The COVID-19 pandemic's financial impact on key sectors of the economy has triggered some tightening of business and consumer lending requirements, and banks have been imposing more stringent standards for borrowers, especially consumers.

This change is borne out by the Fed's July 2020 Senior Loan Officer Opinion Survey on Bank Lending Practices. In addition, leading banks continue to increase reserve rates on consumer loan portfolios in anticipation of higher delinquencies to come.

While many traditional lenders have pulled back from consumer lending due to new uncertainties in their risk model and funding pressures, other competitors are pursing profitable growth. There is an opportunity in the consumer lending space to capitalize on market opportunities created by lenders' tightening of the traditional FICO-based credit box, as one executive puts it. Savvy banks can outpace the competition by maintaining marketing programs aimed at driving customer acquisition.

Executing on Profitable Growth

We've seen a trend where some leading national scale lenders have been able to originate loans during COVID-19 because of investments in enhanced analytics for risk, marketing and operations functions. This is a major competitive differentiator, as these enhanced capabilities enable lenders to drive profitable growth in all phases of the credit cycle.

A former CEO of auto finance and credit card businesses shared that, in his experience, relentless execution of enhanced analytics delivered both higher returns on capital and profitable growth.

If you're a consumer lender, there are distinct ways to enhance your credit risk analytics capabilities. Just having better analytical models is insufficient to drive profitable growth. Three areas in combination need to be developed:

  • Advanced credit risk analytics that score risk at the micro-segment or individual level
  • Embedding advanced risk analytics into originations and collections processes
  • Managing to ROI targets for profitability

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