Leaders in Lending
Leaders in Lending

Episode · 1 year ago

Unlocking the New Lending Experience: The Innovations of Hybridized Banking


Emerging leaders of the consumer lending industry all have a few things in common.

On this week’s episode, Upstart’s Senior VP of Business Development, Jeff Keltner talks about what he’s learned from nearly a decade of working in the consumer lending arena, where the industry is advancing, and his forecasts of who will rise to the top of the market.

What he talked about:

- Differences between the ] phases of fintech innovation

- Latest advancements in innovation and digital transformation

- Hybridization of fintech and traditional banking

OPTIONAL: Check out these resources we mentioned during the podcast:

- https://www.linkedin.com/in/jeffkeltner/

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You're 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 today's a bit of a different episode and that I'm going to be talking to you directly about our experiences. I here ITT upstart and what we've learned about the consumer lending space since starting up start. In Two Thousand and twelve I joined up starts the fourth or fifth employee, a topic of some debate between our General Council, Alison and I, and I, like many of our executive team, came from Google, where I'd been an early member of the Google Enterprise team, helping to found what is now Google workspace, or g suite, and particularly running the educational sector of that product for a number of years, and so really came from the pure technology space and I want to share kind of what some technologists to who felt like there was an opportunity to really improve the lenning experience through the application of better technologies. Have seen in our nearly ten year, I just nine year, long journey in the consumer lending space and hopefully a few lessons that you can take away from what we've seen what we've learned over time. So I really want to talk about here personal loans, UN secured consumer loans, because I think they are illustrative of what's happening more broadly in the industry. They're kind of the sharp end of the spear, if you will, an early example where innovation is reaching the lending industry first, but represent trends that I think will apply more broadly across the consumer banking industry as a whole. On. So if you go back to the early days of online lending, what was once called peer to peer or or market place lending, you really found that this category of loans was was kind of kind of abandoned by banks, particularly after the two thousand and eight financial crisis. Pre the two thousand and eight crisis, I won't say this was a huge area of business for banks, but we really found that banks were engaging in almost none of these. There were, they were products were available, but the lending volumes were very small and unsecure consumer loans, and that really left the door open for online lenders, fintech players, to come in and launch these products that were almost uncontested by banks. And if you go back and look at the early presentations from the first players in the space, you really see a focus on lowering the cost basis. Right, they said, we can take a current product that's in branch. It's so small. It's hard for banks to make profits and that's because their cost basis too high. They have people processing applications, they have in branch employees, they have real estate, and we can get rid of all that, we can digitize it, lower the cost base and therefore, even though the dollars are small and therefore the interest revenue is small, we can still be profitable on these loans because because we have a lower cost basis. And that was really you can think of. That is digital lending. One point, though. The first phase of the digital ending, you know, evolution, Lution, was really based pretty much around this sense of, you know, lowering the cost. But I think ultimately the players that are winning now in the unsecured lending space or doing something a little different than that. They're not just lowering the cost spasis by having a digital process, but they're really trying to figure out how do we design a better end end lending experience right? How do we not just take and put a digital front end on the way we used to do things, but build a better way to do things that's native to a digital, Internet connected world? In really this results in a product that's both better for banks. Right. The cost base is lower, conversion rates are higher, so marketing spend is more effective. Yet positive selection bias when you can simplify processes your best consumers don't want difficult processes. It is better for consumers right. It's faster to complete, it's an easier process. You can do it from your phone while you're lying on your couch, but you don't have to go into a branch. So it's really a win for both the lenders and the consumers. And I really want to focus on two areas that I think this process was, or is it really currently being reimagined right and not just digitized but but fundamentally transformed. And number one is moving from not just digitization where we take the old process and, and you know,...

...take the documents we used to ask for. Take the underwriters who used to do this, and put a digital interface, a digital exchange between these things, but fundamentally the same process. Moving to a automated process right, one where the underwriting decisions are entirely automated, where maybe the Deverification, fraud prevention, income verification steps can be fully automated. Mine, how do we reduce that burden? So I think increasingly you're seeing lenders focus on automating that process right and getting to a place where I'm either requiring a very minimal set of documents, only those I really need, or no documents for the lenders. Leveraging upstarts platform we see almost seventy percent of loans originated with with no manually uploaded and reviewed documents at all. In those loans convert between two, two and a half, sometimes even more times greater, at a pull through rate from, you know, approved the credit decision point actually originating alone, and so of course that's hugely valuable. Again, it increases the customer satisfaction, it increases the pace of originations, it lowers the cost. Of course, the Magic to doing that is doing it without creating a lot of fraud, and that's something I think many lenders who have come to a digital world have struggled with. How do we, you know, when you've got fraud prevention processes that are oriented around a physical process and in branch process where somebody has to walk in, they bring their ID and just walking in the door frankly, as a huge to turrent to fraud, and when you go digital you have to find other tools and and I'll say that those are out there like what we've learned is that it's possible to do that. It generally requires quite a bit of work. It requires lots of different data sources, innovative ways of looking at what's going on, at an adaptability of process, for the ability to, you know, maybe look at which documents were required or being different depending on different risk signals and our degree of comfort or concern about particular pieces of information in an application varying a lot and therefore the the verification processes varying a lot. But you can solve this problem, and this is really where one of the two areas where this second wave or phase of digital ending is really improved upon the old one is it's simplifying the process right it's where you're getting too very easy, sometimes less than a half hour, to complete loan approval, distribution of funds. That's kind of the second wave. And I think the second area, beyond just a simplification of process, is moving into improvement of underwriting outcomes. And here it's easy to get caught an accuracy metrics and statistics. But I think the core of this is can we approve more of our customers for loans who are going to pay us back? And every banker I've spoken to kind of acknowledges that most credit policies are, in a sense overly conservative. They're not wrong, right, and they do their job, which is to control losses to predicted, expected and acceptable rates, and in most bank credit policies actually do that quite well, but they do it at the cost of declining a lot of would be good borrowers. Right, if you look at the loss rates in even a subprime pool that most banks wouldn't even dream of looking at, it could be ten in the worst pools, maybe fifteen or twenty percent loss rates. But of course even a twenty percent loss rate means that eighty percent of borrowers did pay you back. And so when you cut that whole segment out, you're declining the eighty percent who paid back successfully on time in order to prevent lending to the twenty percent who didn't, and that, of course means that you're unable to serve a wide variety of consumers. And almost every banker I talked to, and this was one of my realizations, coming from the technology space, where my perception of bankers maybe was colored by Hollywood, the perception of investment bankers and kind of, you know, the the movies and TV shows around that, and my experience with consumer and community bankers has been so entirely different. They're much more, you know, it's a wonderful life than wolf of Wall Street, and I think most people here really want to help consumers. We really want to get consumers into the right product at the right rate to help the...

...most people that we can with their financing needs. And yet the inability to improve on underwriting has held that has held us back in terms of being able to reach all the credit worthy customers that are out there. And this is where I think there's been a tremendous opportunity to improve because in the first phase of digital ending, even the fintach online lenders mostly still used credit score based systems, on the same systems. That fundamentally what banks have been using for decades and they were tweaked around the edges and got a little bit better, but not dramatically so. And you know, one of the studies we did when we first got into this business with transunion, and we re run several times, showed that eighty percent of American con Sumers have never defaulted on a credit obligation and yet less than half of credits of consumers have a credit score that would qualify them for traditional Prime Bank level credit. And so that discrepancy, it's not a tinkering around the edges. That's, you know, sixty percent more consumers are credit worthy than we think. That's a huge increase and so, you know, one of the areas, I think that you're seeing more innovation now, and that's really exciting, is how do we identify those consumers? Can we take that near prime population, what we sometimes that up start referred to with the hidden prime, the good barrower who performs just like a prime borrower, and be able to identify them by looking at, you know, more deeply at credit files, applying more sophisticated models, looking at maybe alternative types of data, but how do we really go and build a model that helps us understand that consumer better and allow us to serve a greater number of those consumers, which is really what every lender I talk to got into the business to do, is to serve that consumer, to help them with the financial products that they need at a fair rate, and that's something I think you're seeing in the second wave is kind of these two transformations of the personal loan product, from a digitization of the old school signature alone to a highly automated online experience with very sophisticated underwriting to allow you to really serve the broadest number of consumers. And so those are the trends we've seen in personal ending over the last handful of years and it's really you've seen a real shift, even in the online players and those who have executed these areas well. I've taken advantage of those trends, who've separated in these ways from others and those that looked more like the digital lending one point out, and it would not been a successful in growth or profitability. And I think the key thing to me is that this started in unsecured lending. Right. Naturally, I think this is where fin text looked. It's the easiest category of lending in some ways. There's no lean entitle it's the hardest category of lending and others, which is to say it's one of the riskiest forms of consumer lending. But it represented kind of a green field. It was relatively easy to digitize. It was a place if there wasn't a lot of competition from existing banks and credit unions because really, you know, most of them had exited the space. But there's nothing about what's being done in that space that's not applicable to any kind of consumer lending, be an auto lending, helocks, mortgages, credit cards, lines of credit, all of those products will see the same pressures, right and I think you're starting to see more and more of the FINTECH lenders enter into more core bank lending products, the things that banks really have built their balance sheets and their businesses around, be those, you know, mortgages on the consumer side or auto loans, credit cards on the consumer side, or even the larger loans on the SMB side. And and I will say there was a second group of online lenders who did much the same thing. In the small medium business base. I think the story is very similar where smaller dollar loans below a million or a half million dollars really had been left alone, and these same kind of trends are coming in and allowing digital lenders to take share and serve customers that had by and large, been been left out of availability of these credit products for a number of years. And so when I see these trends it reminds me a lot of kind of one of the siminal strategy texts. At least four high tech companies all look at this. This this book as kind of one of the similar works and thought processes around innovation, which is a book by the Harvard Business School Professor Clayton Christensen called the INNOVATOR's dilemma. And in the INNOVATOR's Dilemma Christensen argues that that existing income of players are often threatened by new market entrants and...

...those new market entrants typically are attacking lower margin customers or offering the lower margin products in an incumbents suite. In so incumbents rationally don't really compete, they don't want to invest the level of resources. So I got to put all this resource into getting better at this thing that's like a small portion of my business and it doesn't make sense to do that. I'm going to focus on improving my capabilities for my largest customers, for my biggest products, my most profitable product lines, and I'm not really going to attack this kind of new thing that's not not really there. But of course the story goes that often those new entrants go from the low margin customers, the low margin products, that the small sale size and they grow into the bigger products and that their innovation around technology, often around capabilities that were not there before, new distribution or production mechanisms, allows them to win the larger share of business. And you can see this whether it's, you know, digital book selling, and why as Amazon the winner and not Barnes and nobles or boarders, which many of us remember, and I still see the boarded up boarders around my house. That's gone right. And why did Amazon when? Why? Why did blockbuster lose to Netflix in the streaming wars? Right, streaming was a little side thing that and have. It wasn't going to be the serious business. It wasn't the big business and so it was underinvested in. And these are not often irrational decisions by the incomebent player, but they do ultimately put the incumbent player in a difficult position to respond to these emerging technologies and competitive threats. The represent really seismic shifts and capability and the question becomes how do I how do I deal with that? And so I want to talk about what I think we can learn from Christensen's work and what I think the mental models are for how you approach this in I think the first is that when you try to, you know, take your existing distribution mechanisms, you are existing infrastructure, and serve this new capability, it often doesn't work right. So I think of this in the banking segment as if we try and you know, put a digital code of paint over a manual process right, you're not going to compete with a purely digital process. So if you haven't a form that comes in but then you wait two days for a manual under writer to review, versus a digital process that was digital native when you go, I would never starting Denovo, build a digital process that relied on a human to get back or rate. And one of the most valuable things that we've seen in the personal loan space is the ability to instantly checker rate and see, you know, interest rates, maximum loan sizes that you can qualify for. So so consumers can go and check availability of different options. And I think enabling those things is is critical. And if you're kind of, you know, digitizing the old process versus starting with the blank slate, it can be quite hard to figure out how you do that to build that same level of experience. And so you typically build, you know, the best you can on top of the existing tools, but it's not competitive. And so I think you really got to think about how do I maybe start from scratch in some of these areas? How do I really start to bring in brand new capabilities, right? And this is where an interesting thing we've seen some banks to I is to launch entirely new digital banks beside their existing physical footprint. They're existing branch footprint, right. So they're going to go and they're going to compete with the the NEO banks, the Challenger banks of the world, on an equal footing with a purely digital experience. You know, sometimes these customers can't even come into the branches of the bank that that's offering the digital bank to be serviced. But they're going to you know they've started and launched and actually a separate line of business to launch digital bank. Often those are unconstrained by the traditional geographic footprints, and so I might be at two or three or a one five state footprints as a bank with my branches, but I might take my digital bank and go to all fifty states and attract customers in digital channels and serve them through a mobile APP or a digital experience. And the wonderful thing about that is when you unlock your digital team in that way from needing to be deeply integrated into the branch, you allow them to...

...build best of class products right and to really figure out what it takes to win. Now I think ultimately the winning banks, and many of my guests have said this and I think they're right, will be those that can combine high levels of customer service, high touch service, support advice. I think many consumers are really looking for advice and finding the right product, the right fit for what they need. With the highly digital experience, the ability to apply from your phone on your couch, I think the combination of us two things is really powerful. But starting from the old way as opposus to starting fresh and then layering and well, I've got a digital experience. What do I do if somebody comes into the branch? I think is a very different approach to answering the question and finding your way to that hybrid future and I think those who start the Novo will be really at an advantage when it comes to how do I build the best hybrid experience and how do I make sure I understand the pure digital experience that people want? How am I learning about what it takes to win in the digital experience, in the digital marketing channels? Right, when you when you move to digital, you've got a whole different customer acquisition experience, right, you've got different kinds of marketing, got different kinds of a sponsorships you might do. You can do podcast sponsorships, all sorts of things that allow you to kind of engage in a different way and I think that's a really interesting thing and one of the interesting things that you read in the innovator dilemma and is actually even fully isolating those units from a pnl point of view so that you've got really the ability to start fresh, to start almost like a competitor. And often you find that the successful companies a translating into the new world are allowing their new business lines to compete and take away business from their old business lines, even when it's less profitable, because those new business lines represent the future. And so if you know if you still need your old way and you've got your new way, you want the new way to be able to compete in win customers away, even at a lower profit margin, where it makes sense and if you have the same organization trying to do that. Of course, organizationally people don't want it. If you're a manager and do I want to invest in my less profitable area, my more problem, and invest my more profitable if I could drive more adoption of x product or why product? I want the more profitable product, a larger product, and so driving that separation so that you've set that business unit free. I think it's really interesting and that, to me, is what's really fascinating about the kind of digital bank set ups that are happening. You don't have to go all the way to take advantage of this, if you see it, to the to the kind of digital brand and separated bank, but I do think starting your process of moving to your next phase of lending with the question of which products can I start peer digital right, which products need to be thought of as digital first and branch oriented second, which products really need to be thought of as branch first in digital second, and then how do I combine the experiences of the two? But assuming that there are places on each side and where digital first needs to be the answer, finding a way to do that, and maybe it means setting up, you know, two different lending programs with similar products, one that's digital, one that's branch oriented, that's, you know, follows your existing processes, but but really being thoughtful about how you unlock the innovation so that you're able to not just take small, incremental steps when when giant leaps are available, and so that the teams that are responsible for the new products and initiatives are unlocked from the economics, the politics of the current business and, you know, often territorial disputes that can emerge around wanting to not have a new product line take customers from an old product line. I think those things are really important and the banks that are able to do that right, who are able to thread that, that that needle and and find a way to support the teams doing innovative things to really build, whether it's, you know, partnering with Third Parties, whether it's buying newer systems in piecing them together so that you can have systems that are super optimized for one kind of product or another and providing really that better experience in the digital and then connecting to your branch origen systems. I think those that are able to do that and find a way to unlock the innovation the digital product areas to really be their most full...

...expression of what they're capable of will be the ones that have the best chance at melding the old world righte the the need of many customers to have an in person interaction, and it's not just some customers one to interact in person and someone to be digital. I think every customer, frankly once both pending on their needs their comfort level with the particular product. You know, I may be in a dealership and want to get an all alone and I want it fast and easy, don't want to talk to anybody and I may be trying to plan for retirement. need to understand how I do that and where I turn to and what kind of products for available on. How do I think about a Roth Ira a versus Nire and that's a conversation and it's one that banks with the right relationships, the right in person call center capabilities, are really well suited and well position to take advantage of to provide that level of service. And figuring out a way to unlock your digital capabilities from the existing systems, the existing processes, so that you can actually win in both and then find the way to mail them together over time, I think will be a really powerful opportunity and a really awesome opportunity for banks, where able to take advantage of it, to really start increasing their market share, to start winning the day, because ultimately, what a transition like the digital internet, mobile, kind of multiple transitions that are coming at us all at once, only accelerated by Covid really represent is a point in time when winners and losers will shift and some people will end up winners and growing substantially and some people won't, and so it's an opportunity for banks to really separate themselves. Where we're in the not super early days, but we're at that point where I think people will be choosing one path or another, and some paths will lead to growth in market share, to growth and profitability, to larger success us. And some paths will lead to, you know, shrinking of the bank and probably, you know, conglamorations and you know, lots of m a activity where we're putting a lot of these smaller banks together because they're not making these transitions fast enough. So I think it's a massive opportunity to take advantage of for those who can see it and take advantage of it. So those are a few of the thoughts, the things I've learned over my last not quite decade in the lending space. Cut Looking at it from the point of view of a technologist who's come into the consumer learning space and tried to understand it and compete in it effectively. And you know, hopefully, as you think about you know your own journey towards how do we think about the future of consumer lending? How do we think about digitization, digital products, new products? Do we need to be an unsecure we need a new kind of Helock? And what are the places to really invest in and how do we do that? The some of these thoughts are helpful and we're always happy to share more thoughts. You know you can. You can reach US pretty easily. I'm just jeff it UPSTARTCOM. So if you want to want to talk about any of this or share your own thoughts, please do feel free to reach out. Now, I guess there's nobody here to ask me my three lightning round questions, but I'm going to ask me to myself anyway. So number one, what's the best piece of career advice I ever got? So my first job at a college I worked for my fraternity, true story, and it was an amazing learning experience. But I was in this meeting in Boston with the Guy Nam Jab Brunettie and I was needed to ask Jay to do something for me. I needed a favor. It was a big favor, and I sat down and I had breakfast and I explain the situation to Jay and I think I was young and I was I was trying to convince him to do something, but I want to ask him. I just wanted him to come to the conclusion of his own. They said, Jeff, I'm going to say yes, but you have to ask the question. People can't say yes unless you ask the question. I thought that was great advice that I've used throughout my career, that when you want something you got to ask. If you don't ask, you can't get, and so that was probably the best career advice I've gotten. Use It all the time. A second question. What's the best piece of advice I've gotten in consumer lending? I've given a lot of my thoughts, but one of the things simple mental model, maybe not advice, but a mental model that are cofounder Paul Gou put out for consumer lines that consumer loans are really a very simple equation. It's kind of, you know, default loss, operational cost and required return equals the cost to the consumer, and lower cost to the consumer wins. And so if you can find ways to reduce the default risk by better identifying risk, to reduce the operating cost by, you know, simplifying automating processes, or to reduce the cost of capital by having more confidence in they'll,...

...the capital markets or your Credit Committee and your underwriting capabilities, then you can reduce the cost and you can win. And that's a it's a simple framework for a very complex set of actions, but it's a framework that helps me think about the truth of lending all the time and also to keep in my mind what I think of as the true North for consumer lending, which is the consumer right, and are we finding ways to make product offering and capabilities better for the consumer? And then I guess I need a bold prediction. I'd love my bold prediction to be large numbers of downloads of this podcast, but I think my bold prediction is that, you know, the future will really be not fintext beating banks and not banks beating Fintax, but I think that the combination of if you think of fintext has really becoming the technology partners to financial services institutions. Players like that have existed for a long time and most banks have been buying forms of technology and I think that the most successful financial institutions will be those that are able to find the best technology players, including new emerging players, and Meld them together to provide high quality experiences across products and high quality experiences for each individual product that they're focused on, that they can really optimize, tie those things together, but really focus on each product and offering being tightly integrated together but highly optimized for what it is. And I guess my bold prediction is there will be a handful of banks that do it well in a large number of that don't, and that there's a tremendous opportunity right now for banks to win and that there will be, you know, a number of winners who come out of this much stronger than they were a few years ago, and I look forward to see and if that's true or not. Somebody'll have to come on a year from now and test me if I was right or a couple years from now test me files right. So I hope that was useful and thanks for listening. Up Start Partners with banks and credit unions to help grow their consumer loan port folios and deliver a modern, all digital lending experience. As the average consumer becomes more digitally savvy, it only makes sense that their bank does too. Up Starts 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 lenning programs or you're just getting started, upstart can help. Upstart offers an into ind 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 for 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 as a quick rating by tapping the number of stars you think the show deserves. Thanks for listening. Until next time. The views and opinions expressed by the host and guests on the leaders and lending podcast are their own and their participation in this podcast does not imply an endorsement of such views by their organization or themselves. The content provided is for informational purposes only and the discussion between the host and guests should not be taken as financial advice by companies or individuals.

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