The Importance of Digital Engagement on Lending

This insight discusses how cultivating an engaged, educated, and responsible borrowing community can allow financial institutions to maximize lending potential while minimizing credit risk.

How has lending evolved?

Like most banking transactions, lending has historically been an in-person experience. Financial institutions increased revenue by attracting individuals and businesses to the branch and offering lending services to meet their financial needs. This in turn also evolved into a very relationship oriented business.

As digital banking evolved, so did the lending process. Financial institutions began to drive revenue through their website rather than branches. Branch month-over-month traffic has decreased and digital channels are now the main way most customers interact with their financial institutions. Lending has also become very commoditized, with rates and terms taking priority over any pre-existing relationship(s).

Lastly, the emergence of peer-to-peer and niche online lenders, collectively known as marketplace lenders, has disrupted antiquated lending practices. These companies emerged during a time of historically low interest rates, making borrowing more attractive to consumers and driving investor yields[1]. Marketplace lenders combine data-driven analysis, targeted online marketing, and consumer-focused technology platforms to attract customers. Technology-adept marketplace lenders have heightened consumer expectations for banking technology, motivating traditional financial institutions to enhance their digital offerings[2].

What is the lending environment right now?

American consumers are continuing to borrow, with average household debt at approximately ~$90,000[3]. While borrowing for housing has been relatively steady, the portion of debt allocated to both unsecured products and student loans has increased in recent years[4]. Interest rates have remained low, which has further incentivized consumer borrowing and put pressure on lenders to grow their loan portfolios in order to remain profitable.

Generating organic loan portfolio growth is increasingly challenging. In order to acquire new relationships and retain existing ones, financial institutions are prioritizing a customer-focused business model[5]. With the understanding that loan products have become largely commoditized, lenders must compete on the usability of their platforms rather than the terms of their products. Customers expect straightforward, user-friendly platforms, and are beginning to show preference for mobile rather than online services[6].

Why does engagement matter?

Digital engagement describes the relationship between consumers and an institution’s online and mobile platforms. Because consumers are increasingly making choices based on the quality of their digital experience, it is necessary to tailor digital products to consumer needs. In practice, financial institutions personalize the digital experience by using data to offer timely, customer-focused products based on an individual’s attributes and financial situation[7]. Additionally, institutions offer targeted educational content, such as personal finance guidance and interactive tutorials, to further their commitment to the customer experience.

User-centric platforms enhance digital engagement and facilitate customer acquisition and retention. Institutions that offer simple, informative, and streamlined online and mobile platforms can create a positive experience for their customers, which in turn incentivizes loyalty and further borrowing[8].

If you can engage your customers or members, your borrowers will be:

1. More likely to repay their loans, even in times of financial uncertainty. If a consumer feels a commitment to their financial institution, they will be more receptive to adjusting repayment parameters, rather than allowing their account to become delinquent or refinancing elsewhere. Such loyalty materializes when an institution offers personalized services to their customers. This positive relationship creates a better experience for both lenders and borrowers.

2. More inclined to apply for additional loan products as they progress through the borrowing lifecycle. A customer’s borrowing lifecycle takes many forms – credit cards and unsecured loans to cover general expenses, student loans to alleviate tuition costs, and a mortgage to secure a first home. Lenders can capitalize on this lifecycle by generating engagement in a customer’s early years, and retaining this relationship through exceptional customer service and robust digital offerings.

3. More receptive to cross-selling efforts, such as loan consolidation and refinancing. As lenders build trust with their customers, these products are more likely to be perceived as trusted financial advice than a simple sales pitch.

Financial institutions should focus on building an engaged, educated community to ensure that their customers will be in the best position to repay outstanding balances and to continue to borrow in the future.

What can your institution do?

Adopt strong online and mobile loan application technology that has a consistent user experience and design with your other digital channels

Customers expect their institution to provide a straightforward, streamlined digital platform in order to support their lending needs. As demand for mobile grows, financial institutions must enhance their mobile offerings in order to make digital a sustainable revenue producing channel.

Websites and mobile apps should be consistently designed in order to enhance usability and reduce any confusion for customers utilizing multiple technology platforms. An integrated digital approach represents a commitment to a user-centric business model, and improves engagement by fostering multi-platform use.

Embed financial education in the user experience

Financial institutions can generate engagement by continuously educating their customers. Building education into the digital framework through simple tutorials and interactive lessons further generates trust and loyalty, as consumers will feel that their lender cares about their overall financial state.

Offering value-add products such as a personal financial management (PFM) tool is another key component of educating borrowers and building trust. Customers with access to these resources are more likely to understand their finances and make more responsible financial decisions.

Use available data

Putting available data into action can improve the customer experience and drive profitability. For instance, financial institutions can identify customers that may benefit from a new loan product by analyzing demographic and account data. Additionally, financial institutions can refer to advanced criteria outside of credit applications in order to better understand an applicant’s creditworthiness. As technology continues to evolve, data analysis has become an essential part of consumer lending[9].

[1] American Banker – Marketplace Lending Grew by 700% in Four Years
[2] US Dept. of Treasury – Opportunities and Challenges in Online Marketplace Lending
[3] NerdWallet - 2015 American Household Credit Card Debt Study
[4] Equifax - US Consumer Trends (Oct. 28, 2016)
[5] PwC - Retail Banking 2020
[6] Bain - Retail banks wake up to digital lending
[7] McKinsey – Adapting to digital consumer decision journeys in banking
[8] Accenture – Banking Customer 2020: Drive consumer engagement & seize digital’s opportunity
[9] McKinsey – Adapting to digital consumer decision journeys in banking

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