2019 Outlook: How Banks Can Prepare for the Unknown
Over the last several years, the U.S. economy has grown at a rapid pace. This year alone saw the fastest pace of recovery since the Great Recession, however, some are projecting that this growth may slow in 2019 to 2.7 percent, according to data from the Bureau of Economic Analysis. In fact, nearly half of corporate CFO’s are expecting a mild downturn by the end of next year, based on responses to a recent Duke University survey.
According to the survey, these projections stem from: economic uncertainty and a mild decline in consumer confidence, although still at historical highs; rising employment costs coupled with a “skills gap” dilemma, despite the employment rate at a 50-year high; and government policies and regulations.
While the jury is still out on whether we will see a slowdown or perhaps stagnant growth in the coming years – and when that might be – banks and credit unions must prepare by focusing efforts on a true digital lending experience and leveraging the true intent behind CECL.
Digitizing the Lending Experience to Drive Portfolio Growth
As we’ve seen in the last decade, companies like Amazon and Alibaba have disrupted the retail industry and shaped consumers’ shopping experiences. Similarly, we’ve seen FinTechs and non-traditional online lenders change borrowers’ expectations, offering an improved loan application process, quicker lending decisions and greater conveniences.
Even this year, we saw big banks like U.S. Bank announce their own digital loan offerings, creating pressure for smaller banks and credit unions to adapt to heightened consumer expectations and modernize their approach to lending – an area where they have been lagging. In fact, according to a survey of borrowers by Oliver Wyman, less than half (43 percent) were able to complete a loan application online through a national bank. Compare this to the 79 percent that did with an alternative lender.
Banks and credit unions must take steps towards fully digitizing the lending experience, starting with the application process. Some institutions have parts of the application process digitized or offer it for specific loan types and not all, according to the American Bankers Association. Additionally, of the institutions that offer digital loans, not all of them have a digital loan application process and less than half support digitized document uploads or e-signatures. Furthermore, some have simply converted paper processes to online, which still doesn’t support a better customer experience.
Automating the underwriting process is also crucial to support faster and more convenient experiences. If the application process is seamless but the decisioning of the loan still takes several days, the experience suffers. The front-end experience then becomes fruitless. Consider banks’ and credit unions’ alternative lender competitors – they can decision loans within minutes. As a result, they now hold nearly one-third (and growing) of the total U.S. market for personal loans, according to TransUnion.
Looking ahead, financial intuitions must truly digitize the entire lending experience to not only deliver speed and convenience to strengthen the borrower experience, but also drive portfolio growth. This will be especially important in the coming years as competition increases to win market share and consumer expectations shift.
CECL A Competitive Advantage, Especially Against FinTechs
Second to growing portfolios, financial institutions must also focus on protecting existing ones. CECL – which has been viewed as a regulatory burden – may actually support those efforts.
Considered the “the biggest change ever to bank accounting,” according to the American Bankers Association, CECL, which takes effect in 2020, will require financial institutions to calculate the expected loss over the life of each loan and set aside reserves to cover those losses. Initially, this may force institutions to significantly increase the loss allowance on their loans, thus impacting their net income. Long-term, however, CECL may actually help banks and credit unions remain competitive through any economic environment. This will be especially important if the economy experiences a mild downturn.
At the onset, CECL will be challenging and require substantial data, however, the institutions that proactively approach CECL and leverage insightful data analytics will be better positioned to forecast future economic conditions that may impact portfolio performance. This ability will hinge on having both enough data and the right data. But for the data to be useful, it must be accessible and of quality, making it imperative that financial institutions assess for quality and establish protocols to mitigate any inconsistencies that could prevent them from identifying trends within their portfolio.
CECL will clearly shift the industry’s approach to lending and risk management, but it may prove beneficial as well. By confidently calculating forward-looking loss estimates, financial institutions can maintain optimally-sized reserves with minimal income volatility, helping to weather economic cycles.
Furthermore, CECL may become a competitive advantage against alternative lenders who are not subject to these new rules and will not be forced to better manage risk. If the economy experiences a slowdown, banks and credit unions will be better prepared.
Whether we experience a downturn or not, the economy and lending environment is cyclical. It is inevitable that growth will eventually plateau, making it critical for financial institutions to not only drive growth and remain competitive but also better manage risk and their existing portfolios. From digitizing the lending experience to embracing CECL requirements, 2019 will be the year for institutions to put plans in place to protect their business. Those who do not will risk losing significant market share.
Posted on Thursday, December 20, 2018 at 1:30 PM
by Mike Horrocks
With more than 25 years of experience in the financial services industry, Mike Horrocks possesses a unique and extensive blend of financial expertise, technology skills, process redesign abilities and solution management experience. Horrocks’ background enables him to create go-to-market strategies for new solutions, help clients convert strategies into revenue generating initiatives and forecast market direction.
As the Vice-President of Product Management at Baker Hill, Horrocks’ responsibilities include the identification and development of new market opportunities in the business of lending, risk management, and analytics for financial institutions. Mike holds a MBA both in International Finance and Venture Technology Management from Indiana University and a B.S in International Finance from Brigham Young University.
Before joining Baker Hill, he held executive positions within several other organizations, including Experian, Profit Technologies, SAIC, Broadway and Seymour (FIS), Zions First National Bank and Zions Data Corporation.
Horrocks is a member of many associations including the Risk Management Association and Bankers Without Borders. In his free time, he enjoys traveling internationally with his wife and five children.