Lending is an ever-changing industry. The market's needs, the regulations being put upon the market from within and without, all of that lends (forgive the pun) itself to a business that is almost constantly in a state of flux. This isn’t a bad thing. Change brings risk and opportunity. The best thing you can do to position yourself for success as a lender is to be ahead of the major changes and trends coming down the pipeline. To that end, we’re going to share some expertise on what the portents and omens are telling us is coming in 2024 and beyond!
First up, let’s review 2023. To know where you’re going, you have to know where you’ve been. The most recent changes in the lending world will give us some strong guidance on what we think is around the bend. Let’s take a look at regulatory changes, interest rates, and what they meant for lenders in 2023.
In October, U.S. regulators began grading banks based on the communities and geographies they serviced via online lending. These changes to the 1977 Community Reinvestment Act (CRA) pushed for modernizing fair lending standards.
After all three major ratings agencies downgraded some lenders' credit ratings in 2023, regulators laid out plans to protect the public in the event of any more failures. Banks with at least $100 billion in assets would be required to maintain new long-term debt levels. This followed changes in July when agencies proposed sweeping changes to heighten capital requirements and standardize risk models in the space.
All this to say, regulators have been putting in work to stabilize, standardize, and systematize the way lending should work.
The average personal loan rates started at 10.37% in January of 2023 and rose all year, ending at 11.6% at the end of December. It wasn’t the best year for interest rates. But we’ve had worse! While the Fed pushed rate hikes a total of four times in 2023, 2022 saw seven hikes! 2023 started with a Fed funds rate of 4.5% and ended at 5.5% Considering in March 2022, it was just .25%, it’s seen a serious increase over just two years. The target of this was to combat inflation rates chewing up Americans’ purchasing power.
A.I. tech rolling out was huge in 2023, not just in the lending space. Every operation in every niche is grappling with leveraging A.I. tools to better their processes. It’s going to keep being a huge development.
All of this means one big thing for lenders – adapt or die. The times are changing, and if lenders want to stay in business in the next three years, they need to start rolling with the punches, updating their systems, and digitizing their business, or they’ll be left behind. More on that in a bit.
Acquiring new customers and implementing technology. That’s the fast and loose of it. Acquiring new customers has been the biggest priority of lending operations as they handle an uptick in interest rates, the rollout of AI, and more regulations from above
First, let’s take a look at interest rates. Heading into 2024, the interest rates have been on the rise since the end of December 2023. However, the Fed had indicated that we would be receiving cuts over the coming year. Rumor has it they are planning on three rate cuts over 2024, so long as the Fed’s inflation goal of 2% is hit and stays over time. As of Tuesday, January 16th, 2024, Christopher Waller, a member of the Fed’s Board of Governors, said they are on track to hit this goal. That’s all we need to say about that. The prediction is good.
What does that mean for lenders? Well, you don’t need us to tell you, but if lending rates are going to go down, it will be easier for borrowers to find and repay loans. Lower rates should mean good news for the industry, as more capital will be available for lending. But this isn’t without challenges either. This also means lenders may end up facing more competition in the market. Lenders should be on the lookout for ways they can make use of lower interest rates for their businesses.
Automation and digital lending are going to continue to be huge. As this space grows, more and more lenders will enter the market and lend over the web. A part of that is leveraging AI tools to make things happen faster, smarter, and more accurately. New products and services that try to make lenders' businesses better will pop up everywhere.
How lenders can take advantage of this is obvious! Lending is being pulled into the modern era kicking and screaming, but what if you (the royal You here) hopped up on the surfboard and rode this wave eagerly?
Get your businesses online and automated with user-configurable, automated underwriting rules like those from PayPlan! PayPlan leverages these features to allow lightning-fast decisioning, easy testing, and increased efficiency in processing and servicing loans. By jumping in early, you take advantage of the first wave of new potential borrowers that are historically untapped. Leverage automation to speed up loan underwriting and processing. Do more for less! Reduce fraud, decrease costs, get more borrowers, and make more money!
Here’s another one we see becoming a huge power play for folks in the lending sphere: integrating lending & marketing technology to drive loan acquisition and portfolio profitability.
The lending process intakes a massive amount of data about borrowers. More than just names and phone numbers, you get their payment history, ability to repay the loans, credit scores, professions, income, debt, location, and more. Typical lenders (according to a Forrester report, some 72%!) don’t know how to handle all of this data. The inefficiency in handling all that data inevitably leads to some of the data being “siloed” away in one platform, lost to the continuing process, and unable to be turned into actionable data for further growth. So make it work.
Integrated marketing solves data silos. Integrate your tech and your marketing, and you are going to be able to create something revolutionary for your business. Those data points that used to get lost along the pipeline are instead used to create more robust borrower profiles. Those, in turn, can be used to create data-driven customer profiles. Now, your marketing can target not just ideal borrowers but also ideal repayers. Cut the risk of fraud, find better borrowers, and more!
Here is a simple truth. Banks, credit unions, and lenders are slow movers and risk-averse. The lending process takes time, and lenders have been slow to advance their operations. But this all began changing in 2020 when (yes, we’re going to mention it) COVID hit. PPP came along and forced all these big banks to have to be okay using third party vendors. Banks weren’t equipped to distribute that amount of capital that quickly – at least not without changing how they look at things.
That sped up the adoption of outsourced technology partners.
Now, many of these businesses are reviewing how third-party vendors can be leveraged to make their processes faster, smarter, and better. 2024 is going to be a landmark year for outsourcing lending technology to get rapid results, and lenders need to adapt quickly or lose out on all of that potential business floating around. Lenders need to start looking at their processes, identifying blockers or hiccups and where things can be improved. There are tools and people out there that are able to help – it’s time to leverage them for your success.
But more on that next time.
2024 is going to be a huge year for lending. Absolutely massive. So long as your business is ready to grab a board and ride those waves, you can take advantage of what’s coming and make it work for you. Scan the horizon with us at Business Warrior & PayPlan, prepare for what’s coming, and succeed.