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The Credit Blueprint: 6 Strategies for Financial Institutions and Fintechs to Master All Things Credit

Strategies for Financial Institutions and Fintechs
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The world of consumer and commercial credit is evolving as we speak. New digital solutions and technologies are changing the way we do business, just as Gen Z and Millennials continue to reshape how we look at customer service. Here, you will get the inside scoop on how to navigate the current landscape, from improving your credit products to discovering the power of operational excellence, such as customer support and AI-enhanced fraud mitigation, to help you stand out in a crowded field.

Even as this generation of consumers comes of age, the effects of the pandemic are still taking a toll on the credit industry. Defaults dropped due to all the stimulus payments — against everyone’s expectations. That money is now gone, however, and delinquencies are rising strongly.

Millions of consumers have sought debt relief options, such as deferment or loan forgiveness. As a lender, you might find yourself restructuring customer payments via workout plans for your customers to make sure they do not default on their loans.

Meanwhile, research we did in conjunction with PYMNTS found that only 45% of cardholders pay their balances in full each month, while Baby Boomers (50%) are the most likely to do so. Furthermore, the use of buy now pay later (or BNPL) continues to grow strongly, particularly among younger customers.

In fact, 20% of Millennials used BNPL in the previous three months compared to 6% of Baby Boomers and seniors, with the average BNPL purchase being nearly 70% higher than the average credit card purchase. Lastly, BNPL is heavily skewed toward clothing purchases, as 39% of Gen Z cited using BNPL for their last clothes purchase.

In an ever-evolving credit landscape, credit issuers must analyze customer data, leverage new technologies, and create positive customer experiences for Boomers, Gen Zers, and Millennials alike. The above data suggests some important generalizations to keep in mind: Boomers are more cautious, so they often prefer traditional loan products  and are more likely to pay off their balances in full each month. Gen Zers and Millennials, on the other hand, are more open to new options and are tech-savvy — they heavily favor BNPL products and installment payments.

As a lender, you must create elevated customer experiences that meet the demands of every generation. The good news is that fintechs and banks can employ a variety of effective strategies to maximize these opportunities in a competitive market. Here is how to start:

1. Enhance credit decision-making and drive strategic initiatives.

As a lender, you can now use alternative data to assess your customers’ creditworthiness more accurately and tailor credit programs to the ever-changing, diverse needs of different generations. Remember the millions of consumers with limited or no credit history, making it difficult for them to apply and get approved for credit. Strive to make credit card issuer processing easier and provide educational resources on financial literacy to those who need them.

Other solutions to consider are:

  • Unified payment processing platforms enhanced by generative AI can help clients create differentiated credit programs and optimize them with ease.
  • Unified platforms across banking products offer convenience, speed, and flexibility, coupled with a 360-degree view of the customer across products for hyper-personalization. Using alternative data, such as online bank account information, may allow lenders to automate tasks to accelerate application processes or avoid subjective interpretations that can sometimes lead to differences in treatment or wrongful discrimination.
  • Alternative data offers a more complete picture of borrowers’ financial situations. Instead of relying on credit scores, lenders might be willing to determine the likelihood to default by looking at other sources of data, such as bill and rent payments. When coupled with generative AI and machine learning, credit issuers can accelerate lending decisions, develop new services, and combat fraud.

2. Expand access and choices for clients.

Consumers across generations have differing perceptions of the benefits of financing and credit and expect more flexibility. While older consumers are more likely to be motivated by rewards when using credit, younger consumers rely on credit to manage their cashflows. Six in 10 Millennials have pending installment payments on their credit cards, with 1 in 4 having pending repayments, according to i2c and PYMNTS research. While Boomers and Gen X typically opt for cash-back credit cards and travel rewards cards, Gen Z and Millennials  opt for BNPL options.

Rounded-up savings, flexible loan options, and installment payment plans can make it easier for borrowers to save money and afford payments. As a credit card issuer, you can also:

  • Leverage next-generation platforms to offer new and innovative credit products that incorporate hypertargeted rewards, virtual cards, digital wallets, and personalized communications.
  • Use a unified banking and payments platform that can help accelerate transactions, better manage risk, increase reliability, and enhance security. This leads to improved profitability, increased customer satisfaction, and an elevated customer experience.

3. Practice credit risk management in an uncertain world.

The consumer credit solutions market has seen significant growth. According to the U.S. Federal Reserve, credit increased by 4% in the second quarter of 2023, thanks in part to card ubiquity, cloud-based payments processing, mobile integrations, and digital-first cards. The foundation built by the card-issuing API networks allows a diverse set of players to access these rails and enhance their card-issuing  solutions and credit products through digital channels.

According to our research with PYMNTS, more than 50% of Millennials cited better spending management as the main reason they use credit products, showing that cash flow management was the primary driver for increasing their use of credit products in the last year. Wanting to keep more control over spending and debt, it’s no surprise that 14% of Gen Z consumers used BNPL to make a purchase in the last 90 days.

Additionally, Baby Boomers and seniors are 75% more likely to have used a credit card in the last quarter than Gen Z, with 40% having three or more cards. Usage follows a bell-shaped distribution across all age groups, with 83% having made payments for credit products in the last 90 days and Millennials and Gen Xers being the most likely to use any credit product. Furthermore, 40% of Gen X consumers made an auto loan payment in the 90 days prior to being surveyed, while 22% of Millennials did for personal loans.

In today’s challenging economic climate, with new technologies and complex financial markets, you must use data analytics to monitor these trends, develop relationships with borrowers, and automate card issuer processor issues like loan origination and underwriting.

To effectively manage credit risk in this uncertain world, use predictive models such as lifetime value systems (or LTVs) to develop tailored credit product offerings that meet diverse needs better than traditional banking models. This involves analyzing consumer credit usage habits to help understand preferences and drive customer engagement. You can also:

  • Offer differentiated credit solutions based on alternative data and machine learning algorithms that can lead you to make lending decisions faster.
  • Gain insights into risk parameters while offering consumers transparent access to their financial data in order to make informed decisions.
  • Use predictive models, such as LTVs, to develop tailored credit product offerings that meet diverse needs better than traditional banking-as-a-service models.
  • Mitigate your risk by offering rounded-up savings, flexible loan options, and alternative payment plans.

4. Secure transactions and protect data.

Cybercriminals are using sophisticated techniques to steal data, and the ever-skyrocketing volume of data we are storing makes it harder to secure. New technologies, such as blockchain, quantum computing, and issuer processing platforms, can help improve your security while governments and businesses cooperate in combating cybercrime. Everyone has a role to play, and you can:

Develop a plan for responding to data breaches, including detailed procedures for how to identify, address, and report any potential threats while using encryption technology to protect your customers’ sensitive information when transmitting or storing it.

Monitor user activity on all networks and systems in real time to detect any suspicious behavior quickly and implement firewalls and anti-malware software across all customer systems to block attacks.

Educate employees on how to recognize and prevent cyberattacks and ensure they are regularly trained on the latest security best practices.

Regularly review existing security solutions and identify new ones that could provide additional protection against cyberthreats.

5. Use artificial intelligence to enhance fraud detection and risk mitigation.

AI is changing the credit industry  daily. Already, we can turn to AI to pinpoint fraudulent behavior, predict who will default on a loan, and assess which businesses are investment risks by analyzing the data. AI can also help you:

  • Improve customer onboarding by automating your credit vetting process and assessing risk quickly and accurately in real time.
  • Model scenarios for different possible outcomes when issuing loans or granting credit lines, without having to consult additional sources or manually input the data and thus potentially making errors.
  • Gain deeper insights into your customers’ spending habits and create more tailored product offerings based on their profiles.
  • Use machine learning algorithms that can track key financial metrics and analyze customer data to help you develop more robust security measures, protect against fraud, and improve your credit scoring models.
  • Monitor credit transactions in real time to detect and alert you to unusual activity.
  • Use natural language processing, mobile analytics, cloud computing, and machine learning algorithms to optimize customer experiences through personalization — all while reducing your time for tedious manual credit issuer processing.

6. Use value-added services to stand out from the crowd.

It is difficult to compete with the big players regarding consumer or commercial credit. Banks and credit unions must adopt a digital-first attitude to differentiate from the competition, achieve better credit card KPIs, and provide a more rewarding experience.

For example:

All of these add to the way you deliver more value to your customers and differentiate yourself from the pack.

The credit landscape is constantly evolving. New technologies, such as AI and blockchain, are changing how credit is provided and managed. We are already seeing increased competition, which in turn will lead to innovation and a keener customer focus. Start implementing these strategies to ensure you are not left behind.

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