Leaders in Lending
Leaders in Lending

Episode · 1 year ago

Taking Advantage of Data to Give Customers a Choice w/ Jim Deitch


Most banks are sitting on a goldmine of data that could be used expansively across different products and services to build a relationship with their customers for life.

Jim Deitch, Founder & CEO at Teraverde Management Advisors, joins us to talk about how banks are underutilizing one of the biggest strategic advantages they have.

What we talked about:

- The strategic advantage banks have in lending

- Why many don’t use the opportunity

- How banks can define the best way to innovate

- The transformational power of offering customers a choice

To hear more from Leaders in Lending, check us out on Apple Podcasts, Spotify, or on our website.

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If I had one piece of advice to give to a banking executive, it would be to really think about how I can tap the data that's literally spinning inside my institution and use that to make a consumers like easier and to take the friction out of a consumer's life. You are listening to leaders and lending from upstart a podcast dedicated to helping consumer lenders grow their programs and improve their product offerings. Each week here, decision makers in the finance industry offer insights into the future of the lending industry, Best Practices around digital transformation. In more let's get into the show. Hi and welcome to leaders and lending. I'm your host, Jeff Keltner, and I'm joined a day by Jim Ditch, the founder and CEO of Terra Verde. Jim's found of the company after thirty years and banking and writing three books on mortgages and digital mortgage transformation. So I think it's got a lot of great insights for us today. Jim, thanks for joining us. Jeff, the pleasure to be here. Thank you so much. You know, we were talking before we get started and you made this really interesting comment where I know many people see banks as being kind of attacked and in kind of a defensive posture, but you actually talked about the strategic advantage of banks as lenders versus others in the space and I'd love for you to expound on that a little bit. Souse, I thought it was a really interesting point. Well, certainly so. One of the things that I think banks tend underestimate is the value of both that trustworthiness of that relationship and also the expansiveness of that possible relationship. So one of the things that banks can think about is really how can I use the data I have, not only the lending side, which is really important, but also on the deposit side of the balance sheet. You know, I'm involved with form free as a director and it has founds me to the number of banks that will buy their deposit data back from form free when it's sitting literally there to be used for them and because that deposit data and that transactional data is so important in evaluation of a customers financial standpoint. I'd be thinking expansively of how I could take all the resources of a bank and not just in the silos of mortgage lending or consumer lending or utter will bile lending or indirect lending or small commercial realm estate or the deposit side, but expensively. How can I really grasp that whole consumer balance sheet and put it to work for me to build that relationship for life and technology can really enable that? It can't. It makes so much sense to me that you would want a perspective on the whole relationship and all the data you have. Why do you think more institutions don't take advantage of that asset that they have and put it into use in the context of their lending decisions? Jeff, that's a that's a great question. I think it comes to a couple things. The first is that banks traditionally have a lot of legacy systems that are hard to navigate. So the sessibility of that information from the legacy system has here too, for been a little bit more difficult. Fortunately, there's a lot of tech there that can kind of layer on top and grab that data and make it more actionable. Of the second is banks don't necessarily think of themselves as innovators, but really they are innovators if they choose to be an innovator, because you can make a credit decision based upon the bank credit policy, which virtually no one in the securitization business can. So if you can make a make sense loan or study your customer, your geography, the types of customers that you deal with and really serve that customer well, you can be a big innovator because you take friction and time out of the consumers day and if you can take friction and waste of time out and make it a competitive product, you absolutely can win in a big way. I totally agree. One of the things that surprised us at I've start in our personal loan program with our big partners is when we can reduce all friction, I get to a purely instant approval...

...frock, those borrowers convert a pull through bass a two to three times the rate right. So when I can remove that friction it's incredibly valuable to the institutions that can do that. So that's a really interesting point. And I think it's interesting that you talked about the layering of middleware or kind of connectivity tissue from a technology perspective, because I think there's so many areas of banking where that's going to become critical that you know, plug all your data together. It's interesting that you're seeing people actually do that. It's been one area where I think it feel like banks of lag. I don't know if you've seen the same thing, but the kind of bringing together of your day of resources and making them accessible to new projects or different products has been, I think, something that's been a challenge for many institutions. It has been a challenge and I think it's something that if I had one piece of advice to give to a banking executive, it would be to really think about how I can tap the data that's literally spinning inside my institution and use that to make a consumers lie easier and to take the friction out of a consumer's life. You know, it's before we go on we're talking about friction, that you know, some of my favorite banks Ay, well, we can't be rate competitive because, you know, we don't necessarily have a blank. You know, I have a bottle of water here and someone pays a dollar for a bottle of water. This is sixteen ounces of water. In terms of converting that to a gallon of gas, that's nine dollars a gallon for water when gas is three bucks, and people buy it because it's convenient and it's accessible and easy to use. If bankers put that whole thought process to them. What's important to customers. It's how can I take friction out, how can I buy my time back and how can I get a fast decision? If you can do those things, generally people are not as price competitive if you can do or not as brice sensitive if you can provide that layer of value. If not, it just comes down to price and for banks I think that's a huge opportunity miss. That's fascinating. It connects with, I think, this idea of digital transformation, or one of the things I always ask banks, which is kind of like what's your goal? And I know you have you've obviously done written some books and thought a lot about digital transformation, but how do you think about this context of adding value in the way you think about approaching a road map for a digital transformation effort or a new digital product Rollox? It seems like that's kind of a core part of what you have to be doing when you're thinking about how and what and why in a digital transformation effort. So a couple of things in Jeff. That's a great question because consumer expectations are just being elevated when you can go on to Amazon and by virtually anything you want and have it arrived one two days later and if you don't like it, you can just click and send it back. When you create that degree of convenience with transparent pricing and transparent policies, is Amazon the cheapest? Know? Is it convenient? Yes, or people adopting it? Absolutely so. The question is, if you think about Amazon, their entire process, from the sales part to the logistical side of thing, translates into what bankers should be thinking about. It's not only how you can capture that consumers interest to start a transaction. How do you build a logistical framework behind that to make it work flawlessly, make it seamlessly and make it easy and fast? There are so many opportunities for banks that, because of the regulated side of the business, you have really great opportunities to interact with customers and you aster's disclosure and yes, there's consumer protection, but that consumer is available to you. There are so many tools available to essentially take the legacy technology and the data connected to that, operationalize it and make it easy for consumers to happen. Example, it took a long time for mobile banking to catch on, but now virtually every bank on the deposit side as a mobile banking APP. It's powered generally by a third party that talks to your...

...legacy core system. It integrates out through plethora of different devices and people have just become accustomed to it. So take that fundamental capability of raw transactional opportunities and think about what you could do with that in the overall relationship on both the lending side, the deposit side, the wealth management side. The opportunities from banks, I think, are endless. It's just really hard as a banking executive to have so many things coming at you all the time. Did you can't take a day out and say, if I were to re engineer this and start over, how can I make a process where I could make a loan like that and take the friction APP? And those opportunities are out there, Jeff, they're out how do you think about, you know, if you were in the shoes of a bank exact trying to make that choice? It's hard because unless you're starting a challenger Bank, and maybe that's an option. We've seen the digital bank side of some of these banks come out where there's taking a blank sheet of paper. But how do you think about, you know, finding your spots to do the really innovative things versus the places where you are more hindered by a big legacy system processes, a large institutional machine that's moving in a certain direction? Because I think it could be a real challenge for an institution, for how do I how do I build momentum behind this concept and how do I find a room to do something totally new when I may have a bunch of bankers and, you know, loan officers who are used to a certain thing or a huge core technology investment that I kind of can't get around? And how do I layer on top? So how do you think about finding those the spots and prioritizing where you can really get the most bank for your back when you were picking where to spend your time in us? You know, Jeff, that's a great question. I'll go back about twenty years to a discussion the gentleman whose name was Clayton Christensen and he wrote a book called the innovators dilemma and it's classic. And Yeah, it's a classic and Clayton and I actually did a project at Du twenty years ago in the tech side and got to spend a couple days really talking with him about how to do this specifically relates to financial services, and his comment was, Jim, it's actually pretty easy. The technollogies are out there. You need to get people just in a room and if it means creating a separate division or a separate little side of the organization, don't start another bank necessarily, don't go through all the legal manch nations, but just do it as a test bed and see what happens. And it's amazing for some of the clients that I've worked with and some of my peers what they've been able to do simply by saying what's take a group of people and and just see what they can do with this. And it's easy to do because there's so many technologies out there that are simply Bolton, that have already been proven has viable technologies, and it's really, in my view, of a renaissance opportunity for banks to simply go through and think about with this this whole ecosphere of different systems, how do you just go and get the data and bypass legs? There's one issue here, and I'm probably not going to make very many friends in the tech community. But the CIO, there'd be the chief innovation officer, where the chief interference officer? And if you have a chief interference officer that can really be hard because these technologies are not it things. Yes, they need to have security, yes, they need to have vetting, yes they need to have vendor management, but this is like an excel spread cheek going into a computer. You don't have your cio looking at every piece of software. You go in there. It meets certain standards and it has certain capabilities. So again, to my friends who are chief innovation officers the CIO side, do more. For those who are chief interference officers, look in a mirror, because your bank is it's serious deficit. If you're interfering with progress. It's great. I mean I spent my number of years of Google and the early days of cloud computing and I definitely saw both sides of that on the CIO or the technology size office, those who are enablers and those who were really inhibitors. I on get. I think the banks of we well served by finding technology folks who are enablers for new ways...

...and new approaches. I do think it. I was thinking about Christensen's book actually, and the context of this and the idea of standing up, whether it's a separate division or a sidebyside product, but kind of unshackling some of the innovation efforts from the history and the legacy, both from technology point of view but also from a people a business model. Don't steal my customers from one product to the other. This new products going to take away my old you gotta let some of that go if you're going to let the new, new technology is really flourish. And I think that the challenge is if you don't, somebody else will, and so your you know, it's not this or nothing, it's this or somebody else. Who's going to come on off for that kind of experience? Your clients? Yeah, absolutely. Now, I know we were talking before about, you know, some of your thoughts around mortgage underwriting and the deficits or the maybe the misperceptions people have about how they were. I love for you to kind of talk a little bit about what you think people do wrong in the underwriting a mortgage and it maybe not irrationally, but kind of where they go wrong and understanding risk on the mortgage side. That's a pretty deep question. So it's kind of take it at the surface level and will summarize it by saying the way we do mortgage lending in the United States was invented in the s with the estabage of the Federal Housing Administration, Federal National Mortgage Association and, at the time, the population of demographics. The methodology of thinking about stable monthly income had a population that was completely different than what we have today, but that one. Fourteen hundred pages in the fanny may seller's guide, half of them are devoted to the computation and documentation of income, and I always ask myself that's really great, since eighty five percent of the people that work in the United States are at will, employees who can lose their job tomorrow. Why in the world are we spending all this time trying to document income when it can be gone like that? Is there a better way, and I think the answer is yes. The second piece here is that the industry, particular the mortgage lending industry, has been very slow to adopt the concept that we're interested not in the documents that composed the eight hundred pages in a loan file, but the data, and oftentimes those documents take thirty, forty, fifty pages to extract a small data set that is simply available, oftentimes within a bank already in the institution. So the transformation from thinking about pieces of paper and documents to the data sent that's necessary to make that credit decision is instrumental in the transformation and you really have to start and say, if I were to invent the process or establish the process in my bank or Credit Union that really was aimed at being customer friendly, taking the friction out and being precise but fast. I'd start by saying don't look at the Freddy Underwriting guides unless you sell to Freddie macra Fanny May. But think about what really makes the difference in there. And there's a number of products that are really good at getting at the data and then use in that data to essentially suggest a credit decision. And that suggestion of a credit decision can either be YEP, we're going to do it, or it can be reviewed or it can have a second review and the event of an adverse but think about all the power that's available in that data that you don't spend time just flipping through pieces of paper. It cost in the first quarter of this year for the average mortgage lender to do a securitizable loan to Freddy Fanny Faha, it's about eight thousand dollars for two hundred thousand dollar loan. You can do the mass. That's four percent. Think about what the cost of that four percent, which is financed in the interest rate.

What would happen if you could cut that by half, by seventy five percent? The end result is a consumer could see a reduction and rate of three eighths a half, five eighths of a percent. Does it really make a difference to do all that work, have all that time, spend the forty five days to essentially get it into a thirty or fifth rate loan? I think that's a question that banks should ask themselves, particularly when they can do it decision on a portfolio alone. That maybe isn't third thirty years, but most people don't stay in Alan for thirty years anyway. They in five years, seven years, ten. You use that strategic to ven it. Yeah, that's interesting question because I mean I know most loans do end up, most mortgages also not loans, but end up going into the GSC's and to fanny and Freddy. How do you think about how banks need to credit? Keep saying banking. I'll say banks and credit unions. But lenders should think about, you know, what they can do to you know, if you believe there is better opportunity to have a simpler process, maybe more accurate underwriting, approve more borrowers for with better underwriting capabilities for loans, how do you actually take advantage of that in the context where, institutionally, you've almost always sold almost all of your loans off into the GSC's and so you're kind of used to following the fourteen hundred pages. That's what you've always done. How do you go about finding a way around those requirements? I don't mean a nefarious way, but just, you know, freeing yourself from the constraints imposed by the GSC's? In that way we will certainly the interestry and duration subsidy that comes from Freddy Fanny Faha is is substantial. It's, in my estimate, a half to maybe three quarters of a percentage point. That over a period of time. That's a significant number. But the way I think about it is if I'm going to buy the use of money and I'm having a bank or sit down with me and talk to me about what is it that I'm really interested in doing. If I simply say well, you're going to get a thirty year fixed rate project or product, prepare for sixty days or forty five days of, you know, an inquisition, that's one thing. But some of the smart just people in community banks and regional banks, I've seen sit down and say, particular for self employed's or commercial loan customers or people that have a broader relationship with the bank, kind of the choice. You can get a three and a half percent today, thirty year fixed rate and go through sixty days, or I can give you a three hundred and seventy five or three eight seventy five seven, one arm and it's approved tomorrow. which would you prefer to do? And for people who have a very busy schedule, they look at that and say I pay a dollar for a bottle of water that can get for free from my tap. It's just not big at that. It's just not worth it to have that difference hanging on top of me. So that's a way to do it and it's not sell the customers something, it's give them the choice. If I have an enabling technology that let's me make that decision like that, whether it's a home ecody or a mortgage or a consumer loan or an auto loan or whatever. Keep the customer the choice. You can do it really fast, here's the rate, where you can do it really slowly, and here's the rate. which do you prefer? That's the key to building relationship, because that consumers now given the choice. Do I want to go through the hassle or do I just want to buy something because it's convenient? My Bank or Credit Union offers me both. That is a key differentiator but I think is under utilized by bankers. It's the choice. If you go to a more de broker, you don't have that choice. The choices or here's the rate, here's the rate, here's the rate, and we're going to equally abuse you hard in all those rates. So it's just what can you do it in the choice and how can you make it easy? It's choice, choice and convenience. You talked a lot about, you know, the value of the relationship and I know we've been talking about how do institutions really understand the value of the relationship and the context of a new product and how are they really representing that to the customer, and I'm curious your thoughts on this because it's it feels like an area of opportunity to me as well, to go and actually have a better three hundred and sixty degree view of your relationship with the customer...

...and bring that to bear when you're thinking about a new product they want or how you price a product or who you can approve things like that. Yeah, and Jeff, it goes back to one of the questions that you ask me earlier about how is the organization structure? You know, the typical bank has product lines moving out of his vertically throughout the organization, consumer and mortgage, commercial, deposit, wealth management, and it's really hard for a bank or who's in one of those vertical ors to think about the economic value in those adjacent towers because, number one, they may not have control over number two, they may not be compensated for it. So the first thing has to be structural. The CEOS and in Boards of banks have to think about how we going to use their strategic advantage to do this. As a relationship. We talk about relationships, but then we present the four or five or six pillars to a customer and the customer gets this? I don't understand. Yeah, so the first is, at least on the lending side, to be able to aggregate that. And if you want to see it being done in banks that might be considered to be very slow or very large and difficult to change, just look at the jumbo business at wells or chase or city. They are ready are looking at if you're a private banking client which two wells is two hundred and fifty thousand or more, because it's if you have that on deposit or five hundredzerod on deposit, they'll give you a subsidized jumbo rate simply because you have that deposit relationship. This is I mean, you see it happening day in and day out, and that has to be adopted by the regionals in the community banks and the credit you just to think about how do I look at the total value that relationship? It's not in the accounting that banks are set up to do, but the leadership to say if we are going to thrive and literally take share from our competitors, we have to think about taking the friction out and thinking ansively about the customer how we serve them on both sides. The customer balancing huge opportunity the banks have figured out. I think we'll do extremely well. Yeah, it reminds me two of the conversation we were having earlier about the importance of data and unsiloing the data and bringing it the visibility, because I think often bankers that even have his ability into the other relationships you may have with the Bank of those are in siload systems and let alone using that intelligently. Really interesting topic. So I always like to end these sessions with the same three questions. I think you saw these in advance, Joe, so you know. I hope so. It would love to ask you these because this has been a really interesting conversation. You've got of got my head spinning and I'll be probably falling up with a couple things. Here's my three ending questions. You can kind of take them rapid fire. Number One, what's the best piece of career advice you've ever gotten? It's literally take risks and if you haven't been fired, work really hard to get fired, because really hard to get fired. That's not a piece of career advice I've been given before. Jim, I won't be honest. Well, what it really translates that. Gentleman that gave it to me said, look, Jim, if you are not putting it on the line every day, you're not really pushing the tape that they wouldn't know. If you aren't literally betting your career every day, you're not really performing at the level that you could be performing. I like that. Push the less, like what I always tell my kids about skiing. If you're not falling down every now and then, you're really not learning how to ski any better. So I like that. Second Question. What's the best advice you've gotten about the consumer lending industry? You've got thirty years to draw on here. So yeah, thirty years to draw on. It's sound super simple. Ask the customer what they really wanted in the choice and don't push a product. Ask them what they're trying to accomplish and give them the choice that helps them solve yeah, that's that really it's a great message, a particularly I think so often we're hearing now that consumers don't feel like they have somewhere to turn for advice and they're they're being sold something, not being consulted with and given advice. And frankly, those of us have been in the industry for a while forget how difficult it can be to navigate the different offerings available. I know is this when it came to the technology industry. Ad Sol didn't understand and a relatively savay consumer the the space fairwell. So choice and help...

...navigating those choices, I think, is extremely valuable. And then I feel like my last question you're going to you're going to knock out of the park. You feel like a good guy for this one. It's just can you give me a bold prediction for the future? Eyes I've gotten all sorts of stuff that have to be specific to banking or lending, but your bold prediction for the future, so we can we can bring you back and hold you to it. Awesome. So, Jeff, I think the the bold prediction is that the use of data in a positive way will greatly take friction out of the whole consumer experience and the extent that it can be adopted broadly, it will open up choices and it will open up the literally the ability for the consumer to get more time, better decisions and to really understand what they're doing and how it affects them in their financial life. So remember the graduate, the future is plastics, plastics, plastics, plastics. The future is data, futures, data. All right, I like a gem. Thanks so much for spend the time. I certainly think the message has been really consistent throughout the conversation. The focus on data. They need to unlock data and use it intelligently. The presentation of choice and reduction of a friction make things more convenient, and I think the blast thing that really resonated with me was the idea of focusing on the relationship, understanding it, valuing it, bringing that context into the different things you're doing with clients. Take all great pieces of advice and things for people to think about. That I love any conversation where Clayton Christensen comes up, so that's always a bonus for me. So thanks a lot for making the time to that. Appreciate your joining us. Yeah, really appreciated. Thank you. Upstart partners with banks and credit unions to help grow their consumer loan portfolios and deliver a modern, all digital lending experience. As the average consumer becomes more digitally savvy, it only makes sense that their bank does to. UPSTARTS AI landing platform uses sophisticated machine learning models to more accurately identify risk and approve more applicants than traditional credit models. With fraud rates near zero, upstarts all digital experience, reduces manual processing for banks and offers a simple and convenient experience for consumers. Whether you're looking to grow and enhance your existing personal and auto learning programs or you're just getting started, upstart can help. Upstart offers an into in solution that can help you find more credit worthy borrowers within your risk profile, with all digital underwriting, onboarding, loan closing and servicing. It's all possible with upstart in your corner. Learn more about finding new borrowers, enhancing your credit decisioning process and growing your business by visiting UPSTARTCOM Ford Banks. That's upstartcom forward banks. You've been listening to leaders and lending from upstart. Make sure you never miss an episode. Subscribe to leaders and lending in your favorite podcast player, using apple podcast. Leave us a quick rating by tapping the number of stars you think the show deserves. Thanks for listening. Until next time,.

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