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6 Strategies Banks Can Use to Grow Their Unsecured Personal Lending Business

Earnix Team

16. November 2023

  • Pricing

This article offers a closer look at the new opportunity the fast-growing unsecured personal lending market presents and how technology can help banks hit new growth goals. To learn more, download our complete guide today.

Many banks are now turning to the unsecured personal loans market as a new opportunity to grow their business. 

It is an attractive market. Overall demand for unsecured consumer loans has been growing high since the end of the pandemic. More consumers are showing more interest in personal loans since they offer lower interest rates than credit cards, deliver faster disbursements than traditional credit cards, and don’t require collateral. 

According to recent research from TransUnion’s Q1 2024 Credit Industry Insights Report*, the number of consumers with unsecured personal loans in Q1 of 2024 grew by 4.5% from the same period in 2023 and increased by almost ¼ since Q1 2021. The same report cites that unsecured personal loan balances ticked slightly upward, growing 9% YoY in Q1 2024. by the end of Q2 2023, the total account balances grew 21.1% year over year and reached a total of $232.4 billion. 

However, unsecured personal loan originations were down slightly YoY as lenders continued to use tight underwriting standards and focus on lower-risk borrowers to help decrease delinquencies.

By doing so, are lenders missing out on an opportunity? Today, Yet even as volume hits record levels, unsecured personal loans in the US only represent a tiny fraction of outstanding consumer debt as compared to mortgages, auto loans, and credit cards – making it an appealing potential growth area in the short term.

The overall trend represents an opportunity for financial institutions that haven’t done a lot of unsecured consumer lending besides credit cards. However, creating the right offers to capitalize on this emerging opportunity may not be as easy as it may seem, since banks face a number of challenges:

  • Increased competition, both from existing banks and financial services firms as well as aggressive FinTechs and niche-focused startups. 

  • Economic uncertainty and changing macroeconomic conditions could reduce consumers’ demand while also increasing lending risk. 

  • Delinquency rates – already standing steadily increasing and now standing at 3.756% – could continue to increase as banks market to lower credit tiers and accept more subprime and near-prime consumers. 

Unsecured consumer lending is a viable opportunity, but banks should be careful in how they proceed. Clearly, they need to focus on maximizing success (growth and profitability metrics) while also minimizing the risk that could come from making the wrong decisions. 

The good news? Technology can help them achieve all these goals and more. 

Six Strategies for Success in Unsecured Consumer Lending

Embracing modern technology can help banks develop better pricing offers and make more informed decisions. More specifically, AI-based pricing analytics and decisioning technology can help banks improve in six important areas. 

1. Improve risk management strategies:

As banks develop various growth strategies, they may be tempted to hit new targets by offering lower rates. Not only does this affect profitability metrics, but it also increases the risk of delinquency. 

A better approach: the use of AI-based risk-based pricing to accurately predict credit risk and other potential risk as the offer is developed to match your risk appetite. 

2. Take advantage of scenario simulation and predictive analytics:

One of these ways to improve modeling efforts (and results) is through the use of powerful predictive analytics. Using auditable AI, these advanced pricing and decisioning solutions enable lenders to run extremely detailed “what-if” simulations using competitor rates, consumer demand, elasticity, target conversion rates, retention, and other variables.  

Additionally, advanced analytics and simulations give lenders an important advantage to see how their strategies will perform before they’re actually deployed in the-market.

3. Optimize pricing:

Moving to agile, data-driven pricing strategies and tools enables banks to maximize loan volumes without affecting profitability. Advanced data analytics uses a wide variety of internal and external data to simulate and test many different pricing strategies prior to deployment to help pricing teams determine the ideal sweet spot for every customer group in their portfolio.

4. Accelerate the approval process:

Let’s face it: consumers now expect instant approval processes and faster disbursements of funds from unsecured loans. 

This means lenders need to embrace digital solutions to deliver offers the way customers prefer. Ideally, this should include digital applications, fast approvals, and instant delivery of loan funds. AI-based automation and decisioning capabilities can help improve internal workflows and then deliver pre-approved personalized loans based on data analysis and scenario simulation outcomes. 

5. Increase conversions:

Pricing automation, systemization, and smart decisioning capabilities powered by AI and machine learning allow lenders to put the most relevant, personalized offers in front of each applicant, leading to higher conversion rates and customer satisfaction. 

For example, one Earnix customer, a leading European bank, successfully used the Earnix pricing analytics and decisioning solution to achieve impressive results in its unsecured lending portfolio:

  • 9% growth in loan conversion rate

  • A 15% increase in the amount borrowed

  • A 17% increase in total revenue

6. Personalize pricing and product offers:

Consumers’ expectations are constantly changing when it comes to what they value in a relationship with their banking partner. Instead of attempting to guess what offers will be most appealing to prospects, lenders can now develop AI-driven models that result in very specific offers based on consumers’ actual data and history as well as the desired lender’s objective. 

By following these strategies – and embracing AI-based pricing analytics – banks can win more business and increase growth in the unsecured consumer lending market without losing sight of profitability. 

Interested in learning even more? Download our comprehensive guide, “Six Strategies to Help Grow Your Personal Lending Business,” today. 

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Earnix Team