Navigating Economic Uncertainty: How Lenders Use Data to Respond to Rapid Market Changes

Financial institutions (FIs) are encountering an existential challenge when it comes to serving the next generation of customers. There is a disconnect between how FIs believe they’re serving these generations and how that service is actually perceived.

IBM research underscores this fact, noting that nearly nine in 10 (88%) of bank managers believe they understand the needs of Gen Z account holders. On the contrary, roughly three in 10 (34%) of those customers would agree.

The crux of the issue is that the traditional credit data, models, and systems FIshave long relied upon are no longer sufficient and could spell the end for FIs that don’t adapt. While this reality may not be crystal clear to everyone yet, swift economic shifts and technological disruptions are sure to crystallize this notion in the near term. The way FIs approach credit data and adapt to changes will help them solve this problem.

Here’s why: as economic conditions fluctuate, lenders often have the knee-jerk reaction of drastically cutting lending, a reflex that can be damaging to both their business and consumers. It’s untenable for consumers, who are in the greatest need of credit access during uncertain economic times. It’s also doubly detrimental to lenders; they alienate customers looking to them for help while negatively impacting the bottom line.

We know that some are attuned to this plight; they are the contingent of investors, banks, and credit unions that voted for and awarded Bloom+ Best In Show at FinovateSpring 2024. These are people on the frontlines of the next looming lending and credit crisis — people who want to be armed with the tech and tools that will enable their FIs to adapt and evolve in ways best suited for current and future customers.

This article explores the impending paradigm shift towards embracing comprehensive data strategies that enable lenders to make informed, adaptive decisions that benefit the entire lending ecosystem.

Reliance On Traditional Credit Data Models Stifles Opportunity

We’ve written in-depth about the inherent limitations of traditional credit data models. In many ways, FIs relying on traditional credit reporting systems alone are digging their own graves, especially in the current financial landscape. Predominantly backward-looking, these systems do not adequately reflect real-time user data or the nuanced financial realities of potential borrowers.

This lag leads to conservative, often outdated lending decisions during economic downturns, which inadvertently shut out viable borrowers and curtails lenders’ market opportunities. The result? A financial ecosystem where opportunities for growth and inclusion are stifled — and one where consumers look outside of their primary financial institution for help.

This conundrum translates to an existential crisis for financial institutions, with many already toeing the line of trust with consumers. One need only point at the regional bank mini-crisis of 2023 or the shrinking pool of financial institutions to see the writing on the wall. Consolidation will continue, and FIs’ biggest threat may not be competitors but rather their ability to instill trust in consumers. Stale lending practices mired in dated technology and old ideas will not suffice. The ability to adequately serve future generations depends upon FIs’ actions today. That starts with loosening the chokehold that antiquated credit data systems have on lending decisions and consumers seeking access to credit.

Technology Underpins Lending Innovation

In many ways, technology is the root of the problem. Outdated furnishment systems, often marred by inaccuracies and errors, paint incomplete pictures of consumers’ financial lives. This paired with a mentality fixated on doing things “the way they’ve always been done” corners consumers in a negative feedback loop of bad data and financial exclusion in perpetuity.

There is no way out of this cycle via traditional means. Continuing to feed bad or incomplete data into existing models neither fixes transparency and accuracy in lending nor creates new opportunities.

Subsequently, lenders are stuck in stagnation, particularly in tough markets. Financial institutions grappling with inaccurate data, compliance issues, and outdated technological infrastructures find themselves ill-equipped to respond to market changes dynamically. In other words, they’re not able to give consumers what they need.

On the other hand, real-time information and detailed analytics foster credit and lending transparency for lenders who can make more informed decisions and for consumers who wield greater control over what gets fed into the system. These are essential tools for the industry, and they become especially critical during unpredictable periods when lending typically tightens.

Modern technological solutions, such as advanced APIs, provide a pathway out of this impasse by enhancing data accuracy and broadening the scope of data for making risk-adjusted lending decisions.

The New Data Paradigm: A Holistic Approach to Data

The current landscape demands that financial institutions reevaluate their data strategies. There’s a stark discrepancy between the perceived adequacy of financial institutions’ current strategy and the actual needs of today’s consumers, especially younger generations who face unique financial pressures. By integrating APIs and embracing a broader spectrum of consumer-permissioned data, FIs can align their services more closely with real-time economic conditions and consumer needs, ensuring more sustainable and inclusive lending practices.

Adopting a more holistic approach to data not only mitigates the risks associated with outdated information but also enhances the lending experience for both providers and consumers. Furnishing traditional and non-traditional data sources allows FIs to perform more nuanced risk assessments, offer more personalized loan products, and respond more agilely to economic changes. The result is more continuous lending even during periods of economic uncertainty, avoiding the need to “shut off the spigot” and maintaining a steady flow of credit in the market.

The key for lenders is to address the technologies and mentalities inhibiting them from moving forward with this holistic approach. “Turning on” consumer-permissioned data can be a big ask for large FIs and their entrenched legacy tech. Add to that stringent compliance requirements, and it makes sense why many FIs continue to sit on the sidelines.

This crossroads is where Bloom can bridge the gap. Our consumer-permissioned data product serves as a no- or low-code translation layer for FIs to compliantly and accurately furnish demand deposit account (DDA) data to bureaus while unlocking a world of lending opportunities.

Our plug-and-play solution is a streamlined way for lenders to improve the lives of their consumers while better equipping their lending arms to adjust lending activities with surgical precision rather than broad strokes, especially during economic downturns when consumers need it most.

With Bloom’s consumer-permissioned data solution, FIs can empower consumers to strengthen their credit histories with accurate, robust alternative data like rent and utility payments that are highly predictive of risk. This improves consumers’ access to credit and provides greater insights and visibility for lenders to make better-informed credit decisions.

It’s the best of both worlds; Fis can use a robust, data-driven strategy to make intelligent decisions attuned to consumer needs and broader economic realities. This strategic alignment is crucial for adapting to the rapidly evolving financial landscape. By utilizing comprehensive data sets, lenders can better manage risk, tailor products to meet diverse consumer needs, and maintain operational resilience against economic fluctuations.

The Future of Lending: Data at the Core

As we look to the future, enhanced data will increasingly become the cornerstone of lending practices. The ability to effectively gather, analyze, and act on vast arrays of information will likely define the competitive edge among financial institutions. Data processing and analytics innovations will further refine these processes, fostering a more resilient and inclusive financial market.

For financial institutions, the transition towards data-centric lending practices is not merely beneficial — it’s imperative. In light of changing market dynamics, institutions must reassess their reliance on traditional credit data and embrace more innovative, comprehensive data strategies. Such a shift will enhance their decision-making capabilities and better serve a diverse consumer base, ultimately contributing to a more robust and equitable financial ecosystem.