Courtney Rogers Perrin
Over the last ten years free Personal Financial Management (PFM) tools have changed how borrowers interact with lenders. PFM providers—Mint and Credit Karma, for example—offer free online services, such as credit monitoring, tax preparation and budgeting and use the data from these tools to market tailored loan offers. These platforms earn attractive commissions from the many lenders in the market who compete for new loans.
So what does this have to do with community banks? The technology and business model employed by these PFM platforms can be applied locally by a bank. Community banks now have the technology to adopt a PFM-based loan origination model to reclaim their role as the primary credit relationship for consumers.
To put this in historic perspective, below is a timeline of the customer experience related to loan origination. This shows how underwriting has come full circle, returning to a personal, local underwriting experience, as it existed prior to the standardization of credit underwriting.
Before FICO (Personal, Local Underwriting)
Underwriting was local with no credit intermediation. A borrower met with a local bank credit officer, and underwriting included factors that relied on a local connection. There was very little intermediation of credit because of the lack of standardized underwriting metrics. This local-only approach had major drawbacks; it was inefficient and created the potential for discrimination. However, the local interaction did offer benefits to people who needed help in understanding how to improve their credit or whose risk was not well reflected in a standardized credit score.
- Banking Experience: The customer goes to the local bank for all credit products without thinking much about options. He works with a loan officer and is either approved or declined. A relationship is built between the local bank and the customer, but there is little that the bank can do to help the customer obtain credit outside of what the bank itself can offer.
After FICO, Before PFM (Impersonal, Non-Local Underwriting)
Underwriting was at a distance with some intermediation. The scoring models existed, but they were in a black box that the borrower couldn’t understand or interact with. Credit intermediation existed in forms such as comparison web sites, agency credit card programs and mortgage brokers, but there were no platforms that combined an attractive user experience with personal data mining to pull borrowers into this process.
- Banking Experience: The customer hears about loan offers from multiple sources, such as direct mail or comparison sites. She thinks of the local bank as one of many loan product providers, but not as an advisor in relation to market offerings. The bank has no way of knowing what credit products the customer has taken out with other providers.
After PFM, Before Bank Adoption (Personal, Non-Local Underwriting)
Underwriting is at a distance and online intermediation is the norm for many credit products. Technology has helped customers understand the system and take advantage of their personal data to obtain the best credit offers. Borrowers benefit from lower cost loans as a result of better underwriting and increased competition. Banks are largely out of the loan origination process except for their own loan products.
- Banking Experience: The customer uses various online tools to manage her finances, some of which are offered by her bank and others by non-bank, online-only platforms. The customer receives pre-approved credit offers from the online platforms, but not from her bank. The customer relies on the online services to provide the best credit because she understands the value of her data and expects tailored offers.
After Bank Adoption of PFM (Personal, Local Underwriting)
Underwriting is still at a distance, but it is managed locally. Intermediation is the norm, but it starts with a local relationship. State-of-the-art PFM tools are offered by banks and can be used by their customers outside of a branch or in a branch with the optional assistance of bank personnel. Banks reengage with consumers as relationship lenders. More people sign up for the bank’s PFM tools than would have with online vendors because of trust in the bank’s security.
- Banking Experience: The customer uses an attractive, bank-branded online platform to manage all aspects of his financial life online. He sees real-time, pre-approved offers from multiple lenders. He can access the platform within the branch, which gives him the opportunity to speak with branch personnel about his finances and how best to optimize his credit options. He can affirmatively provide information to improve his credit options. Over time, his relationship with the bank is strengthened by the information sharing. He views other lenders as temporary product providers, whereas he values his primary relationship with the bank.
As you can see, credit origination has come full circle. Local banks can now fully capitalize on their relationships. This should result in high profitability and growth prospects for the community banks that adopt the new technology early, as well as the technology providers and lenders that partner with these local banks. For more information on how community banks can increase revenue in the face of new technology, read Now is the Time for Community Banks.
BlackLine can assist banks in developing a loan origination strategy using the new technology. For assistance, please contact Shane Hadden. Upcoming articles will include a detailed discussion of profitability, examples in the market today, partner selection and management, compliance, and Community Reinvestment Act issues. To stay informed on BlackLine articles, please sign up here.
 This article focuses on consumer borrowers, but the PFM-based loan origination model applies equally well for small businesses using business information tools such accounting software.
 FICO is a trademark of Fair Isaacs Corporation. “FICO” is used here as short-hand for credit underwriting models based on large amounts of data.