions and reduce the risk of defaults, which can lead to increased profitability," says Rahul Singhal, Head of Machine Learning at Zest AI. According to a report by Deloitte, "Using machine learning algorithms for credit scoring and risk analysis can increase the accuracy of credit decisions by up to 30%".
Open Banking APIs are 3rd party software systems that securely connect to borrowers’ bank accounts and provide information to a lender about account usage(balance, history, etc.). Most recently, they are helping lenders optimize payment dates by providing real-time data on a borrower's cash flow. By aligning payment dates with a borrower's income stream, lenders can reduce the risk of missed payments and improve their profitability.
Open banking APIs can also help lenders monitor borrowers' accounts and detect any potential risks of default. For example, if a borrower's account balance falls below a certain threshold, the lender can proactively work with the borrower and prevent default.
"Open banking APIs provide lenders with real-time data on a borrower's cash flow, which can help them align payment dates with a borrower's income stream and reduce the risk of missed payments," says Steve Kirsch, CEO of Token. According to a study by Accenture, "Using open banking APIs to optimize payment dates can reduce the risk of delinquencies and defaults by up to 40%".
Traditional, outdated credit scoring models do not capture the full picture of a borrower's creditworthiness. Lenders can use alternative data sources such as social media, reputation, mobile phone, or other historical data to make more informed credit decisions and expand their pool of potential borrowers.
By using alternative data sources, lenders can identify borrowers who may not have a traditional credit history but are still creditworthy. This can help lenders increase their loan volumes and grow their profitability.
According to a report by TransUnion, "Using alternative data sources can expand the pool of potential borrowers by up to 20%".
Personalization is key to meeting the needs of today's borrowers and improving customer satisfaction, which can ultimately lead to increased profits. By using data analytics and customer insights, lenders can create personalized offers that incentivize borrowers to stay with the lender and continue to borrow. Personalization is extremely effective when used across the entire funnel. For example, data from an ad campaign can be retained during the application phase and be incorporated into a highly personalized offer, giving the customer exactly what they searched for.
Personalized loan products and services can also help lenders improve their cross-selling and upselling efforts. By understanding the needs and preferences of their borrowers, lenders can offer additional products and services that meet those needs and increase their profitability.
"Personalization is key to meeting the needs of today's borrowers and improving customer satisfaction, which can ultimately lead to increased profits," says Jill Castilla, CEO of Citizens Bank of Edmond. According to a study by Accenture, "Offering personalized loan products and services can increase customer loyalty and improve profitability by up to 15%".
It’s no secret that offering a wider range of products and services can increase revenue. The challenge is understanding customers and markets to create the right product/market fit. Additionally, once a lender knows what to build, it must be able to easily build and iterate on ideas to optimize the product or service.
Using a digital lending platform is key to rolling out products. It will provide the understanding and mechanics of how to cross-sell in the right way. It will also enable the ability to efficiently train and implement the new products to the lender’s teams.
"Lenders that introduce new lending products can increase their market share by up to 15% and improve their profitability by up to 20%," according to McKinsey & Company. Additionally, "Introducing new lending products can increase cross-selling rates by up to 40%, which can help lenders increase revenue per customer".
Marketing intelligence in lending is about helping lenders identify and close high-quality borrowers. It has major impacts throughout the entire loan lifecycle, like reducing fraud, reducing spam, and reducing bots, all while improving conversion rates.
An intelligent marketing stack involves using leading-edge tools and technologies that work in conjunction to form a comprehensive view of the application funnel. It gives the lender a leg up and allows it to make quick decisions in constantly shifting environments, which is critical when advertising costs are rapidly accruing. Successful marketing intelligence will lead to increased profits through efficiency, visibility and scale.
An intelligent marketing stack also learns about success and failure and feeds that data back into the marketing software to constantly improve results. This process is highly technical and something traditional advertising agencies charge big dollars for; however, the technology is just now starting to evolve into lending software.
"Marketing intelligence can help lenders identify high-quality leads and reduce their loan origination costs by up to 50%." - Forbes
One of the biggest expenses for lenders is labor. However, many of the tasks performed by employees are repetitive and time-consuming. By automating these tasks, lenders can reduce headcount and cut costs.
Automation can be applied to a wide range of tasks, from data entry and document management to account reconciliation and reporting. For example, a lender can use software to automatically retrieve borrower data from external sources, eliminating the need for manual data entry. Automation can also generate and send loan documents, reducing the time and effort required to complete the loan origination process.
Investing in automation also has many future benefits. It will improve efficiency, reduce the risk of systemic errors, and set the organization up to scale when market conditions turn positive.
"By implementing process automation, lenders can reduce processing times by up to 90% and decrease error rates by up to 75%." - The Financial Brand
In 2023, borrowers expect nothing less than a fast, convenient, fully branded, personalized offering. Additionally, lenders must understand the entire borrower journey while optimizing products, mitigating risk, and reducing defaults. The amount of information, intelligence, and coordination needed to successfully perform in these areas has never been higher.
Every aspect of a lending system needs to be connected. The amount of efficiency a lender will gain with streamlined software, connected data, visibility, and intelligence is unparalleled.
According to a report by PwC, "Digital lending platforms can reduce origination costs by up to 70% and increase customer satisfaction by up to 25%".
For these reasons, we rank implementing a digital lending platform as the #1 way to grow profits in 2023. From streamlining loan processing to improving customer experience to increasing customer loyalty, the right lending platform will include EVERYTHING a lender needs to run a lending business at lower costs with more efficiency. Gone are the days of fragmented, third-party systems. Running a lending business on fragmented software with manual processes in 2023 is not only inefficient, it’s borderline negligent.
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