Editor’s note: This feature originally appeared in the August issue of MReport, out now.
When it comes to the home equity line of credit (HELOC) and personal loan markets, consumers have never had more options for—or influence over—who to borrow from and how to manage their financial experiences. Disruptive fintech players have established a firm foothold across the spectrum of lending categories and are finding success in offering specialized, best-of-breed offerings that are challenging traditional full-service financial institutions. As a result, battle lines are being drawn around the balance of intuitive digital engagement and personalized service as the fight for borrower wallet-share heats up.
An interesting evolution is underway, in which digital expectations across all of the product life stages—from initial shopping experience, through the loan payoff—are rapidly rising. That said, the lending market is a broad and nuanced one, and there are significant differences in preferences across loan product categories. For instance, in the mortgage market, we are seeing demand for a combination of personal and digital services for loans that can be relatively sophisticated. In this category, different portions of the process trigger different demands.
On the one hand, borrowers want to digitize and automate the simpler and more rote stages, but they also welcome a high-touch service that features personal interactions with advisors for the more complicated aspects of the relationship. In short, having the right blend of digital and personal services at the right stages of the loan product is emerging as the key to success in this competitive market.
In the HELOC market, we see a similar desire for personalized advice. However, we’re also seeing customers become increasingly dissatisfied with the traditionally lengthy process associated with applying and securing a loan. This is causing many borrowers to consider alternative digital products that are relatively new to the market.
The Fintech Wave of Innovation
Disruptive fintechs are among the loan providers that are making it to the top of J.D. Power assessments of institutions with high customer satisfaction rates. Quicken Loans, for instance, has made rapid gains in securing extremely high customer satisfaction rates by combining competitive interest rates with innovative, digitally enabled experiences. The company has recognized the notion of “speed” as an attribute that is attractive to consumers
going through the mortgage process and has incorporated this as a key differentiator with its Rocket Mortgage product.
Not to be outdone, Goldman Sachs has made strides in shedding some of its Wall Street “whiteshoe” image with the launch of its online-only offering, Marcus. Nearly three years after its launch date, the online lending platform is scoring high levels of satisfaction due to its ability to deliver funding to customers quickly.
Marcus is a terrific example of how traditional lenders are overhauling legacy thinking—and systems—to deliver borrowing experiences that compete effectively with the new generation of best-in-class fintech lenders. It also illustrates a trend among established lenders to develop separate brands and subsidiaries to tackle this market.
Traditional Banks Have Plenty of Game
There is still significant value, however, in being a full-service institution. While traditional players cannot escape investing in new platforms that address digital engagement imperatives, they do have opportunities to leverage—and extend—existing relationships in checking, savings, investment, and other account service categories by integrating them into a single cohesive digital banking experience. In fact, one area of clear advantage banks have over fintechs revolves around the perception that they are interested in pursuing comprehensive customer relationships. There is also a counter-perception among consumers that fintechs are more profit-driven and offer interest rates that are less attractive compared to traditional banks.
Still, fintechs do appear to have an advantage over banks in appealing to younger customers. One of the keys to capturing the next generation of borrowers revolves around the ability to attract the talent necessary for developing technological and service infrastructures that digital consumers are looking for. For banks, this is a tall order, because the fight for talent extends well beyond the fintechs. Silicon Valley, Seattle, and tech centers all around the world are competing with established financial institutions to capture and retain a workforce with precious digital engagement skill sets.
How Technologies Contribute to Borrower Lifecycle
There is no shortage of technologies—from artificial intelligence and machine learning to cybersecurity, workflow automation, and more—that are leaving an indelible mark on the ability of lenders to connect with next generation borrowers. However, at J.D. Power, we have concluded that the most important success factors are rooted less in deciding what technologies to deploy and more on determining where to focus digital investments. Specifically, there are three critical areas that deserve high-priority executive attention:
- Deploying technology that captures and addresses consumers during the research and shopping stage.
- Ensuring that technology can make the application and funding process as streamlined and intuitive as possible.
- Focusing on how technology can be leveraged to enhance ongoing relationships as borrowers use the account and make payments.
Understanding how technologies can be harnessed to engage with different demographics in a compelling manner is another important success factor. In this context, it is important to note that common stereotypes about consumer behaviors based on age can be misleading. While there are clear differences between the “under 40” and “over 40” crowds, some of their preferences are surprising.
For instance, even though older demographics are more likely than younger borrowers to take out HELOC loans, they actually report lower levels of customer satisfaction. The difference has less to do with actual dissatisfaction than with the fact that the experience is new and exciting for millennials.
According to research by J.D. Power, baby boomers and Generation Xers enter HELOCs with higher levels of confidence because they have less anxiety over the downside of variable-rate contracts and are more accustomed to the process based on past experience, and therefore have a better understanding of the tax-deduction benefits HELOCs can bring to the table. They also have tended to be in the instrument longer than their younger counterparts. More than two-thirds (70%) of borrowers over the age of 40 have been in their loan longer than two years, compared to a little over half (54%) of millennials.
Getting into a HELOC for the first time appears to be a stress-inducing process for the younger demographic, who find the shopping and research phase for traditional offerings complicated and demanding. As a result, many tend to drop out of the process and pursue other paths to debt— such as unsecured term loans and credit cards. Once in a HELOC, however, millennials are thrilled to harvest the benefits of additional tax deductions when the proceeds are used for home improvements— a borrowing reason driving 52% of this segment of millennial borrowers, compared to 47% of their older counterparts.
This is an important thing to note. In the fight for the hearts and minds of consumers, traditional banks currently have the upper hand in the HELOC market. That is rapidly changing, however, as fintech players expand their presence in this segment. Quicken Loans has positioned its mortgage origination offering as a viable HELOC alternative by touting its streamlined application process. This year has also seen Prosper launch a HELOC product that promises to deliver funds in half the time of traditional banks. Meanwhile, Discover—the credit card company—is also throwing its hat in the HELOC ring. It is waiving application fees and appraisal costs and offering fixed rates for anywhere between 10 and 30 years.
The Way of the Future
Consumers of all ages today are experiencing a golden era of choice when it comes to their personal borrowing options. They are bringing a level of expectation for digital convenience into their financial lives that is transforming the entire industry.
Fintechs have made great strides in the market to meet these tech-driven requirements. This has caused many of the more established members of the lending community to respond aggressively in the technological arms race to identify, engage, and retain borrowers.
No one is in a position to rest on their laurels. The constantly evolving demands of consumers—who are hyper-aware of their borrowing options—have created a complex and rapidly moving target. Institutions—including traditional banks and fintechs—that invest heavily in new talent, processes, and technological infrastructure to elevate the customer experience are the only ones who will be poised to establish a leadership position as we enter the next decade in the consumer lending space.