Traditional Banks Keeping Up with Fintech Lenders

How the best brick-and-mortar banks continue to prove they still have a fighting chance against digital only lending fintechs.

• Fintechs continue to be heavily funded with Q1’21 being the highest quarterly total since Q2’18.
• Emergence of new partners across the industry has led to traditional banks being able to quickly modernize their legacy products and launch entirely new lines of business.
• This, combined with the digital acceleration in 2020 due to COVID-19 has forced all institutions to adapt – everyone from regional top tiers through smaller community-based credit unions has some form of fintech in their banking stack.

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Technology has become an ever more prevalent player in every area of modern life, and consumer lending is no exception. For years following the Great Recession, industry pundits insisted that fintechs were the end of banking as we know it. In some regards, they were right in that these companies have provided a real challenge and eroded a significant market share from traditional banks over a relatively short period of time.

It’s worth pointing out, however, that the marketplace acceleration propelled by fintechs has forced traditional brick-and-mortar banks to take notice, accelerating their own digital transformation and develop new lines of business to provide their customers with the best experience possible.

Though COVID-19 decreased lending volume across the industry, online lenders have already begun to bounce back, and their growth is only expected to continue – with projected annual compound growth of 26% continuing until 2024. Additionally, they’re coming in with full war chests – according to CB Insights, in Q1’21 quarter-to-date (QTD) funding across all fintechs has surpassed $13.4B, the highest quarterly total since Q2’18.

To keep up with the industry, traditional banks must continue to keep up with emerging fintechs and find new opportunities to grow where their online-only rivals cannot, turning some of their biggest challenges into significant opportunities for growth.

1. The Challenge: Varying Consumer Expectations

Consumer expectations of the banking experience vary dramatically by generation, and banks must find a model that satisfies all their consumers.

Not surprisingly, millennial adoption of mobile banking exceeded other generations. With Gen Z continuing to enter the workforce in the coming years, and the increased digital expectations fueled by COVID-19, a convenient digital banking experience is expected by these younger generations, but not all generations feel the same way. The majority of Baby Boomers and the upper end of Gen X still prefer in-person interactions and banking experiences in physical branches.

The Opportunity: A Hybrid Banking Model 

Banks need to build relationships with younger consumers in order to secure a future customer base but must also ensure the expectations of baby boomers are met, as they control more than 53% of the U.S. wealth, as of 2020. One opportunity for meeting this full range of consumer expectations is a hybrid banking model.

A hybrid banking model still relies on traditional bank branches, but incorporates more elements of a digital experience, for example, self-service kiosks, mobile AI assistants, and more digital options for typically time-intensive processes, such as lending applications that are fully online and sometimes provide helpful features like click-to-chat or guided navigation.

2. The Challenge: Providing a Personalized Experience

Many banks center their approach around products, while many online lenders create a more personalized experience, tailored to the unique needs of the consumer. This personalization casts doubt that the traditional banking offering is less robust or creates the perception that online lenders offer a product better meets their need.

The Opportunity: Demonstrate an Understanding of Consumer Needs 

Consumers have come to expect comprehensive solutions that help them to meet their unique needs. In fact, 40% of consumers would switch banks all together for more personalized service.

When a customer is in the market for a loan, she or he may not know they need a personal loan, just that they want to finance their home improvement project. Banks can further personalize the product experience by tailoring their offering to the end need of the customer.

3. The Challenge: Increase Approvals Rates While Reducing Credit Risk

Banks historically have primarily leveraged credit-driven decision metrics while fintechs have been more open to adopting non-credit metrics to aide in their decisioning. This makes it difficult for traditional banks to keep up, specifically for underbanked populations with “thin” credit files

The Opportunity: Using Customer Data to Further Inform Underwriting

Banks have mounds of data from their existing customer base and can tap into it as a way to make better credit decisions without opening themselves to unnecessary risk. By looking at additional elements such as income from direct deposit, customer tenure and other accounts the customer has with the institution, banks can inform their decisioning models including pricing and ability to pay.

Continued Opportunities for Traditional Banks to Thrive

Remaining competitive in an increasingly digital world isn’t about keeping up with the competition in order to survive, it’s about considering the environment and finding opportunities to thrive.

At Anovaa, we help our clients assess new marketplace opportunities and implement best-in-class consumer lending products. For over 20 years, we’ve worked with institutions of all sizes to develop the right solutions to meet the needs of their business. Schedule a meeting with us to learn more today.