Optimizing Credit Risk for Increased Lending Profitability
There is significant change going on within the lending industry. With the pressure from nonregulated competitors growing in all segments, financial institutions are seeking lending alternatives. In pursuit of these new approaches, financial institutions can now leverage new technologies and data sources to paint a more detailed financial picture of consumers and small business to provide more profitable loans within acceptable risk tolerances.
Many financial institutions are looking to the technologies and data sources developed by the nonregulated firms. Through partnership and vendor agreements, financial institutions can gain the ability to gather and analyze more information, which can result in better informed loan decisions. They can also benefit from the technology that provides a more streamlined process to deliver a more positive outcome that potential borrowers seek.
At the same time, the financial technology, or fintech, companies that provide lending services are beginning to wake up to the realities and needs of a regulated marketplace. For some, the new standard is to operate in a secure and compliant manner, which often means partnering with regulated financial institutions. Major changes within the banking industry itself create dynamic all their own. Large financial institutions are partnering with marketplace lenders to handle small business loans in the $50,000 - $100,000 range, 1 customers squarely in the range of smaller financial institutions.
The market for consumer loans from alternative lenders is growing as well. While the number of consumer finance loans have fallen 2 percent since 2007, consumer loans through alternative lenders have increased at an average pace of 84 percent per quarter. 2 For both consumer and small business lending, smaller financial institutions can meet that challenge by using the tools and data sources fintech firms have developed, thereby keeping small business and consumer customers and helping them grow.