Transform Your Lending Model: 4 Major Breakthroughs of Pre-Qualification Technology
Did you know that FinTech digital lenders doubled their market share in Personal Loans category from 22.4% in 2015 to 49.4% in 2020 (Experian study1)? Did you know that this market share gain came at the expense of traditional lenders - Credit Unions and Banks? This rapid market share gain was a direct result of Fintech digital lenders’ effective use of Pre-Qualification technology and “No Credit Impact To Check Your Rates” messaging. Now, this same technology is put to work by a new crop of FinTech digital lenders in auto loans also - a segment that has long been the heart of lending.
While this market share erosion storyline is playing out in real time, legacy lending systems have done nothing more than lip service in helping financial institutions take this fight head-on. Credit Unions and Banks should consider next generation lending platforms that are democratizing this pre-qualification tech and making it accessible to these institutions. Such a platform (eg: CreditSnap) can transform a financial institution’s lending economics in 4 ways:
- Accelerating direct loans (More of the profitable loans)
- Decrease adverse actions (Better customer relationship)
- Improve operational efficiency (Lower costs)
- Increase cross-sell loans and increase share of wallet (Member relationship expansion)
This white paper goes into great detail on how these four wins can be realized.
1. How Can Pre-Qualification Platform Accelerate Your Direct Loans Volume?
When a borrower engages with digitally on a Credit Union or Bank website (direct loans), they often have other choices – including the option to go to a Fintech digital lender to see instant offers and quick loan approvals. Legacy lending solutions fail to provide the capabilities that a financial institution needs to deliver the modern experience that the average borrower has come to expect (such as ‘Instant offers’). A next generation lending platform addresses this and many other pain points like this.
Chart below outlines the key ingredients of a successful “Direct Loans Growth” strategy, and how a pre-qualification platform can be the driver. Together, the below capabilities make a powerful platform promoting i) Borrower Engagement: Increased application starts, ii) Improved Conversion: More borrowers accepting offers and iii) Better Risk Mix: Attracting better borrower profiles.
At its core, a pre-qualification platform is built on soft credit inquiry technology. This enables the banks and credit unions to underwrite an application based on the borrower’s credit and the institution’s lending criteria without impacting the borrower’s credit health. Thus, the marketing team can leverage a powerful “No Credit Impact” message to help drive additional borrower engagement, like Fintech lenders do to drive their volume. It is not uncommon for a credit union to realize a 10%, 20% or even higher increase in top of funnel applications after implementing a pre-qualification platform.
To help improve conversion, the borrower experience is enhanced to remove friction. A short, easy application that is designed to get the borrower to offer as fast as possible helps reduce abandonment. This is further streamlined by use of Mobile 1st technology, integrated data sources for auto fill assistance, and integrations with existing lending and core systems.
Upon applying, the borrower is presented with the most relevant offers they qualify for. This empowers the borrower with choice while providing a guided recommendation to make the decision easier; two aspects missing in most legacy lending application experience. Together, this approach consistently leads to a higher conversion rate for those banks and credit unions that have adopted a pre-qualification platform.
2. Convert Decline Scenarios Into Positive Offers
Approaching the loan application and underwriting differently, enables a pre-qualification platform to present a positive offer to the borrower where a legacy lending system will present a decline. This is better described using two examples:
Auto Loan Example: Imagine Sam is applying for an auto loan and asks for a $35K loan amount request via a legacy lending system, however Sam can only qualify for $34K. In any and all lending systems today, this is a DECLINE, and in some systems, it becomes a counter offer of $34K. If Sam does not accept the counter offer, FCRA guidelines require you to send an adverse action letter to him. A pre-qualification platform, on the other hand, never asks for loan amount. Instead it always presents the maximum loan amount possible to the borrower – after applying DTI, LTV, PTI and all other capacity and eligibility parameters of your credit policy. In Sam’s case, he never asks for $35K and instead sees that he is eligible for $34K. No trigger of adverse action, and a better borrower experience.
Credit Card Example: Imagine Jane is looking for a credit card and she has 690 FICO score. Most credit unions and banks have a signature line of cards and a classic line of cards. Signature line comes with richer rewards and benefits, but usually have a tighter credit policy given its generous credit lines. When Jane wants to apply for a card, she may naturally like the Signature card, but may not know that it has higher score threshold OR that she may not qualify. With legacy systems, Jane will most likely get declined when she applies for Signature card. With a pre-qualification system, Jane will be applying for a credit card, and not necessarily a specific card. As a result, she will never get declined for Signature, but instead will see an offer for Classic (no decline on Signature). This powerful technology changes the entire lending experience into a positive experience in every way possible.
3. Improve Operational Efficiency
Traditional lending process requires hard inquiry on every single application, and most likely underwriters reviewing every single application. This leads to i) inefficient use of underwriter resources, ii) large number of hard inquiries and iii) processing of large number of adverse action letters.
A pre-qualification platform, on the other hand, acts as a filter in front of the LOS, and removes the unqualified apps from entering your lending queue. Modern lending platforms automatically apply your credit policy to categorize incoming apps into I) Automatic DNQs (Do Not Qualify), II) Instant Approvals and III) Manual Reviews. A pre-qualification system filters Category I (DNQs) at soft inquiry stage and eliminates the need for LOS and underwriters to process DNQs. Category II applicants see instant offers and the apps are sent into LOS for final underwriting instant approval. And lastly, Category III apps are sent to LOS for manual review. This new lending process eliminates the need for LOS and underwriters to process the Category I DNQs, and allows them to focus on high quality opportunities (Category I and Category II). Effectively, this new lending approach increases operations resources efficiency by at least 30%.
Furthermore, incorporating data integrations in the application process, such as real time collateral valuations from NADA and real time self-service accessory selection, reduces the need for underwriters to follow-up with borrowers for auto detail and accessory clarifications. This allows the team to focus on other value-add activities instead, and drives efficiency higher.
On the cost side of the equation, filtering out the DNQ applications helps reduce transaction-based fees and variable transactional costs. For instance, preventing the hard declines from entering the processing cycle can reduce transactional costs such as the hard credit inquiry fee, collateral valuation fee, and per application fee levied by the LOS.
These efficiency improvements and increased loan activity addressed previously more than justify adopting a pre-qualification platform. In fact, with some pre-qualification platforms (such as CreditSnap) having zero capital costs and a success based per funded loan model, a pre-qualification platform can provide a significant ROI within the first year.
4. Enhanced Cross-Sell
A pre-qualification platform with soft inquiry enables cross-sell capabilities that a legacy lending system cannot provide with a hard inquiry. Cross-sell engine is further enhanced by AI, and together they evaluate the borrower’s credit scenario to determine which bank and credit union offerings are applicable to the borrower, and for how much, and where the odds of conversion are highest. Each of these pre-qualified offers is assigned a relevance score by the pre-qualification platform’s AI powered cross-sell engine to determine the odds of conversion.
Using the platform assigned relevancy scores to prioritize which offers to cross-sell, the most relevant offers can be delivered via a multi-channel marketing effort. This can include direct messaging, digital banking channels, in-branch signage, and member service rep interactions (phone or branch). When a borrower engages with a pre-qualified cross-sell offer, they are able to see instant offers with pre-filled applications. No additional application form to fill all over again.
A more recent advancement in the use of Cross-Sell technology is the ability for a Credit Union or Bank to use loan cross-sells at deposit account opening, presenting the member with a pre-qualified offer upon opening the new account. Now, a very relevant (often money saving) pre-qualified loan offer based on the member’s credit profile can be presented at the end of account opening. This provides a great member experience and a way to strengthen that new member relationship with a revenue generating loan transaction.
Summary
In summary, we reviewed the several different ways a modern pre-qualification based lending platform can improve the economics of the financial institution's consumer lending business.
- By accelerating direct loans (More of the profitable loans)
- Decrease adverse actions (Better customer relationship)
- Improve operational efficiency (Lower costs)
- Increase cross-sell loans and increase share of wallet (Member relationship expansion)
Experience transformative results with CreditSnap's pre-qualification platform. Don't just take our word for it, see it for yourself. Schedule a hassle-free demo or reach out: community@creditsnap.com.
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