There is a lot of media attention on the consumer end of economic struggles. But lenders are struggling as well. Lenders may have difficulty finding customers when consumer spending drops and interest rates increase. Mortgage lenders face a tight housing market with higher interest rates, while personal loan and auto lenders battle an economy where people spend less.
The pandemic also shifted how many customers look for and apply for loans. Institutions that have been slow to embrace online application and approval processes are now falling behind. Let’s look at some of the challenges lenders currently face and some ways they can effectively address them.
Challenge: Finding a Place for AI
ChatGPT was a twist for many industries, including lending services. Artificial intelligence can be a powerful tool for businesses trying to figure out how to implement it in their workflow. Embracing AI tools to help speed up loan processing and online customer service could benefit the lenders’ bottom line. However, it cannot be very safe.
Lenders can address this challenge by learning more about the tools available and finding ways to utilize them to benefit their employees and customers. Lending companies can incorporate AI into their business in many ways, including prequalification and data processing.
The human-to-human interaction is still important in the lending industry, but AI could simplify routine tasks like income verification and provide a more personalized experience. Lenders might also consider utilizing artificial intelligence tools for fraud detection, document management, and risk assessment.
Challenge: Slower Loan Origination Process
The COVID-19 pandemic offered a glimpse of a more digitized world. Zoom meetings and telehealth visits provided safety and convenience and created more demand for accessibility. Lenders who weren’t using digital systems struggled to keep up with the heavy demand for mortgage loans and refinances. While many lenders were holding on to the old way of doing things, the pandemic highlighted the risks of lacking flexibility.
Mortgage loans, in particular, have historically taken a month or more to move from prequalification to approval. In a fast-moving housing market, this pace can make it difficult for buyers to secure the home of their dreams on a timeline that works for them. Online lending options can help streamline the process for everyone involved.
It’s important to adapt to avoid being left behind. Lenders could implement more digital processes like Zoom conferences, online document reviews, and financial management.
Challenge: Exposure to Commercial Real Estate Debt
Shifts in the real estate market have left many large lenders vulnerable to commercial real estate debt. The Federal Reserve began increasing interest rates to help combat steep inflation, which prompted a slowdown in the commercial real estate market. Historically, fewer trades and lower values have led to defaults, and some banks have already fallen into insolvency.
There are some potential risks of a negative feedback loop where default loans hurt the banks’ bottom line, so they start offering fewer loans, which means even less revenue. Fortunately, despite rate increases, borrowers have options (like refinancing) that could help reduce the risk of defaults. Small and mid-sized lenders are at a higher risk for loss from commercial real estate loans.
Lenders can help offset some risks by communicating with clients and offering resources like refinance options to avoid default. Further, a close watch on local economics and stricter lending guidelines could help protect against future defaults.
Challenge: Less Liquidity and Higher Interest Rates
The Federal Reserve has increased interest rates seven times since September 2022. In September 2022, interest rates were between 3% and 3.25%. Today, interest rates average between 5.25 and 5.5%. Pre-pandemic, interest rates were averaging between 1.75% and 2%.
While federal research has made progress in slowing inflation, higher rates affect the market. Most notably, three major banks (Silicon Valley Bank, First Republic Bank, and Signature Bank) failed in March 2023. Silicon Valley Bank lost $42 billion in liquid assets when customers withdrew funds over 10 hours. Silicon Valley Bank and Signature Bank customers quickly followed suit over the next two days.
These failures were, at least in part, a result of the banks’ investments in Treasury securities. Rising interest rates pushed bond prices down and devalued bank reserves.
Lenders can maintain an open line of communication with customers to ease their worries. Additionally, lenders can secure money for risky investments through investments like CDs and long-term bonds. Since investors in long-term products can’t access their funds quickly, any losses could be easier to manage.
Challenge: Shortage of Employees
The United States Chamber of Commerce tracks employment rates and job vacancies nationwide. According to their recent findings, the financial industry faces a severe employment shortage, with an estimated 45% of job positions left unfilled. Multiple factors could affect the shortage of workers, including the increased desire for flexible work-at-home options. Other factors include retirement, employees venturing to start their businesses, and workers leaving for fintech jobs.
The labor shortage in financial services isn’t a new issue, but it’s worsened in the years following the pandemic. Nearly a quarter of all financial advisors are over 65, and the average age of financial advisors is 55. As more financial employees head for retirement, lenders must consider some changes to attract qualified workers.
To address this issue, recruiting the next generation of advisors will be important. Lenders may need to consider flexible work arrangements, more attractive benefits and vacation packages, and higher wages. Offering scholarships, shadow programs, and internships could also spark interest in younger individuals.
The financial industry is one of the oldest industries in the United States. Lenders have witnessed the gamut of economic performance from top to bottom. New challenges will continue to confront lenders, but active work toward innovation and wise planning can strengthen the industry from future problems.
