Strategies, Best Practices and Thought Leadership

Have We Forgotten About the Great Recession?

Since the last recession, the economy has experienced the longest upturn in decades. While this has created opportunities for growth, financial institutions may have forgotten some of the important lessons learned from the Great Recession, thus, loosening underwriting standards.

As the economy expanded and the number of borrowers increased, for some, this led to complacent underwriting. But regardless of an economic boom, a recession or just stagnant growth, financial institutions must continue lending in a way that does not open them up to risk.

Additionally, staffs have changed. Many of the individuals working at financial institutions today did not experience the last downturn, making training critical. Not only that, the younger workforce is pickier, so recruitment and retention is even more challenging.

Even with the right training, keeping employees is a task and must be a priority. In fact, a recent Gallup poll revealed that 21 percent of millennials have changed jobs within the past year – more than three time the number of non-millennials. Translated into a dollar amount, that comes out to an economic cost of $30.5 billion annually.

The solution to balancing risk with growth, despite staff changes? Technology, automation and analytics.

1. Modern Technology for Origination and Risk

Modern technology has never been more important as it is today. Banks and credit unions can no longer rely on outdated, underperforming platforms or a mix of systems cobbled together to handle different functions that result in a completely disjointed process.

Instead, financial institutions should implement systems that handle both origination and risk management. As a result, they’re able to increase efficiencies and loan volume during economic booms but minimize the risk.

Additionally, modern technology appeals better to today’s workforce versus the old-fashioned systems of yesteryear. A global study by Penn Schoen Berland (PSB) of individuals working in a variety of different industries found that new technology is what today’s employees want most. And it goes beyond millennials.

2. Automation Critical

Second, automation is critical. Financial institutions must monitor risk continuously throughout the entire life of the loan on a daily, weekly, monthly, or even quarterly basis. The challenge is that doing so manually is impossible and completely impractical. Not only does it rack up additional costs for the institution, but it leads to inaccuracies.

Automating processes helps alleviates these headaches, while also effectively and efficiently monitoring for risk. Plus, institutions are no longer relying on staff to manually input data – they can focus on other areas of the business.

3. Solid Analytics

Finally, financial institutions must have solid data analytics in order to effectively manage risk. Unfortunately, the biggest hurdle for the majority of institutions when it comes to data analytics is consolidating data across the enterprise.

According to a Capgemini report, “60 percent of financial institutions in North America believe that big data analytics offers a significant competitive advantage and 90 percent think that successful big data initiatives will define the winners in the future.” However, more than 57 percent cited that there are too many silos, and therefore, data is not pooled for the benefit of the organization. That’s over half of respondents and the number one cited impediment to data success.

Financial institutions must gain a complete, holistic view of their portfolio. In turn, they’re able to make better decisions based on powerful insights and a data-driven strategy. Banks and credit unions are then able to detect problem loans before they become a problem – safeguarding them from future risk.

While there were many lessons learned from the last recession, the biggest lesson is to keep underwriting standards in check by balancing growth with risk. This can be easily achieved with modern technology, automation and analytics. And as a an added bonus, these areas can support employee retention.

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