How Pre-Qualification is changing Credit Union Consumer Lending Economics
Unsecured personal loans have been a small part of a traditional bank or credit union's loan portfolio despite being a healthy source of revenue. Traditional banks and Cu's have often overlooked unsecured personal loans and as a result lost a significant amount of market share in this segment to FinTech digital lenders. FinTech lenders have more than doubled their market share in the Personal Loans category from 22.4% in 2015 to 49.45% in 2020. This rapid growth in market share has resulted from FinTech digital lenders effective use of Pre-Qualification technology and "No Credit Impact tp Check Your Rates" messaging.
The same Pre-Qualification tech is now being applied by a new crop of FinTech digital lenders into the auto loans category- a segment that has long been the heart of Credit Union and Bank lending. Banks and CU's are seeing the erosion of market share of the auto loans segment in real-time. Unfortunately their legacy lending systems cannot compete with the Fintech digital lenders in their existing form. Banks and CUs must adapt and consider next-generation lending platforms that are democratizing this pre-qualification tech in order to stay competitive. Such platforms (e.g., CreditSnap) can transform a Credit Union’s lending economics in 4 ways:
i) Accelerating Direct Loans (More of the profitable loans)
ii) Decrease adverse actions (Better customer relationship)
iii) Improve operational efficiency (Lower costs)
iv) Increase cross-sell loans and increase share of wallet (Member relationship expansion)
How Can Pre-Qualification Platforms Accelerate Your Direct Loan Volume?
Legacy lending solutions fail to provide the capabilities that a credit union needs to deliver the modern experience that the average borrower has come to expect such as ‘Instant offers’ and quick loan approvals. A next-generation lending platform addresses this and many other pain points like this.
A successful "Direct Loans Growth" strategy in tandem with a powerful pre-qualification platform promotes Borrower Engagement: Increased application starts, Improved Conversion: More borrowers accepting offers, Better Risk Mix: Attracting better borrower profiles.
How Can a Pre-Qualification Platform Decrease Adverse Actions?
Approaching the loan application and underwriting differently enables a pre-qualification platform to present a favorable offer to the borrower where a legacy lending system will present a decline. The examples below will elaborate on this point:
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 counteroffer of $34K. If Sam does not accept the counteroffer, FCRA guidelines require you to send an adverse action letter to him. A pre-qualification platform, on the other hand, never asks for the 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 a 690 FICO score. Most credit unions have a signature line of cards and a classic line of cards. The signature line comes with richer rewards and benefits but usually has 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 a higher score threshold or may not qualify. With legacy systems, Jane will most likely get declined when she applies for a Signature card. Jane will be applying for a credit card with a pre-qualification system 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.
Improve Operational Efficiency
The traditional lending process requires hard inquiry on every single application, and most likely, underwriters reviewing every single application. This leads to inefficient use of underwriter resources.
Whereas, a pre-qualification platform 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
III) Manual Reviews
A pre-qualification system filters Category I (DNQs) at the soft inquiry stage and eliminates the need for LOS and underwriters to process DNQs. Category II applicants see instant offers, and the applications are sent into LOS for final underwriting instant approval. And lastly, Category III applications 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 focuses on high-quality opportunities (Category II and Category III). Effectively, this new lending approach increases operations resource efficiency by at least 30%.
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 success based per funded loan model, a pre-qualification platform can provide a significant ROI within the first year.
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. Together, they evaluate the borrower’s credit scenario to determine which credit union offerings are applicable to the borrower and 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.
The most relevant offers can be delivered via a multi-channel marketing effort using the platform assigned relevancy scores to prioritize which offers to cross-sell. When a borrower engages with a pre-qualified cross-sell offer, they can 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 Credit Union's ability to use loan cross-sells at deposit account opening, presenting the member with a pre-qualified offer upon opening the new account. This provides a great member experience and a way to strengthen new member relationship with a revenue-generating loan transaction.
To demonstrate the efficacy of considering pre-qual tech if you are currently relying on legacy lending systems, let us look at this real life example of one of your partners Tresl, who have seen some very impressive results on adopting Pre-Qual tech with Creditsnap.
Tresl is an auto refinance leader, and on adopting Pre-Qualification tech, they saw Applications-to-Funded ratio (often called look-to-book ratio) shoot up +300%. Which is a result of several game-changing tactics that pre-qualification allowed them to employ. Such results have been observed consistently over a long period of time.
Deepak Polamarasetty
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