COVID-19: The Future of Lending Can’t Get Here Soon Enough
The economic impact of civic shutdowns, business closures and layoffs in response to combating the novel coronavirus places local banks and credit unions at the center of helping to preserve, if not salvage, the financial well-being of their communities.
On March 22, financial industry regulators released an interagency statement encouraging financial institutions to help borrowers and giving leeway on risk classification requirements for certain loan modifications amid COVID-19.
“The agencies encourage financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19. The agencies view loan modification programs as positive actions that can mitigate adverse effects on borrowers due to COVID-19. The agencies will not criticize institutions for working with borrowers and will not direct supervised institutions to automatically categorize all COVID-19 related loan modifications as troubled debt restructurings (TDRs).” – Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working With Customers Affected by the Coronavirus (original March 22, revised April 7)
For the loan franchise, this means institutions need to swiftly conceive solutions that provide customers and members payment relief and quick access to low-cost funds, all while effectively managing resources constrained by a surge in activity and volume. To help their communities, financial institutions should consider an array of new product and promotional offerings:
- Allow refinance of existing loans with 0 percent APR for three months
- Offer a new emergency loan or line of credit at 0 percent APR for up to $5,000
- Waive fees on skip-a-pay programs and offer these programs for up to six months
- Promote 0 percent credit card balance transfer offer for six months
- Promote tap-to-pay technology via card or mobile wallet
- Prominently and clearly feature links to online and mobile loan applications
- Participate in the Paycheck Protection Program
From an operations standpoint, people and systems are facing real-time stress tests of their capabilities. To the extent possible, financial institutions should document what’s working well and what needs improvement now so they can emerge with a clear and concise path forward that can power them through the 2020s and beyond. Financial institutions should ask themselves:
- How simple is it to complete an application on our mobile and online platforms?
- How well do we leverage data and technology to speed up the approval and funding processes?
- How easy is it for borrowers to set up and make loan payments via mobile or online?
- What is our capacity to use data to identify accountholders who may be facing hardship and proactively reach out with assistance?
- How universally skilled is our staff to readily assist across a variety of departments and functions?
- How capable is our IT infrastructure to handle greater volume of users and activity?
- How effective is our staff in interacting remotely with accountholders as well as colleagues?
While the above capabilities have been thrust into “acutely vital” status in today’s environment, the extent to which they are lacking illuminates the deficiencies of an industry shackled by legacy systems and practices in the most normal and opportune times.
Recent innovation in lending provides a blueprint for institutions to rebuild their loan engines for the future starting now. In home equity lending, most major lenders now offer a line of credit with the option to lock in a portion of the line into a fixed-rate, fixed-term loan. Last year, Citi introduced its Flex Loan and Flex Pay options within its credit card suite, similarly allowing the borrower to lock in a portion of the line, or recent purchases, at a fixed rate and fixed term. And Apple perhaps elicited the greatest fanfare in all of lending last year with the launch of its Apple Card. These advancements entail product flexibility and process simplicity – two tenets that will define the future of lending.
Just as these enhancements in equity and credit card lending have emerged, consumers have been flocking to these products. The Raddon 2019 Lending Insights study, The Future Is Now, finds that consumers applied for equity credit and credit cards far more than they intended to in the prior year.
The flexible equity credit and credit card products effectively facilitate the ability for consumers to grant themselves a loan at the appropriate time of need with minimal effort from the lender. As many institutions scramble to construct and sell the above-noted product offerings, consider the ease of using existing credit card lines to extend low, fixed-rate loan offers up to a certain dollar amount with next-day funding via direct deposit. Also, as we practice social distancing and rethink personal boundaries, consider the advantage of an end-to-end mobile experience from application to approval to loading the “card” directly into the mobile wallet, whereby the physical card becomes a secondary thought in the mind of the consumer.
These developments stand to change the paradigm of consumer lending by breaking down product silos and giving consumers perpetual, on-demand access to a fixed secured (equity) or unsecured (credit card) loans with a few button clicks on a mobile device. This mechanism could even push auto lending into a niche product serving non-homeowners with less than good or limited credit. If more of the car shopping and buying process moves to virtual, along with product delivery, then a mobile-based auto loan solution clearly becomes imperative.
While the current focus is on helping consumers and communities through the COVID-19 crisis, banks and credit unions can’t afford to lose sight of the strategies and efforts that will keep them relevant and viable over the long term. When it comes to lending, that means finally shedding outdated processes and rigid product suites that have been exposed as constraints in our increasingly mobile-centric world.