Digital Lending Ecosystems – Building Your Flywheel
As competition for profitable loan customers intensifies, it is critical for financial institutions to build a digital lending ecosystem – an interconnected set of services that solve a broader set of financial needs for borrowers. Doing so allows financial institutions to improve retention, increase lifetime customer value, and fortify their competitive position within a rapidly changing industry.
Join Alex Johnson, Director of Fintech Research at Cornerstone Advisors and Ankur Rawat, Banking Products Director, Newgen, as they outline the concrete steps that financial institutions can take to start building their digital lending ecosystems.
- Consumer, small business, and commercial lending trends and competitive dynamics
- Digital lending ecosystems – The what and why
- Newgen’s digital lending platform
- Real world examples
Michael Fondessy: Newgen’s webinar on digital lending ecosystems, building your flywheel. My name is Michael Fondessy, and I’m part of the products and solutions team with Newgen, and I’ll be our host and moderator for this webinar.
I do want to thank you all for taking the time to join us today. The response has been pretty overwhelming, and we are excited to talk about the nuances of digital lending in 2021.
Now, today we do have with us Alex Johnson, the widely recognized financial industry strategist. He is the director of Fintech research at Cornerstone Advisors. We also have our co-presenter, Ankur Rowat, is the director of products and solutions at Newgen software. For our webinar today, Alex will take us through the digital lending ecosystem, an interconnected set of services that solve a broader set of financial needs for borrowers, and then Ankur will go ahead and take us into a deep dive of how Newgen can help financial institutions transform lending with its digital loan origination solution.
At the end of the presentation, we will conduct a Q&A session, so please do go ahead and type your questions into the question window at any time during the webinar, and we will go ahead and address them at the end of the session. So with that being said, I’ll gladly allow Alex to take the floor to start a session with a digital lending ecosystem.
Alex Johnson: Awesome. Thank you, Mike, and thank you everyone for joining us here today. So when talking about topics like digital lending ecosystems, I always kind of like to start with a quote from one of my favorite movies, Moneyball, where Brad Pitt’s character, Billy Bean from the Oakland A’s sat down with all of his staff and tried to work out the problems they were trying to solve by getting to the root of the issue and just sort of continually asking, “What’s the problem? What’s the problem we’re trying to solve?”
So when thinking about digital lending, and kind of more broadly, the strategies that banks and credit unions are pursuing, I think it’s really important to try to understand, based on the priorities of banks and credit unions, what problem they’re trying to solve, and then try to figure out, “Is that the right problem? Are you looking in the right place?”, because a lot of times, we spend so much time and energy devoted to trying to solve a problem and living in it in a day to day sense, you kind of lose track of the overarching strategy that you’re trying to take to market, and given how quickly the digital lending space is changing, Ankur and I were just chatting about this before the webinar began, it really is a worthwhile effort to sometimes take a step back and go, “Do we have the right strategy? Are we approaching this problem the right way?”
So if we go to the next slide, Cornerstone Advisors has done a survey every year of banking credit union executives, our “What’s going on in banking?” survey, and because it’s an annual survey, we have a pretty good sense, year over year, what some of the kind of key strategic priorities are for banks and credit unions.
One question in particular always kind of catches my eye, which is, “What are your institution’s most important technology priorities for the upcoming year?” Obviously, we all know that where banks and credit unions place their investment bets from a technology standpoint really is probably the clearest indication of what their overarching strategy is for the market, and when you look at this list for 2021, 2020, and 2019, and you look at the answers that came out at the top, and in particular, the ones that are trending up over the last three years, rather than down, a couple stand out. One is get more value from your existing technologies and vendor relationships, and another is increased revenue generation opportunities. So in sort of summary, if you’re trying to just sort of look at this list and go, “Well, what’s the problem that most banks and credit union are focused on solving?”, it’s, we need to ring more money out of our vendors and find opportunities to generate more revenue.
Totally reasonable, makes sense, right? But if we go to the next slide, as Billy Bean might say, it’s really important to keep digging, because you might not even be looking at the problem the right way, and I think there’s one key piece of insight that’s missing from this analysis. So if we go back to that slide, the one piece that always jumps out to me is, if we look at that data again, the top answer, which is always and has very consistently been improving customer experience, improving service delivery, and what strikes me about this is, even though it’s the highest priority on this list, it’s actually trending down for banks and for credit unions rather than up, and at a time when consumers and businesses have never had more choices for which service providers they want to work with, and so much money and innovation is flowing into financial services, that’s a pretty alarming finding that that answer is actually going down, and what it tells me is that the actual problem that banks and credit union are trying to solve is figuring out how to make more money without really fundamentally changing the products and experiences that they deliver to customers.
If we go to the next slide, the problem with that is it’s not possible. In the short term, you might be able to find ways to optimize revenue to cut costs, but it’s not a sustainable long term strategy, especially in the face of all of this sort of innovation disruption coming into the market from Fintech. The only sustainable strategy, if we go to the next slide, is building new, more compelling value propositions that are competitive with all of those new offerings that are coming into the market.
You have to have a strategy for doing that, and anything else that you’re doing, whether it’s optimizing your relationships and your contracts with vendors, which is work that we do every day with banks and credit union at Cornerstone, it’s incredibly important, or if it’s trying to find new sort of ways to adjust your business model in order to generate more revenue, all of those are great, and they’re tactical things that we work with banks and credit unions today to do, but if you don’t have a larger strategy that those fit into that’s focused on delivering new, more compelling value propositions to your target customers, it’s just a delaying tactic, and when we talk about new, compelling value propositions, I want to draw a really clear distinction between what I’m talking about and what I think a lot of banks and credit unions interpret that to mean.
If we go to the next slide, another finding from our same “What’s going on in banking?” survey found when we asked, “What new products or services does your institution plan to launch in 2021?”, the number one answer, which was shocking to me, was digital account opening. So when we talk about launching new products or services, and we talk about improving the things that you’re delivering to your target customers, we don’t mean digitizing access to your existing products. Digital account opening by itself is not a product. It is not something that in and of itself is going to deliver value to customers. Digital needs to be an enabler that is wrapped around new experiences, new value propositions that you’re building for your customers.
So if we go to the next slide, really, the way I would sort of conceptualize this idea of what banks and credit unions need to do in the face of all this disruption is solving the entirety of a customer’s problems, which means building ecosystems, not products, and so at the very beginning, when we were talking about our topic for today, building a digital lending ecosystem, what we’re talking about here is solving the entirety of a customer’s problem.
So if we go to the next slide, a definition that I like to use when talking about ecosystems in a lending or financial services context, is a collection of interconnected products and services that can be seamlessly utilized by customers to completely solve a single distinct problem. Right? So if you are conceptualizing the way that most banks and credit unions have traditionally gone to market, it usually is through a breadth of different specific products and services, and trying to provide sort of the most comprehensive set of solutions that a customer, whether it’s a consumer, small business, a commercial customer, might need for all of their banking requirements, and where we see the market evolving to is away from breadth and towards depth, and building an ecosystem of related products, services, experiences, some provided by your company, some provided by other companies, and pulling those all together into a vertically integrated solution that addresses one key problem end to end for a small target customer segment.
The problems that we’re talking about here can vary tremendously, right? If we go to the next slide, just to give you sort of a sense of what some of those look like, they could span the gamut, from consumers saying, “Hey, I want to pay off my debts and build healthy financial habits,” or a small business owner saying, “I want a single set of tools that I can use to run my entire business,” or again, a consumer may be saying, “I want to buy something that I can’t quite afford without going into long term debt,” or even a business like an Airbnb, a platform or a marketplace that says, “I want to help my customers grow their businesses that they’re building on top of my platform.”
In all of these cases, these problems, while they are centered around financial services products and centered around, in a lot of cases, lending, they aren’t exclusively about that, and there’s a broader problem here that customers are trying to solve, and in a lot of cases, they extend well beyond the bounds of a specific product that a banker credit union might offer. We have a consumer saying, “I want to pay off my debts and build healthy financial habits.” They’re not just asking for a loan to refinance existing debt, right? That’s part of the solution, that might even be the core of a solution, but by itself, that doesn’t fully meet that need.
Same thing from a consumer perspective if they’re saying, “I want to buy something I can’t quite afford without getting into long term debt.” Again, maybe a credit card is a good way of doing that, maybe it’s not, and what does that larger problem look like? So we’re going to get into a couple different examples of where some of these emerging solutions from Fintech providers and the ecosystems that they’re building are focused on, because it really tells you a lot about how to fully conceptualize the customer problem, and then wrap all of the products and services around that.
If we go to the next slide, Ankur, there are sort of two different approaches that you can take when building ecosystems. One is to build your own ecosystem, meaning that you are going to be the brand and the trusted sort of front end partner interacting with customers, which means that you are assembling the ecosystem for them to interact with and use to solve problems, and doing that yourself and taking the work and the cost and the responsibility out of doing that, or alternatively, participating in other companies’ ecosystems, where they are taking that responsibility and you are plugging into provide an essential piece of that overall solution.
I think it’s worth pausing here for a second just to point out that there is no one right answer for businesses when sort of thinking about ecosystems. There are pros and cons to each. If you’re building your own ecosystem, a lot of banks and credit unions sort of initially prefer this approach because it’s familiar, it involves you sort of continuing to sort of own the branded relationship with customers and sort of have that customer facing relationship, but it’s also really expensive, right? What we’re talking about here goes well beyond just digitizing access to your existing products. It’s about building new products and experiences, and that’s expensive. It oftentimes involves skill sets or capabilities that might exist outside of your organization that you have to hire for or partner for. A lot of ecosystems involve bringing together multiple stakeholders and making your environment easy to integrate with, and a lot of that is very uncomfortable or potentially risky for financial institutions to do.
So alternatively, and we see this a lot in the banking as a service space, the other model can be very attractive in terms of participating in other companies’ ecosystems and just providing the lending component that goes into those companies’ ecosystems. This can be a very profitable model, because it cuts a lot of the costs and a lot of the work of managing that ecosystem and dealing directly with customers out of the equation, but alternatively, it also disintermediates you from that direct customer relationship, and that presents a different set of business risks.
So there is no one right answer. Actually, a lot of the banks and credit unions that we talk to at Cornerstone are sort of splitting the difference and kind of tackling both approaches at the same time. So it doesn’t have to be one or the other, but you have to have a very clear strategy for how you’re going to go about delivering that integrated set of products and services that solve a particular customer problem, and we’re going to give you a couple examples now just to sort of illustrate the breadth of potential different solutions and kind of widen your perspective a little bit, hopefully, on the types of other companies that are already doing this and who you should look to both for inspiration, but also potentially as competitors in this new world.
So if we go to the next slide, I want to start with building your own ecosystem. So a couple examples here. If we go back to some of those key customer problems, the first one was, “I want to pay off my debts and build healthy financial habits,” and I would say that a lot of banks and credit unions believe about their existing product set that they help customers do this, that they offer all of the products necessary to do this, that they have customer service and financial advisors that can come in and sort of wrap all the advice around those products necessary to help consumers do exactly this, but I think one thing that we don’t see enough of in the space is going beyond giving the theoretical capability for consumers to pay down debt or build healthy financial habits, and actually productizing that offering in a way that actually drives results.
In particular, I think one thing that we’re starting to see some early examples of, that I’m hoping a lot of other banks and credit unions sort of double down on and start to imitate, is designing an ecosystem of different products that are interconnected in ways that allow customers to be rewarded and incentivized to build healthier financial habits, and I think SoFi is probably the clearest example of a company in financial services that’s doing this today.
So you’re probably very familiar with SoFi. They started in the student loan debt refinance space. They had a sort of very well to do customer base based around students from universities like Stanford, but over time, they’ve expanded into much more of a full service bank. They offer investments, personal loans, student loan refinancing. As I mentioned, checking accounts, savings accounts, they do mortgages and home lending, credit cards, private student lending, insurance, monitoring your credit score, even refinancing auto loans.
Within that very large set of products, doesn’t necessarily distinguish them from existing banks or credit unions, but if you double click into some of the specific products and how they’re structured, you start to see some of those differences. So using credit cards as an example, SoFi recently introduced their credit card product, and one of the things that’s really cool about it is that the reward structure is based on rewarding customers for paying down debt or saving money or investing money.
So every time you pay down your student loan refinance, or every time you save a little bit of money or invest a little bit of money with SoFi, it’s that action that triggers the higher reward rate for the SoFi credit card, and this is fairly unprecedented within the financial services industry, and it’s not incredibly complex, it’s not something that anyone else couldn’t have come up with, but it’s a meaningful shift in the design of the products and how they’re integrated together, focused on, again, solving SoFi’s members core problem, which they identify as helping them build better, healthier financial habits. So it’s a really good example of a fairly simple thing that any bank or credit union could do to integrate those products together in order to create that sort of outcome that everyone is looking for.
If we go to the next slide, an example on the business side, if we focus on small business, again, designing your own ecosystem is Square, and Square is very focused on this core problem that a lot of small business owners have, which is, “I want a single set of tools that I can use to run my entire business.”
A stat that I just sort of discovered in doing research and talking to different companies in the space is that on average, a small business in the United States has about 10 employees, but they utilize 20 different software tools in order to help run their business, and that is just sort of unsustainable, right? It’s too much work. It’s logging into too many different systems. It’s too fractured of an experience for a small business that doesn’t have a lot of resources or bandwidth to manage every aspect of their business, and a lot of times, banks contribute to that problem, because banks are one of those 20 providers that they’re logging into in order to get access to certain services, and so what we see playing out in the small business space, and Square is a perfect example of it, is integrating as many of those services together into a holistic offering as possible.
So Square wants to be, essentially, the command center that a small business uses to manage every aspect of their business. Point of sale system, marketing, invoicing, inventory management, payments, lending, deposits. Obviously, they just got their ILC charter, and now they have their own bank where they’re offering Square small business banking products, all of it is designed to be integrated into one harmonious whole, the intention being that it’s going to dramatically simplify small business owners’ operations, and it presents a really interesting strategic challenge for banks and credit unions, which is you may have the best small business lending program in the country, but to a small business owner that is just overwhelmingly focused on keeping their small business alive and being as efficient in doing that as possible, they may view your product in a vacuum as superior to any of the other ones that are out there, but they are increasingly going to choose the ecosystem that’s provided by Square or Shopify, or even a legacy provider like QuickBooks, in order to get access to those same services within an ecosystem that allows them to solve their overarching problem, which is, “I want a single set of tools that make it easy for me to manage my business.”
So Square is very much sort of vertically integrated into that direction. If you’re a bank or credit union that doesn’t provide a similarly integrated set of tools, not that you have to have all of them built in house yourself, but if you don’t have some approach for integrating all of those into one environment, you’re going to increasingly be at a competitive disadvantage.
We go to the next slide. If we talk about the other side of the coin, which is participating in other companies’ ecosystems, there’s a whole set of other examples that are also, I think, very instructive. So going back to, again, a key consumer problem that we see come up a lot in our consumer surveys, “I want to buy something that I can’t quite afford without going into long term debt.” One of the things that we see being increasingly true with millennial and Gen Z consumers is that they are averse to credit cards, and it’s not all consumers, but for younger consumers that are growing up during the great recession and are growing up in sort of a challenging economic environment, they’re wary of credit card debt and they’re wary of what their parents went through.
That doesn’t necessarily mean they don’t want to consume things the way that their parents did. They want to consume things, they want to shop, they want to get access to things that maybe they can’t quite afford or they don’t quite have the cash flow to buy, but they want to do it in a different way, and so this is one of the sort of fundamental shifts that’s driving interest in the market around “buy now, pay later”, and Affirm is, I think, one of the sort of classic examples to look to of participating in another company’s ecosystem in order to address a customer’s key problem.
So in this case, the customer is going to an eCommerce site or going to a brick and mortar merchant and shopping for products and feeling a little uneasy, because they can’t quite afford what they’re looking for, and in that moment, what they are looking for is financing that allows them to make that purchase, that allows them to stretch out their available cash flow, and that allows them to do that without the risk of slipping into long term debt, where they’re not going to understand all the costs associated with it, and where they may end up carrying an interest rate for a long period of time, something that happens frequently with credit cards.
So what Affirm did was, obviously, build an installment lending product to help enable that, but the key is they embedded that installment lending product within merchant’s existing environments. So it’s the merchant providing the ecosystem that solves the customer’s problem, “I want to buy something that I can’t quite afford without going into debt,” but it’s integrated into that environment in a seamless way that allows those merchants to convert those customers, to increase the overall average order size, and to provide a service to their customers that the merchant is willing to pay Affirm a very healthy fee to help enable. So really interesting example of how to participate in another company’s ecosystems rather than insisting on controlling it yourself.
Then one final example I want to get to, again, participating in other company’s ecosystems. If we switch to more of the sort of B2B context, an interesting problem that we’re seeing pop up with businesses that run platforms, B2B platforms that enable other businesses like hosts on Airbnb, as an example, to manage their business, is those platform providers want to increasingly find more ways for businesses to succeed on their platform and to not have them go somewhere else.
So lending is obviously a key component of that. I want to enable businesses on my platform, if I’m someone like an Airbnb, to expand and to grow, and that might be something simple, like, I want to have… Again, using Airbnb as an example, maybe I want to have my hosts, that are businesses running on my platform, have access to financing so they can redecorate their home and make it more appealing to customers, or it could be something big like, “I want my super host to own multiple properties to be able to get access to financing to buy more properties and expand their business on my platform,” and so they need access to lending, but again, the key thing for these businesses is they want to enable that experience on their platform. They know the businesses that they work with better than anyone else. They have data on them, they understand exactly what their needs are, and they can see on a day to day basis what’s going on with their business and identify the right times to present offers or to expand the services that they’re offering to those businesses.
So I think a really interesting example of this is Stripe, and the Stripe capital for platforms product that they rolled out a little while back, which is a really interesting product, in that it enables platform businesses operating on Stripe to offer installment loans, working capital loans, to their business customers that are fully guaranteed by Stripe, and it’s kind of an amazing product, because Stripe uses all of the data that they have on these platforms and the businesses that they’re interacting with in order to underwrite those and take 100% of the credit risk on. So for the platforms that are operating on Stripe that use this service, they literally can just flick a switch, turn lending on, and it just becomes an additional revenue stream that they split the revenue on with Stripe, with taking no additional risk and having to introduce no additional capabilities.
So it’s a really interesting example of Stripe facilitating the creation of these ecosystems for these different platform businesses without having to be a brand or in front of the customers at all. It’s just something that invisibly gets turned on in the background, and while it’s a new product, I expect this and similar offerings from other providers in the space to really start meaningfully eating into a portion of the B2B lending space, because it’s incredibly convenient and easy to integrate with.
So that brings us to my final slide, which is, how do you go about executing ecosystem strategy? Well, regardless of whether you choose to focus on building an ecosystem yourself or participating in other companies’ ecosystems through partnerships, or through a combination of the two, there are a couple of key points that are, I think, really important.
The first and most fundamental is figuring out which customer segment you’re focused on serving. I think a key mistake that banks and credit unions make, particularly smaller, midsize, community based banks and credit unions, is trying to fight on all fronts at once, and there’s just too much competition, particularly from very large companies, to be able to fight every front in a war at the same time. You really have to focus in a particular area, and so the number one advice we always give at Cornerstone when we’re talking about some of these strategic questions is, “Who is the customer base that you can identify that you know better than anyone else, and that you understand more deeply the key problems they’re facing better than anyone else?”, and every company that we talk to, every bank and credit union, has some core set of customers that they know better than anyone else.
It might be within a specific geographic footprint, it might be a particular segment of consumers or small businesses or mid-market businesses, but whatever it is, there’s a group that they know better than anyone else, and over time, generally what’s happened is that has expanded into a broader set of products and services. Our first piece of advice is narrow your focus, find the center of that bullseye that you really want to focus on, and really double down on owning that segment and dominating it with some of these new ecosystem based solutions.
The second thing that you need to focus on, and I know Ankur’s going to talk more about this, is making it much easier to integrate with your environment. It is absolutely critical, whether you are building an ecosystem yourself or plugging into other companies’ ecosystems, to make every aspect of your technology stack, your core system, your digital banking system, your digital lending platform, as easy to integrate with as possible, which means it’s opened by default, means it has a set of predefined APIs that are easy for other companies to integrate with. It means that you have processes wrapped around that platform and that technology from a legal standpoint and from a business development standpoint that are easy to use and friendly to outside developers.
Everything needs to be really easy to plug together, and that doesn’t just mean to outside companies. It also means making sure that data between your different silos can flow easily, and that different products can be connected together in the same way that SoFi has interconnected their different banking products in order to solve that broader problem.
Then finally, making sure that you can quickly get new products and experiences to market. I think overall, the metric that defines success in today’s sort of quick moving market is, how fast can you ship, and how quickly can you get new things out there, and not only how quickly can you introduce new products and services, but how quickly can you learn from the reaction that they get in the market and make adjustments?
I joke sometimes that Twitter seems to always be turning off new features as quickly as they’re introducing them, but realistically, what it really is an indicator of is they’re being agile, and they’re cycling through new ideas to find something that sticks, and banks and credit unions that are pursuing this ecosystem strategy, they need to be able to be that agile, especially if they’re focused on a very small segment of customers, and making sure that they’re constantly introducing new products and services, which is, again, I know something that Ankur’s going to talk more about. So with all of that, I will hand it over, Ankur, to you, and let you get into to some of the details there.
Ankur Rowat: Thank you, Alex, and that was a great insight in terms of the digital lending ecosystem, and I think your questions towards the last slide are really important, and then I’ll being hammering on those questions and how Newgen is able to respond to those questions.
Now, I just wanted to also add my perspective on the lending specifically, and I love this quote from Charles Darwin. “It is not the strongest of the species that survives, nor the most intelligent. It is the one most adaptable to change.” Now, we have seen that right from the recession era, when a lot of the institutions collapsed, we have seen the emergence of alternate lenders, as well as Fintech organizations, and they’ve already increased the competition for the traditional banks.
Now, at this time, and this is the right time that we should talk about it, we are seeing in the market that large players, the market sellers like Amazon, the social media giants like Facebook, Uber and Square One, as Alex, you talked about… So they’re already entrenched into the lending space, and I believe that they are in that area right now, where they’re trying to iron out the kinks that they have in the process. So they’re still not at the full throttle stage, but at the same time, if you see, Amazon has been lending more than one billion in the credit, the loans for the last three to four years. Similarly, if you talk about the Square One, last year, they gave small business loans up to 140,000 small business customers, and similarly, in terms of Apple, they already have seven million customers of their credit card, and more than 10 billion in the credit card so far.
So we are seeing that they are emerging, but if you see, what is the common thread amongst all of these giants or the new age lenders? The common thread here is a great digital platform, and that’s the context of today’s webinar, also. We are looking at a digital lending ecosystem. Now, they already have a digital platform. So if you talk about Amazon, they have billions of transactions that are happening on Amazon, and they have the power of the data for these sellers, resellers, and using that, they’re able to drive their credit risk models and provide these loans pretty quickly.
Similarly, Square One also has all the transactions of these merchants and the credibility that comes from those transactions, and again, able to provide that digital experience, which is now transformed into lending, but as I said, this is the right moment for all the institutions to assess the situation and already gear up for the future, because this is the time when these guys are ironing out their kinks in the process, and they’re still not full throttle on their business.
Okay. Now I’ll just align with the questions that Alex has pointed out. So the very first question that he pointed out is the institution should observe and identify, which customer segment do they want to serve, and do they understand the problem that they’re trying to solve better than any other provider or not? Now, what we are saying here is at a high level, you could probably segregate and segment your customers in terms of individuals or entities, small businesses, “Are these existing customers, new customers? What are the age groups of these customers? What are the actual needs?”, and accordingly align the products.
Similarly, you could very well also create that segmentation on your loans. So most of these are your retail loans, small business loans, commercial loans, and how many of these can you categorize between no touch, low touch and high touch loans? Wherein it is really dependent on the type of risk that you are exposing yourself to, to the amount of the credit that you’re offering, and then the actual loan types, which could be secured, unsecured, asset based lending, or other type of CRA lending and so on.
Similarly, another facet that you can add to the lending space is the channel preference. So what kind of channel are your customers or members preferring? So are they mostly coming online? Are they mostly coming in branch for the services, or do you have brokers or people calling up the call centers to ask for these services? Okay, now this is just at a very high level, but I would really suggest and recommend the institutions to further bifurcate and drill down into the actual needs of the customers versus the loan segmentation and channel preference.
Now, with this, what would happen is that you would clearly understand your customer base, the loan segmentation and channel preference, where you can actually focus and create an expertise.
Now, how Newgen helps you in all of this is Newgen has a single platform for all lending products. So we have a loan origination solution, which helps the institutions in consumer lending, small business, SBA, CRA loans, commercial loans, whether these are CRE and C&I. So there’s no limitation of the type of products that the customers would want from the institution, and for the institution itself, it becomes fairly easy to handle all these products using one solution for the customers. They’re able to switch between the products, combine the products at the initiation stage.
Secondly, we are able to also align with the institution’s policies. So as per your segmentation, as per the customer bifurcation that you would’ve done, the solution that we have easily aligns with your no touch, low touch, high touch loans policies, or if you have specific unique cases for the customers, if they’re looking at PPP loans, CRA loans, the solution easily aligns to those unique cases.
The third is omnichannel engagement, which is the core of, I would say, the digital ecosystem. Now, while we are also including the other aspects, but the very first initiation stage is the customer touchpoint when they connect with you through these channels. So you need to have a clear strategy in terms of how to connect with these customers across multiple channels, so online branch customer call center, and provide a consistent experience to these customers.
Now, some of the examples in which we have kind of delivered these business values for a digital ecosystem. So one of the financial institution implemented Newgen’s consumer lending, small business lending and commercial lending on the same platform, and they had integrated with 17 different systems, including core banking credit bureau, but the idea is they were able to leverage the same platform, reuse the integrations, reuse the consistent user interface and minimize the training requirements.
When it comes to the low touch, no touch, high touch loans and unique use cases, we have been able to successfully deliver loan origination to more than 25 institutions in the last year. Along with that, we have been able to handle very specific strategies of institutions, whether it was creating a dealer portal for a boat loan origination, or if it was merchant financing implemented across various institutions.
If you talk about omnichannel engagement, one of the leading consumer finance companies, they have implemented Newgen’s solution, and they’re able to offer the credit in less than one minute. Now that’s the kind of speed which the customers are expecting online, and then all of these are a hundred percent digital applications. There has been a reduction of printing costs up to 90%. Similarly, one of the credit unions in the United States, they have combined their deposit and lending apps in their online channel. So that’s where we are really targeting the integration aspect, wherein you are able to serve your customers multiple products, and they can easily switch between these products at any point in time.
Secondly, the question is, how easy is it to integrate with you as an institution, and how can the data that you capture for these loans seamlessly flow between multiple systems? Now, this really requires technology at the core of it, and what we offer is an open API based platform, which allows you to seamlessly exchange the information across your lending journey, and you don’t have to enter or capture or fill the data again at any point in time.
So what we are doing is we are connecting with the online banking providers like Q2, Alkami, at the same time, the CRM systems like Salesforce or MS Dynamics, in order to capture the information of existing customers. At the same time, get the data for the leads and continuing the process.
Similarly, we are also connecting the different aspects of the third party systems, which are required to make a decision, whether it is a preapproval, soft approval, prequalification to these applicants. So the credit bureaus like Equifax, TransUnion and Experian, and the other systems like Socure [inaudible 00:39:40] to ensure that all the checks for OFAC ID verification are seamlessly done in real time.
Similarly, the other systems that would come into picture, ensuring that you have an e-contracting capability in your lending journey. So we have integrations with the document generation engines, as well as the electronic signature engines, and towards the end, pushing the data seamlessly into the core banking, ensuring a real time and hundred percent automated booking in the process.
Now, what we are really looking at with all of these integration touchpoints and open architecture, we are really looking at 40 to 50% instant decisions when it comes to lending, and a delightful experience to the customers.
Now, when I talk about integration, I am not limiting the integration by just the system’s integration, but also integrating and connecting with all the participants in the lending journey. Now, what I mean by this is any entity which is involved in the lending, whether these are your appraisers, brokers, customers, or environmental assessors, we are able to integrate them into the process through digital channels. So we have digital channels, customer facing portals for all of these entities, whether these are brokers, appraisers, who can log into the system, access what they have to do, communicate with the bank, credit unions instantaneously, and then track their [inaudible 00:41:23] that they have to complete, or the bank request to them.
Now, this reduces the overall manual follow ups that you may have to do over the phone, emails, outside the system, so there’s a 90% reduction in that, and along with that, any kind of compliances that you have, whether this is Reg B timelines and other compliances, those are all taken care of.
Here’s a glimpse of some of the portals that we have for these borrowers. So these are all device responsive, providing consistent experience to these customers, borrowers across multiple channels.
Lending a platform, digital layers for brokers who can log in, see the submitted loans from their side, what is the current status, and if there is a request for additional documentation or not.
Again, a glimpse of the portals for appraisers, engineers, consultants, and other entities.
So the last question, which Alex pointed out, is, how quickly can you get the new products and experiences to the market, and how quickly can you adapt based on what you have learned from these branches? I do believe that this is the most important. From my first slide, adaptability is the core of the banking industry nowadays.
Now, the way Newgen’s lending platform helps you is that it is built on a low code business process management platform, and any changes that you can think of in future, for example, you have devised your strategy for no touch, low touch loans, or you are further segmenting your customer base, borrower base into geographies, into age groups and so on. So it’s fairly important for all the institutions to have the adaptable framework to allow such changes on a continuous basis.
Similarly, we have seen a lot of our customers have gone through the transformation where they were only providing the loans in branch, but they have now moved on to the online channels, ensuring that they have the mobile first strategy following their branding guidelines, adding promo codes for the online digital channels. So how do you ensure that the experience, the look and feel that the customers see, is also continuously changed in the lending journey?
Then the third aspect is the overall credit policies that you have, the business logic that you have. That will keep on changing based on your learnings. So we have seen a lot of institutions who would gather the data from the last three years, four years, align that with the decisions that they made and the defaults that were done, and then accordingly further refine their auto decisioning logic. So how do you ensure that you are able to define this, learn from the historical data that you have on a continuous basis? Then from the integration perspective, from the reporting perspective, this, again, is something that we have seen continuously changes every month, every year. You may require additional insights to your processes, to your productivity, into the lending journey, and then how do you create those additional reports or add additional integration touchpoints?
This is all possible with Newgen’s low code platform, which ensures that we have modules in the platform like process designer, UI/UX designer, business rules engine, business dashboards, and integration adapters, which are agile in nature and accommodate these changes very easily, and on an average, low-code platforms will shorten the change cycles that you have by at least 66%.
A great example of that is the paycheck protection program loans that we delivered last year, and what we did was unprecedented. We were able to create a solution using the domain knowledge that we have and the platforms or the solutions that we had. Within just 10 days, deliver that, implement that in just a couple of days. 24, 48 hours was the average deployment time, and then we also continued that journey, because there were a lot of changes happening on a daily basis. So the platform is nimble enough to accept those changes, roll out those 25 plus financial institutions in a matter of hours.
So that’s the kind of speed we are looking at when it comes to the digital lending ecosystem, and I would like to finish off with this one slide, and again, quoting H.E. Luccock, that, “No one can whistle a symphony. It takes a whole orchestra to play it,” and by that, what I mean is if we have to look at the digital lending ecosystem, we have to look at it in perspective of connected banking, wherein the customer is at the epicenter of the overall processes and the perspective, and all of the functions, systems, processes and people are synchronized, synergized to derive growth for the business and reduction of cost for the business, but at the same time, ensuring the customer satisfaction.
So with that, I will open it up for the questions.
Michael Fondessy: Yeah. Thank you, Alex, Ankur. There’s a lot of great information there. We do have a couple of questions that have been entered, and then for everybody that’s in attendance, yeah, please feel free to go ahead and ask any questions in the questions box in your webinar control panel.
Our first question, I’ll go ahead and direct this towards Alex. It is, “What traction do you see in the small business lending market, and how should financial institutions go about it?”
Alex Johnson: Yeah, I think there’s a couple of interesting dynamics happening in small business right now. So Ankur mentioned one that I think is really, really important, which is the paycheck protection program, and sort of the nimble way in which a lot of banks and credit unions responded to the needs of small businesses over the last year. So it wasn’t always pretty. Sometimes it involved lots of coffee and working over the weekend in order to get those applications through, but the nice thing coming out of that program is that a lot of the banks and credit unions we talked to have a whole brand new set of small business or even mid-market business customers that they had never had before, that they didn’t have a relationship with, and while the paycheck protection program obviously wasn’t designed to be a revenue generation opportunity for banks and credit unions, and it’s not really something that has required a lot of risk or underwriting or other components, it’s a great bridge to a future relationship, particularly given sort of the emotional resonance that that product had for the businesses that needed it to survive.
So I think in the short term, having a strategy for how you’re going to transition those customers to be regular customers of your institution, if they are, in fact, in the center of your bullseye and a focus for your institution, is really, really important, and I kind of go back to what I was saying in the earlier part of the webinar. The needs we continue to hear about from small businesses and the traction we see in the market is really around solving problems relating to their core business and the objectives they have in running their business, not just their sort of niche financial needs at any one moment.
One of the things that’s always struck me about the small business space is that since the arrival of online lenders like Kabbage or OnDeck, small businesses have flocked to those providers for loans, and yet at the same time, they report after having gotten those loans that they are less satisfied with them, with the service they got, with the price they got, than they would’ve been if they had gotten it from a community bank, and what that tells me is that while they value the products and the services the community banks offer, it didn’t address the core problem that those small business owners had, which is always, in the case of small businesses, “I have to keep my business alive. I have to get enough money to expand or to pay my costs for this month or to be able to seize this opportunity next quarter.”
Small business are obsessed with survival, and speed is a really necessary component of that. So I think going back to some of the sort of things Ankur was pointing out, the ability to move quickly, the ability to really digitize that small business lending experience and sort of wrap it into a larger set of services that you can offer to your core small business customers, particularly the new ones that you got through the paycheck protection program, that’s kind of where I would start.
Michael Fondessy: Thanks Alex. We do have another question here. I’ll direct this one towards Ankur, and it is, “Do you guide financial institutions and segmentation planning for lending digitization?”
Ankur Rowat: Thanks for the question, and so yes, typically the implementation cycle that we have, it also has one of the activities, which is gap analysis, and what we do is at that time, we understand how the solution that we have maps to the current processes that you have, and your strategies, in terms of the growth, the cost minimization, and different institutions have different strategies, but what we do is that we do deliver the experience that we have gathered from all of our implementations, and that is not restricted to a US market, because we have seen that the innovative capabilities and ideas have been generated from other geographies as well.
So we deliver the overall experience that we have from our banking center of excellence and bring that to table, highlight some of the possibilities that could be there, which would help you achieve your strategies and the objectives for the lending in a platform. So yes, we do help a lot of our institutions during that gap analysis phase, bring the ideas up onto the table, and then let you choose if you want to go with your strategy or if you want to try with the strategy that you have placed for your bank.
Michael Fondessy: Great. Thank you, Ankur. We do have another question here. I’ll just go ahead and read it out. “If younger consumers aren’t using credit cards as much, how will this impact them moving forward when our society is ‘run by credit scores’, and also, do you think FI’s will start looking at other spend habits like savings, such as what SoFi is doing for rewards to build one’s credibility, to be approved for a loan?”
Alex Johnson: Yeah. Good question, and that’s very much in my wheelhouse. I spend a lot of time looking at consumer credit products and “buy now, pay later”, and I, before joining Cornerstone, worked for a long time at FICO, so I’m very familiar with that kind of credit scoring aspect as well.
I think that in general, what we are going to see is a shift a bit away from credit cards. I think we’re already seeing it play out with “buy now, pay later”. I think the thing that’s not well understood about the credit card space, or something we just take for granted, is that credit cards are different products to different segments of the population. So to transactors that always pay off their balance every month, credit cards are great. They’re convenient, they’re ubiquitous, they generate a lot of rewards that are very valuable to those cardholders, and through interchange, they generate a lot of revenue for issuers with very little risk. That’s one segment of credit card where that product works really well.
Credit cards for consumers that struggle to manage revolving balances and budgeting against revolving balances that are calculated at the end of the month, credit cards don’t work as well for those consumers. They might be very profitable for credit card issuers, if you can underwrite them appropriately and you can get customers who will pay, but will carry a balance and generate interest, they can be enormously profitable, but it’s not a very well designed product for that segment of customers who are revolvers rather than transactors. So I think “buy now, pay later” cuts greatly into that segment of credit cards and will continue to.
I also think, going to the point about credit scoring, that we are seeing a lot of “buy now, pay later” traction around thin file or no file consumers, and these might be young consumers that just haven’t built credit yet, or they might be consumers that just have been sort of excluded from the credit system for other reasons, and because particular aspects of “buy now, pay later”, like pay in for providers, a Klarna or an Afterpay, because they don’t even check someone’s credit score when they’re underwriting them for the loan, because it’s being sort of funded by the merchant, that’s a really interesting potential on ramp for those customers into the larger credit system.
We are still waiting to see some evolution in some of those providers in terms of them actually reporting credit data back to the bureaus, because if they don’t, they’re not going to help them build their credit score, and then I do think, to the other point of the question, we are going to see more alternative approaches to underwriting consumers, particularly for sort of short term or low dollar credit, whether it’s “buy now, pay later” or credit cards or other short term loans, and I think what some of the big credit card issuers like Chase and US Bank are doing, using deposit data and cash flow data to underwrite consumers for their credit cards, even if the banking data that they’re using doesn’t come from inside their walls, I think that’s a really interesting indicator of that starting to shift. So probably won’t see a ton of movement there right away, but we are starting to see some, and I think “buy now, pay later”, the focus that banks like Chime and others, neobanks, have on credit builder products, all of that is starting to chip away at this problem.
Ankur Rowat: Yeah, and Alex, I just wanted to add to that, I totally agree with you. I do see that the credit cards may go away, but that is not something short term. So we do see organizations, as I talked about in Amazon and other institutions like Square One, trying to utilize their own transactional model as a scoring mechanism, and then there are institutions who are kind of connecting with the database of Amazon of these transactions, like [inaudible 00:56:48]. So they are now connecting to the Amazon database and trying to assess the risk based on those transactions. So maybe it’ll be a combination of the credit scores, which is there, and we have seen some fallacies in that as well, a lot of data getting hacked or exposed in the last few years. So that, again, is not the sole source for understanding the credit. So we have to look at a scenario where we are targeting a lot of digital channels and sources to validate, as well as run the credit score for these customers, whether these are just young consumers or maybe the other customers also going forward.
Alex Johnson: Yeah. I think just to add one other thought on that, I think that’s a really good point. The sort of underlying infrastructure thing that’s changing is all of this new data is available that gives you a window into ability to pay, and so credit scores and credit bureau data is awesome for willingness to pay, which is one aspect to underwriting, but another huge aspect to it is ability to pay, particularly for shorter term credit or loans, and you’re right, Ankur. Amazon, for the data they have flowing through their platform for businesses that sell through Amazon, as an example, they know exactly what those businesses’ cash flow is better than anyone, and lending on top of that insight is not that hard from a credit risk underwriting perspective, and the more that those underlying sources of data get unlocked, the more of that type of lending outside of credit cards and traditional bank loans we’re going to see.
Ankur Rowat: Mike, any other questions that we have?
Michael Fondessy: Not so far, but yeah. If anybody wants to go ahead and enter those in, certainly please do so.
Ankur Rowat: Yeah, I did see a lot of questions in terms of these slides and recording being available. So yes, this would be available on our website, I think quite shortly, [inaudible 00:58:50], and whenever that happens, you can surely come and download this presentation or the recording.
Alex Johnson: One other thing I’ll add to that, Ankur, is just that this topic, digital lending ecosystems, is something that Cornerstone is working on a research report around, and we will be releasing that research report in the coming month or so, and it’ll delve into a lot of these topics in more depth. So be sure to come back to Cornerstone’s website when that’s available for download, because that’s a research project we’re in the middle of, but very excited to release some of the findings around that as well.
Ankur Rowat: Awesome.
So I think we don’t have any more questions, and thanks everyone for joining in. Thanks Alex, and thanks Mike, for moderating.
Alex Johnson: My pleasure.
Michael Fondessy: Yes, thank you. Thank you, everyone.
Ankur Rowat: Thank you. Thanks for the [inaudible 00:59:50] insightful session.