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Under Inflationary Pressure: Reshaping Strategy · Leaders in Lending

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  You are listening to Leaders in lending from Upstart, a podcast dedicated to helping
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  consumer lenders grow their programs and improve their product offerings. Each week, here,
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  decision makers in the finance industry offer insights into the future of the lending
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  industry, best practices around digital transformation, and more. Let's get into the
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  show. Hi, We're here live from CBA and Washington, DC, and
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  I have Matt Herna here to join us on the podcast and talk about the
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  inflationary pressures and market volatility that are impacting banks today. Thanks for joining us
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  on the podcast today, Matt, sure thing, I'm glad to be here.
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  Thanks for having me great. Well, could you introduce yourself a little
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  bit, talk about your background and kind of what you're doing and in the
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  banking industry right now. Sure? Absolutely so. I'm with Regent's Bank,
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  have been there about eleven years. I have a team that sits within the
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  consumer Product team. Within the first line. We collaborate with the consumer bank
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  on product design, launch, any of the credit risk related items. We
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  work with our second line partners on things like refining credit policy, understanding impacts
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  that may come from capital changes, and things like that, as well as
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  understanding when we watch a new product, loss expectations, pricing and things like
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  that. Great, great, Well, I know you presented on a panel
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  yesterday talking about similar topics, and we'd love to hear let our listeners kind
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  of hear some of your thoughts that you shared with it with the group here
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  at the conference. So, just as you think about kind of inflationary market
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  pressures, market volatility impacting our banks today, what are some of the key
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  challenges facing lenders, but especially in the banking industry. So I'll touch on
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  three things. One of the most obvious ones is that with the rates of
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  the level, loan demand has continued to be dampened. There really isn't interesting.
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  It was an interesting phenomenon though in twenty twenty two. It's really the
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  first year where we began to see home equity production increase. Now rates have
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  continued to accelerate since that point, so we've seen that slow quite a bit
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  as well. But I think that's an interesting point that kind of proves out
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  the concept that when customers have their first mortgage locked in at such low rates,
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  they really just need to see record equity levels, which we've seen today.
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  And then a slight margin above mortgage rates to choose equity. So that's
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  really one interesting thing, although it's since declined again. Credit Card is another
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  area that's interesting, though transactors aren't as rate sensitive, so we continue to
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  see robust card demand. Aside from that, loan demand remains pretty dampened across
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  the board. Really related to that as we think about funding costs capital deployment,
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  so as rates continue to increase, that means that the marginal cost of
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  funding those lines is also increased, So we have to remain prudent about where
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  we're deploying that capital and making sure that it's profitable, that it's sound in
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  this economic environment with a lot of uncertainty. And then since my background is
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  credit, I have to throw in as well the credit impact. You can
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  look out in the industry and see we know a lot of stimulus from government
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  and that other areas hit a lot of consumers in twenty twenty, and we've
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  been waiting on a lot of this stimulus to normalize. We're now at a
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  point where we're seeing subprime performance to curate pretty rapidly. Luckily we don't play
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  in that space, but you can certainly see those excess liquidity levels normalizing in
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  the impact credit fufilio, So that's really a key emerging risk everyone should keep
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  their eye. Yeah, I think we've seen that and it's been, you
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  know, kind of interesting that the stimulus seemed relatively modest but was really impactful
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  to a group of people in the country. I think the interest of helock
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  versus first mortgages, you know, with how rates have changed over the past
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  few years, what are your thoughts with what are people doing with the helock
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  money? Like, are they improving their home because they don't want to move
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  because they'd be moving and taking out a mortgage at a higher rate. Are
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  they using it to consolidate debt? Like do you have any insights in that?
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  And what is kind of driving that that helock increase that you saw.
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  Yeah, I think that's a great question. It's something I think the industry
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  has been asking as a whole. What is the primary use of the helock
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  and how do we get better customer engagement to drive growth Because we have a
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  recipe for growth, we have re equity levels, we know it's available.
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  To your point, home improvement would be an ideal area, but in general,
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  we know customers are using it for all of those we know that is
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  in this right environment, customers walked into their home, they don't want to
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  give up their low interest rate, and that provides an excellent vehicle for them
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  to fund things like home improvement. We know a lot of customers use it
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  as a potential Randy Day fund as well, so they're just holding it out
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  there to have that access to liquidity as they need it and have pretty low
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  utilization. And then also to your point, debt consolidation, so running up
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  the credit cards and then want to pay them off and which we've certainly seen
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  before and sometimes ends well and sometimes doesn't so well. Helocks can have features
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  too, like locking it into a termline, which can provide for unique features
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  for debt consolidation. Sure. Sure, So you know with all the kind
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  of ongoing economic and certainty and banks and people kind of in your role and
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  related roles have to make decisions about strategies and product going forward, Like how
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  do you see the current and economic uncertainty of what not really knowing what's next
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  impacting how decision makers banks are planning what twenty twenty four and beyond looks like,
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  yeah, certainly an interesting question. Well, the first thing is to
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  all the banks have risk frameworks in place for this exact reason, so we
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  can think about our appetite overall, how we can deploy the frameworks, what
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  kind of emerging risks we're monitoring to ensure that we're capturing those risks, We're
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  factoring that into decisions like capital deployment is in asking questions like, given this
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  uncertainty, is now the right time to lean into certain possibly let's say non
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  core products, Probably not, and focusing more on primacy and relationship. Okay,
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  so kind of retaining the existing customers and expanding that chair of wallet and
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  that relationship with those customers versus maybe a net new unknown customers that're out there.
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  That's right. I think we're in an environment where expanding prospecting, especially
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  in let's say ID secured loan space, the personal line space, it's probably
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  going to be a more volatile time for that. If you're already talking about
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  optimizing capital and higher funding costs, I think that just leads you back to
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  the core of privacy, relationship deepening, and focusing on those core products in
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  the profitable way. I'm going to kind of throw in a new new question
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  here that came up as I was thinking about it, what do you see
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  with the There's been a lot of talk as certainly with you know, kind
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  of an aftereffective stimulus and the student loan moratorium, repayment moratorium and of course
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  the student loans of entered repayment now, but there's really no consequences for people
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  who don't pay because they're still protected by being reported delinquent and additional collection activities,
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  I think, and through later this year. Is that something that's kind
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  of on your mind or you you know, how would you kind of advise
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  banks to think about that who do play in the consumer space, even with
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  helox or things that could be impacted by someone suddenly having a large monthly payment
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  come due that they may not be making now, which we know a lot
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  of people are not. Yeah, that's the big unknown right now. Because
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  we were sitting before October when the repayment began, thinking through what those impacts
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  might be. I would say I thought it would be a much bigger impact
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  than we've seen. So that could be to your point that there's a one
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  year on ramp period, but it's just something we'll have to monitor closely.
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  I think given the demographics of that population, you would certainly expect to see
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  some uptick in unsecured loan demand, possibly some different credit card behavior. I
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  would suggest monitoring any unsecured lines of credit to see what where are those customers
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  that have student loans, whether they have them through you, through the government,
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  or wherever, and then monitor their performance to see what the impacts are,
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  and also looking at their deposit levels to see how stress they are.
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  But as of right now, we've seen pretty minimal impaths and I know,
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  certainly something we talk a lot about well, both at our company and with
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  partners, and I think we've all seen a lot less impact to it then
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  maybe anticipated, and maybe that's good and maybe we just will wait it out
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  a little. So, you know, what do you see as some you
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  know, tactics that banks can use as they think about navigating the current market,
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  Like what are some of the tools in the toolkit to deal with inflation,
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  market volatility, deposit levels? Being well right now? Well, I
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  think the first thing is to make sure you have a recession playbook. So
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  this is hopefully an exercise you don't have to deploy, but at least making
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  sure you have all the players thinking through and talking through those possible scenarios and
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  documenting what is possible or for deployment your toolkit, and so that would involve
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  talking through balance sheet pressures, credit pressures, When is the right time to
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  deploy certain account management features one is the right time to pull out of certain
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  areas or lean in potentially. So I think that's the first thing, having
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  those conversations firm wide, getting the right risk players in so that whenever the
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  next next thing does move, we have that on the shelf. All those
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  conversations have occurred, we've had the right committity, approvals and governance, and
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  they can be deployed as opposed to scrambling. Sure sure, so kind of
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  stress testing like where are risks? What do we see is scenarios that could
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  happen and making sure that you know what to do in various scenarios so you
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  can trigger it versus figuring it out when you're already in that stress scenario.
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  Yeah, that's right, And I think a good example of that would be
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  just picking on one would be when would you deploy something like a credit limit
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  decrease or the reverse of that, When would you be comfortable changing your strategy
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  dot Com slash AI Certification. Thanks and now back to the show. So,
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  you know, I think we there's certainly kind of the risk side of
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  thinking about like how to worry about in different areas and different impacts of market
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  volatility or inflation stressing consumers or even even companies that are that are buying consumer
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  goods or things for their their company. But I think there's certainly an opportunity
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  for banks to think about kind of adapting and evolving. So what is next,
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  Like not just a defensive but opportunistic what can they do? How important
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  do you think it is for banks to be I think if you had to
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  kind of compare contrasts, like being defensive and protecting what they do today or
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  really kind of adapting and evolving new long term strategies to plan for what's next,
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  I think banks should be doing both. So obviously, adapting for this
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  economic environment, you want to be defensive and protect the core focus on primacy,
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  you know, protect the balance, et cetera. But to your point,
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  consumers are demanding new ways to interact with the bank, and so we
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  have to be doing both. We have to think about convenience for the customer.
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  We know online and digital is a pretty big component to that. The
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  branch network is still vital turks success, but we know that customers want that
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  digital experience. And I think the other thing I've hit on a couple of
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  times now is what doesn't change the customer focus focus on primacy no matter how
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  you interact with customers. I think that's key as well. Yeah, it's
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  really been interesting. I think seeing there's you know, it seems like the
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  smaller, kind of more community banks have kept maybe kept their branch footprint.
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  Some of the middle ones, middle sized banks regionals have reduced their branch footprint.
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  And then when you see the largest banks actually increasing that branch footprint,
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  which I think is super interesting to watch as the move to digital move to
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  digital, but the branches still still hold a place, and I think it's
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  that in deepening that customer relationship and providing that place for people to get advice
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  because they do sometimes need in person advisor, need ways to transact. So
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  what do you think you know when you think about adapting and kind of growing
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  for the future, maybe adding new asset classes or adding new features for consumers,
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  or internally, what role do you see the really technology providers fintech partnerships
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  playing and really helping banks both mitigate risk but then also going to capitalize on
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  new opportunities in the market. I think there's really two roles that they play.
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  The first is probably the most obvious, thinking about capabilities that banks don't
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  currently have or that may cost too much, may not have the economies of
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  scale to deploy. So when you think about online origination channels, enhancing the
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  application process and making it more efficient for the customer experience. So there's a
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  lot of FinTechs out there that banks can partner with today to help alleviate some
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  of the pain points in that process. So that's one. The other,
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  as we begin to think through, would be you mentioned different asset classes,
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  So are there certain asset classes that banks haven't traditionally played in that they would
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  like some experience and they would like to ensure that they have those guardrails up
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  with someone who's more experienced. So we think it regions as an example.
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  A couple of years ago, we partnered with so Far and also with GreenSky
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  to play into some new asset classes to understand what that credit performance was like.
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  Sure, yeah, and it's definitely I think a challenge, particularly for
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  a bank that may not have a new asset class like that's a big risk
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  to take career wise, even for the people who are kind of promoting that
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  and being the champion internally. And I think getting it through the kind of
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  new business initiatives committee or whatever that that process looks, particularly the larger banks
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  can be can be daunting. Do you have any I guess kind of words
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  of wisdom, wores of caution for a bank that may be entering a new
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  asset class or considering it, Like, what are some of the things to
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  look out for some of the maybe pitfalls you've seen banks make in choosing those
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  partnerships. I think one of the first first, that's a really good point.
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  I think back to comparing the business models, so in most cases you'd
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  need to check to make sure that that aligns with your own business strategy,
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  comparing how different their credit policy might be from yours. I'll give you a
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  really good example of that. One of the areas where we learned quite a
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  bit was in our so fire relationship. So far is well known to use
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  a lot of machine learning, and at the time that was an area that
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  was relatively new for us, and so that's something we had to get comfortable
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  with to understand the impacts and bring through their appropriate governance channels. Yeah,
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  and I definitely think that being visibility understanding of maybe model construction, model risk
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  management, it can and it can be a challenge because the transparency of what
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  you have access to with different partners may be different. But I did like
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  what you said about, you know, thinking about maybe complimentary things that if
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  the bank doesn't have that core competency internally, how do you partner to bring
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  it in versus versus hiring to bring it in, which can happen but can
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  be very expensive. So I think that you know. The last question I
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  had for you today is a little bit off topic, but kind of a
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  hot take question. So I noticed that you worked in politics before you became
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  a banker, So, uh, which one is more volatile as a space
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  to be in banking or the political arena? Definitely the political arena. Yeah,
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  yeah, do you uh? Do do you uh? Did you enjoy
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  working in politics or or was it a short term thing that then you became
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  a banker after and didn't look back. So that was right after college.
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  I've always been interested in data and analytics, and I found a niche that
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  I could work in there to help support some of the legislative items and and
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  really do a research and analytics role. But I don't think most people would
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  be surprised. Politics is relatively toxic environment. So there's a reason I'm a
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  banker now. I haven't really looked back. Yeah, great, well,
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  good well, thank you, thank you for joining us today. It's definitely
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  been interesting to hear your take on the market. And I think there's no
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  shortage of interesting things happening right now, both in the industry and with the
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  regulators, so there all of them are keeping us, keeping us busy.
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