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November 09, 2022

3 ways lenders can navigate a changing economic landscape

Julie Shin and Rohan Sriram

A changing macroeconomic landscape offers a time of uncertainty, but also of opportunity, for lenders. Surging inflation and rising interest rates are weighing on the housing market while simultaneously hurting consumers’ budgets at home. After historically high origination volumes in 2021, mortgage demand is at its lowest level since 2000. More than 20 million Americans have a personal loan as of the first quarter of 2022 and outstanding debt, now at over $178 billion, is the highest it's been in 17 years. This drop in mortgage demand and rise in personal loans not only sheds light on how consumers are adapting to the current environment but gives lenders the opportunity to adapt with them.

Lenders facing a more competitive market could benefit from focusing on building the most compelling consumer experiences, while also improving backend processes to increase efficiencies and reduce risk. 

At Plaid, we built Assets and Income to help our customers better understand borrowers even during uncertain times. Our products enable consumers to instantly connect their bank and payroll accounts without tedious uploads, providing lenders with the most up-to-date bank account and income data, straight from the source.

As you adapt with the times, we are here to help you:

Effectively evaluate credit worthiness and expand credit to more customers 

As the economy changes, so does the average consumer’s financial picture. An individual’s career path may include working as a full-time W2 employee, chasing independence as a full-time contractor, or even having a side gig while also working full-time. In fact, more than one-third of US workers (36%) participate in the gig economy through primary or secondary jobs.

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Because the workforce and how borrowers generate income in the US is evolving, lenders need to evolve their processes to understand multiple income sources for a single applicant. Solutions like Plaid Income solve this by providing verification of anyone’s income and employment with the most comprehensive, all-in-one product suite. Our product suite includes: Payroll, Bank, and Document Income. We can validate employment and income for 85% of the US workforce working across five million employers and now support 1099 document uploads, so you don’t miss out on onboarding any independent workers.

Consumers are also diversifying their liabilities. 50% of consumers have now used buy now pay later services (BNPL) and 39% of those who have never used it say they're at least somewhat likely to use it within the next six months.

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Beyond this particular type of credit, borrowers have more lending options than ever, ranging from personal loans to auto and mortgage debt. To better understand a consumer’s complete financial picture, you need visibility into a customer’s entire credit portfolio from credit card debt to household liabilities to student loans. Without expertise and the right tools, making sense of this data from a user’s financial account can be extremely difficult. With our new beta feature credit categorizations, we are able to offer insights to identify the most common types of primary and secondary outflows and inflows so you can understand a borrower’s financial obligations, identify how to best serve them, and potentially expand access to more consumers.

Manage evolving risk while offering competitive loans

High prices and interest rates are top of mind for many Americans today. As borrowers’ purchasing power decreases, lenders are starting to see an uptick in loan delinquencies. Auto loans originated in 2021 and 2022 are starting to show higher delinquency rates relative to loans originated in previous years and credit card delinquencies rose for the third consecutive quarter in Q2. Even 17% of BNPL consumers say they're "very likely" to be late with a BNPL payment over the next 12 months, and 18% say they are "likely" to be late within the year5. Lenders need to rely on richer data to manage underwriting risk fitted to each applicant’s unique circumstances. 

With Plaid Assets and Income you can look at a borrower’s full and real-time financial picture over the course of their loan to assess performance. Our refresh capabilities allow for ongoing monitoring with the ability to access the most up-to-date Asset and Income information on your borrower after loan disbursement as often as needed. Lenders can use this information to understand how a borrower’s financial picture may have changed and to optimize repayment timing, minimize NSFs, and develop clearer delinquency risk profiles. 

Reduce fraud and drive operational efficiency through automation

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As the chatter about a possible recession gets louder, many lenders are using the slowdown in the volume of new originations to explore how risk mitigation and workflow optimization can lead to cost savings and improved margins. One area of particular interest is fraud reduction. Studies have shown that every $1 of fraud loss currently costs US financial services firms $4. This figure is even higher for mortgage lenders, who suffer a $4.40 loss for every $1 of mortgage lending fraud, a whopping 23.5% increase from fraud losses incurred before the COVID pandemic. 

Plaid understands the value of decreasing fraud in your underwriting process. Using Identity Verification, we can help you verify user identities as part of the application flow, ensuring you are working with legitimate borrowers and decreasing fraud in an automated fashion. Additionally, we are piloting a Document Income feature to help automatically identify if an uploaded income document has been manipulated.These tools can help you say goodbye to human-centric document verification processes, leverage the power of automation, and use your resources in the most efficient way. 

Consumers want a borrowing experience that is both fast and frictionless but also one that ensures security and data privacy. With our new Assets and Income upgrade mode, Plaid can offer both speed and security: if you are using other Plaid products to serve consumers for other use cases, you can allow those consumers to authorize data for both Assets and Income without having to connect their accounts again. Using upgrade mode, you can seamlessly integrate Assets and Income data to navigate any changes to the economic landscape, whether through more effectively evaluating credit worthiness, managing evolving borrower risk, or reducing fraud.

Answer all of your questions

It is estimated that automating many of the repetitive tasks that have traditionally been a burden to lending teams could save banks up to $70 billion by 2025.

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This environment might be the best time to strategically review your origination process, create clear digital transformation goals and implement technologies that can speed up your cycle and drive down costs. Thinking about what you are positioned to do exceptionally well in-house and finding or expanding partnerships to help automate elsewhere could be the key to implementing time-saving and best-in-class operations. 

We know these are the best and worst of times. We'e here to help. Learn more about Plaid’s Lending solutions below.