Leaders in Lending
Leaders in Lending

Episode · 1 year ago

Unsecured Lending: How AI Can Broaden Your Product Portfolio


Many mid-sized banks are struggling to find new asset classes and new opportunities to offer retail banking services. Unsecured lending has become a viable way for them to broaden their product portfolio on the credit side.

In this episode, Jim Matera, EVP/Chief Retail Banking Officer at Apple Bank, talks about how his firm got involved with unsecured lending and how technology is becoming the new driver of loyalty in banking.

Jim has been with Apple Bank for over 30 years. Currently, he is in charge of all aspects of retail banking customer delivery systems and services. Apple Bank is the second-largest state-chartered savings bank in New York with over $16 billion in assets. The bank offers a full range of retail banking services to individuals and businesses across the five boroughs of New York City, Long Island, Westchester, and Rockland Counties.

We discuss:

- Pursuing unsecured lending through fintech partnerships

- Opportunities for new lending products

- Loyalty in a digital age

- Leading with lending over depository products

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If we can improve the quality of service by speeding up the time it takes to complete that service, then that's that's the goal of what I'm calling our back office technology improvements. 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, the podcast, and thanks so much for joining us. I appreciate your making the time well. Thanks, Jeff, thanks for having me. I know we had to reschedule once or twice for different coundaring reasons, but I'm glad we got on the books and I'm really looking forward to the conversation today in here. You know, one of the things we had talked about that I think is really an interesting topic for audiences your decision to get into this kind of new product line of unsecured learning. I'd love to dive into both why you felt like that was important for the bank in general and then how you picked a path forward for achieving that, because I think it's I think it's a story that will resonate with a lot of people, actually, sure. So I'm going to give you some background. Apple is a privately owned institution and we're quite conservative in the types of loans we make in the places in which we invest our funds. And as we've grown, you know, we've kind of struggled to try and find new asset classes. We've traditionally been a real estate lender in the New York area as well as doing some large, pretty safe commercial industrial ending. I'm at the same time, you know, we somewhat limited in the products that we offer our branch customers. Man, up until our partnership with upstart, we were offering, we did not offer any unsecured credit products to our customers. So, having done our due diligence and chosen up start as our partner here, it's really allowed us to launch a new line of business, which is unsecured installment loans, which we've been we've been live with you guys since think it's February. Thank you. What's February? So what was it about? You know, I know you said you had trouble maybe generating asset of classes. You were not talked a lot of institutions that are sitering, sitting on more cash than maybe his. Historically, I've been true for them. Talk to me a little bit about what it was about the business that you that made you think, hey, we need to we need to find something new to invest in order to, you know, some kind of new income generating assets. It feels like that was the driver more than like the desire to be in a Fintech partnership per se. So well off in Tech Partnership side of this is actually very important. But with respect to the first part of the question, we need a new athlet class and this allows us the opportunity to start to build an unsecured installment loan portfolio and see how it performs, well ahead of the time, well ahead of the point at which it might become super material to the bank in the event that they might be some problems in the credit quality. Yes, like all banks, we're sitting on a ton of cash and we need places to invest it. Secondly, as I said earlier, you know we needed to broaden our product line to our customers on the credit side, and this is one thing that we didn't have. So the fintext side is important because it has allowed us to partner with up start in a way in which it's really been super easy to get started. You know, we've let you, we're letting you guys do the service thing and, of course, using your your a high model here. So there's been really very, very little investment required up front to get into the business. Longer term, we may take a look at whether or not we service this inhouse, but not ever, having had a consumer lending operation, we did not have a servicing capability for this and that was yet another component that you guys offered in addition to your your Ai. Yeah, I think that's a really interesting point. Your message that there was a launch strategy and maybe it wasn't exactly the long term vision of terms of calling the servicing. I think you have a similar vision around how much risk appetite you have and kind of getting going and getting comfortable and maybe reevaluating that over time. But that that concept of like how do we how do we get in market and learn and then and it take those learnings and maybe grow in different ways over time. It is,...

I think, a really important strategy that I like to see you guys executing. Yep, and I think you know, we believe in your model. To you know, we're, as I said, we're very conservative lender and you know we did not have the expertise to do this in house and we certainly weren't going to do it the more traditional way. So we like what we've seen in the industry with AI and and and, frankly, you're you know, we had the luxury of seeing how your model work through the stress of the pandemic on the portfolio that we build for everybody. You know, lucky on our part, but but it survived very well and really kind of convinced us that maybe there's really something here. I remember sitting in your border in pre pandemic and somebody actually asked me about the sustainability of the model through a geopolitical disruption and I thought I don't know that I could speak to that in a few months later I it's relevant question. No, it turned out to be a great test and it passed the test of flying colors. Yeah, that was it was fun to get a come back and show you guys those numbers, because I know there was some nervousness and that I think numbers were we're compelling. So you had mentioned not having a lot of consumer credit products to offer your customers, wanting to kind of expand that product portfolio. How do you think about that, outside of the unsecured installment program that we're working together, other other areas you want to invest in over time that you think are important for a lender trying to reach consumers today? Yeah, well, you know, first of all, what your business brought us to is that, you know, the lone volume we're seeing today, I think, is roughly eighty percent referral for your network in about twenty percent coming through our our website portal, which doesn't mean they're all our customers. But we've also simultaneously launched we've never had an online account opening service and we've just launched that. So tying some of your referral business into that is something that's the next step for us. So we think it's a and that's the fur end end digital experience we've been able to offer a customer right through account opening. But in terms of other products, you know, we are speaking to you guys about some of the other things that you're working on outside of just a consumer installment and we are speaking with you guys about perhaps figuring out a way to use your your ai to help us underwrite our some of our consumer overdraft lines of credit, which are balanche but are not something that we really offered in any aggressive way to our customers. We have a pretty simple underwriting process, but really feel as that will underserve their customers with just that kind of simple product. Do you see a shift in the mix of products that consumers are asking for? I think that is an interesting product that's been under utilized by many. Is kind of there but, you know, not heavily leveraged. Are there other other things you see consumers looking forward demanding that that you feel like her places you want to go? Well, in the credit side, you know, I guess I'm learning that there's might be a market for auto refinance. Not Everybody gets the one point nine percent loan from their dealer, you know, and that and, of course, is the whole refin market for our student loans. Perhaps. Yep, you know, but I mean your products been great. It's been a great re most of our customers have, whether it's referral or not. A lot of it is. It's all credit refinance. It's basically credit card consolidation. That consolidation. Yeah, and that's where I think the opportunities are. It's in lower and consumer costs through some debt consolidation or refinance that consumers are waking up to the expense of wearing balances on credit cards over time, which, yeah, it turns out there they're great way to buy Stoff, but not a great way to borrow to pay for it. Yeah, exactly, to borrow for any PAROD of time. So, yeah, how do you think about the way banks approach earning loyalty and the digital age? Like I often think that loyalty used to be kind of real estate driven in many ways, like it was nearby I came in. Maybe it was relationship. I knew that the person behind the counter, but as things shift digital, it feels like that has to change and I'm curious if you have a perspective on what you think kind of replaces a real estate and relationship, or is it the same and just a different, different mediation for that? What do you think happens to the way you earn loyalty in the context of a digital interaction? Well, you know our perspective...

...on it is it's a combination of both. Clearly, consumers use the real estate much, much less, regardless of what age group they're in. But what at least we find to this point in time is that consumers, even younger consumers, do like to kind of see their brand in a physical presence over something that's just really digital. And we're Apple Bank is the lact a certain extent, although we're catching up rapidly, though, is really staying closer to the leading edge and the technology offerings for our customers and the other bank is going through a massive technology upgrade across the board. Things like upstart and our digital offerings are only one part of it, but even in our back office we're doing a lot of technology upgrades because I think that I think it is consumers are definitely less loyal. That's just the way the industry is gone, and in order to really keep them loyal to to you, you need to be able to offer them a good menu of digital services and have your branches there effectively longer term of the backstop when they need some personal service or really do prefer to come into the bank. But this is a long transition, not unlike what's gone on with the retail and the Amazons of the world. You know, Amazon is a great company, but they haven't put every retailer out of the business at this point. But I do believe that some at some point. You know, clearly be naive to say that banks, we're not going to be purely digital at some point in the future, and so you do so. The only way you can really retain loyalty is, I think, by making sure that your technology is really kind of up to date, which does mean it becomes expensive, because it's hard for a bank. Somebody gave me statistic once and said in chases a big competitor rise in New York. Obviously they're annual technology budget is equal to apples one thousand, five hundred and sixteen billion dollar acid base. So we can't compete with chase across the board, but we need to kind of figure out our sweet spots and kind of go after the customers who are not their prime targets, and that's what we've done in our branch side to for years. How do you think about the customers you are targeting? What's the you know they're not the prime targets for the Chass of the world. Who How do you think about what? What do mark case the customers are going after? So you know, in the marketing world, you know, there's the term service hogs, which means they require a lot of service, and I think our customers tend to be a little more demanding when it comes to service, whether that's in branch or through our call center or in the use of the technology that we offer, you know. But that that that's where there's availability of market penetration here. So we've kind of structured our bank accordingly so that that's a little bit more of it's a more expensive way to attract customers, but we try and run a pretty lean operation to offset some of the more direct expenses. But we do believe we provide decent service and when we do surveys of our customers and things like that, they seem to confirm that. But you know, services is not just personal these days. It is again, as I said earlier, in technology is a big aspect of it to which is why we're in spending a lot of money on technology. So I'll have your two questions on that front. You'd mentioned not just the consumer facing technology or the customer fencing. You Know Bank, you know business client facing technology of IT, but back off a technology investments. So we're important. I'm very curious where you're making those investments and what you're hoping to get out of them. Where you see is the big wins for not just the client facing side of technology but the kind of internal side as well well. Ultimately, a lot of this is effectively client facing. So right now we're in the midst of a two year project upgrade our whole operating their core, core operating system, and that's the system and what all of our branches use and that's the system that our call center uses. So to the event that you can speed up a process, make it much less paperless, shorten a phone call because it just takes less time to access customers information, it is all customer facing really, you know, in that in this is it's through the service side, not sarily always through the product side. So if we can improve the quality of service by speeding up the time it takes to complete that service, then that's that's the goal of what I'm calling our back office technology improvements. It...

...really all starts at that client experience. But some of those improvements are enabling your team or or some processes and making those things possible. Right. Are there technologies in particular that you have your eye on, probably the two I hear about most. Or AI, which obviously we've talked about a little bit, cryptocurrency, blockchain, whatever you want to call that space, where you playing with those, or there other things that are kind of on the horizon that you think are interesting and you're trying to get a handle on that you think are relevant for the audience or kind of curious what you see coming down the road, if you yeah, so ai is something we're taking a good hard look at in a few errors and frankly, partnership with you is really the first that's really truly utilized that, although you know, the business we do with some of our debit card processors and things like that have used the form of ai for a long, long time. So I often laugh at the term syntech. But not to take anything away from from upstart, but the visas and the master cards of the world were really sort of the original fintext and still our absolutely so. So all of us use AI in a certain way. Some sometimes you even realize that some automation, real robot once we get our core upgraded and do a few other things, you know, automating some of our processes you know, we're boting. Automation is something we need to take a look at, but we're not quite there yet. Right now. Are Real focus on technology is anything that's consumer facing and outsourcing or partnering with companies like You guys are even call center support services and things like that through again, it's all trying to improve the customer experience through technology, as we said in the beginning, and that's at least my perspective on how you need to do that to to build continued loyalty from your customers, especially as they get younger. One it seems to me like for an apple or any bank that doesn't have the fifteen billion in annual technology spend the chase does. To compete you kind of need to leverage partnerships where there is very large investment in specific areas where you can, you know, provide that best in class service, not by building it all in house. It's your point. I think the sense that fintech partnerships is new is kind of crazy to me. I look at a go well, your core service providers not that different. Your visa relationship is not that different. Through lots of their party service providers that financial institutions of relying on for decades to provide services and why partnering with a Fintech that's a newer company feels different than that. I think is a bit of a just a gap and perspective for the market. Maybe in some way because it feels similar to me, but I'm curious if you see that as kind of the core of your strategy for how you augment the areas that you can't directly, you know, match that investment and to provide that kind of top notch experience. Know that is our strategy, is in the areas that are important to us, but not necessarily the primary dress. I observe our business, whether that being the lending side or even on my side of the bank, the consumer retail side. You know we are partnering with a lot of different firms. Of even our core conversion, as we call it. You know, we were in our whole data center and House and still are doing that, but this through this conversion, you know, it's going to be fully outsourced to model for us. HMM. So we're going to move that, not only upgrade the cloud. That, by the way, I just might just say you like. The core conversion to me is like one of the scariest things to bake under text. telligrates bank's heart transplant for Evan really is. Yeah, we described similar projects when I was a google is trading out the engine on a seven forty seven while I was midflight. Yeah, it seems like a dangerous thing to attempt, but you're moving it. It's when outsource providers, welster, going to move from managing that that process and ounces having an external with very anything that you know which gets to that still. I mean those the big providers of those services. That's their primary business and they have the budgets to invest in the technology. We're much bigger than a lot of banks in the country, but we're still too small to have that kind of technology budget at this point. Yeah, I'm not sure you want to have that kind of technology budget. It's it can go wrong a lot of different ways. Is there anything that you guys have tried recently that's you've been surprised by the result of any kind of projects you've have going out the door where you kind of said, well, it's not...

...quite what we thought thought was going to happen. That are worth mentioning, honestly, and it's not a sales pitch for upstart. But but this has been one of the model was going to go badly. It didn't know. We thought it would get, frankly, go more slowly than did, although it took us time. Yeah, launched the because of all of the constraints banks operate under in terms of its internal government due diligence. I mean, the portfolio has been growing very, very rapidly and so the demand for consumer loans has really surprised us. You know, we have our arrangement with you through which you feed US certain amount every month and we have we have increased that recently, but seems as a you know, if it continues to go well, we'll be able to accelerate the growth in the portfolio three or ferral business, but also again, as they said in the beginning, without having to build. I mean right now this is not cost me any additional overhead in house. At some point I will need some support and if we have a one to bring the servicing in house, that's different, different build. But this has been a biggest, most pleasant surprised and I really really mean that. You know, and and it's coincident with you know, the pandemic is just a really driven up demand for digital services. We the other surprise is just to see the nearly doubling in demand for all of our online services and well center services and things like that. Do you think those things are going to go back, I mean as a pandemic ways, and we're obviously right now. Maybe maybe it's not waning as much as we thought in certain ways, but I'm curious if do you feel like some of those shifts to digital are going to go back to the old way? All of them? You see a reversion to the older or is this kind of the new normal that we should just be living in and expecting a much more digital interaction from customers on a go forward basis? Yeah, so for us, what we have not seen taper is our online and mobile banking usage, you know, and most of it is. It was truly nearly doubled over where it was pre pandemic, and and that's including the growth rate of customers, that new users. The call our call center volume had the same kind of spike. But since our branches have reopened and we're back and we've been opened pretty much full hours for really now, but six or eight months we kept our branches open we were a little more aggressive than most people in this are and keeping branches open, but the call center volume spiked tremendously for about six or eight months and that's what I've seeing go back to normal and I just suspect that those are those are the branch customers. You know the I mean, they'll pick up the phone and call. Some of them they or may not use online banking, but now that the branches are open, so I think the digital stuff for us is probably in roughly a year's time, probably saw what would be three or four years of what you might have correlated from growth doubling a year. That's a that's like FANTAC type numbers. That's like a song game. Yeah, numbers, I mean, and it's unfortunately we were a little late to the game of an online account opening system and that was a little bit unfortunate. But but we just went live with that system as well. So they said, we'll be building that out and integrating it into solutions like yours. Yeah, it'll be great. I'll be really interested. I'm curious your thoughts being one of the things that's been interesting. You mentioned to me the upstart referral network, where up starts kind of responsible for for finding consumers that are might be interested in your loans and directing them to apple for the actual closing at the Lan. But you know, my history talking to banks and even credit unions is a don't typically bring new customers and through a lending experience. They bring them in through a depository experience and then and then add landing on later. And I'm curious what you think about is we can integrate a depository opening maybe into the borrowing process. He's leading with lending something you're interested in. So it doesn't feel like the traditional banking way to me to have a lending product be the entree into the bank for a consumer. Yeah, no, it's not. You're right, and you know we're going to work with you guys to experiment a little bit and whether or not we can provide some incentives to do that. But historically, and maybe now at the bedtime because interest rate you're near zero, but historically one of the ways we've competed in this market, because we're not a chase with, you know, hundreds and hundreds of branches and every street corner, is we've been a...

...solid rate competitor. So what I'm hoping is that I can convert an upstart borrow or into a depositor through some rate driven product and then hopefully eventually comprot convert them to more of a core customer. I mean that time will prove whether that's true. But but again, we're getting, we're getting referrals from we're not getting. We deliberately defined the area from which we're getting referrals for you, which is our market area. So there is some overlap with the brand and where these new new faces are coming from. And it's that whole referral and and secondary sales process that we're building out right now. So we haven't really even kicked it off, but I think, you know, six months or so from now will see what kind of results we have. But it does provide our sales staff leads that they would not have otherwise had have had one. We'll have to bring you back and six or nine or twelve months and talk about the results tacts. I think. Yeah, yeah, I've heard more and more of the institutions I talk to talking about the concept of maybe I need to lead with lending, maybe I need to be bringing in new customers through lending products, and can I convert them to more depository or traditional pox or time. I think it'll be a really interesting test case because it's, I think, top of mine for a lot of people I talked to, at least. So should before I before I ask you my kind of final closed question, is there anything I you wanted me to ask you that I didn't ask? I know it's sent a list of questions over. I don't think I got to all of them. Yeah, was there anything we want? You wanted to talk about it that it was a question you'd hope that I would be asking that I didn't get to. I think the one I had noted, which you did ask get to, is what what else might I want from upstart? And I think I went through because I've found that you're you guys have been very receptive to some ideas we've had with respect to using your ai for some of the other things we're doing, and you know, I'm very pleased with the receptivity from your team on that and, frankly, just even though it's not so much related to business development, but the transparency we've had in the response we've had when we've had any kind of customer issue or something like that. They that they've much of that, but it comes up from time to time and it group is very respect months and so I think you appreciate that, that feedback and I certainly I think any institution, any FINTAC or attack or any kind of company wants a partner with banks has to be, yeah, aware of the sensitivity of those kinds of issues and the the transparency and speed with which I mean things come up. Right, people are yeah or unhappy, things, things happen. So but you think? I think six months from now would be worth having a conversation because by then or portfolio will have grown substantially. We'll see what we're doing on the cross selling and then, you know, by then we'll have some real good performance metrics in terms of portfolio performance as well. Yeah, we'll bring it back on to talk about all those things. Did you? I? I did send you these questions in advance, which is the three questions I ask everybody. At the end of the PODCAST, though, I'm a get some not kind of rapid fire mode, but what's the single best piece of career advice you've ever got? Read these ahead of times. I wrote the answers down, the good and the career advice I give people, although my kids are in there early s, don't pay attention to it. It's be patient, be patient, but nobody seems to listen to that advice if you're under forty years old. So it's basically be patient and opportunities will will come to you, whether their personal, whether and in business. The patient White Group. Ever. Yet it probably help, would help to of somebody other than dad delivered the ad I find that my kids listen to the same things I say from other people all the time. I could dad. They told me this is really smart thing. I've been telling you that for ten years. Would you just listen to me already? But sometimes it's all about the Messenger. It's my second question. What's the best piece of, you know, consumer lending, our consumer banking advice you've gotten? So this is something that we've always practice here at the bank and we're fortunate that we can do it because we're private. But we really try not to go with the herd and and in lending, you know, there's a real hurt. There has historically been a real herd mentality, whether it's consuming lending or other products. You know, Bank can get into trouble from time to time with regulators or with customers or even legally. But you know, banks died...

...because of bad loans and is usually those banks that followed the herd into something. They're the lated doctors that have those problems. So we try and kind of go at our own pace and not necessarily follow the herd. Be Patient, don't follow the herd. Yep for pieces advice and see the last with the theme there. But in my now you've any insight into my personality, they pair together well, JEM, is true. And my last question is, what's one bold prediction for the future? Value kind of made one about crossl will bring you back on but there was another prediction about what's coming down the pipe and banking or in general, and that we can hold your feature the fire in a future episode. What's what's your bold prediction for the future for us? Yeah, well, let's get this gets to the whole Fintech partnership thing, which I think you know. I mean fintext wanted to kind of get down this route on their own, but at least in lending realized the partnering with Banks Maybe the right thing to do, and I think it definitely is, I think, for midsize banks like ourselves. I think you probably will see us do more and more in the consumer lending space. Face the larger banks don't seem to be so interested in it. As we move along here. Many of them have actually discontinued some of these services. So I think that there are real opportunities from market share gain for institutions like ours, but partnering with a company like upstart who has the artificial intelligence modeling here to kind of really make a difference in making the right credit choices. So I guess the prediction is, I think that midsize and smaller banks will probably gain market share and consumer landing and and and safely do so as well gain of market share from Midsize Bang I. It's a great prediction. I like that one, but certainly a certainly measurable so we can bring you back on is. Yeah for that. Yeah, yeah, I like I think it's I like your reasoning for it as well well. Joe, I just say thank you so much for joining us. Was a fascinating conversation and I appreciate you're taking the time to do it today well. Thanks, Jeff, a pleasure for me too, and look forward to kind of catching up sometime next year follow up on in person. Now than all this covid stuff is receiving we're going to conferences or back, will be able to meet in person. SETT'LL BE RIP. Yeah, we should do this one in person next time. That's right, that's the recap. Will be and person come at once. All right. Thanks. Thank you very much. By 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 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 lending programs or you're just getting started, upstart can help. Upstart offers an into end 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 forward 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. 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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