It’s no secret that being first to market when investing in innovation can offer a competitive edge, but lenders must be prepared for the complications that come with investing in unproven technology. However, those that don’t lead the charge, risk being too late to the punch — so where is the balance?
The real risk for first-to-market lenders shows up in a “handful of blindspots,” said Daniel Parry, chief executive of Praxis Finance LLC. “First, thinking you are smarter than you actually are,” he said. “The data can help optimize solutions to problems, but it can’t tell you how dealers or consumers will change behavior in the future, in response to the tool.”
The other blindspots are spending more on the solution than on the benefit expected, and relying on data that is likely to change going forward, Parry added. For example, pre-recession, a lender may have had 4% of its auto loan consumers show up in payday lending databases — a form of alternative data. Post-recession, that rate climbed to 20%. As such, lenders that rely on decisioning models built on alternative data sources need to continually confirm that consumer borrowing habits don’t shift as the economy recovers — or risk employing skewed models.
There are many aspects of innovating that can “end up not going as planned,” said Ian Anderson, president of Westlake Financial Services. “If you are first to go down a path — and invest your time and resources, then it doesn’t work — it can end up hurting.”
Westlake is no stranger to innovation. The nonprime lender recently announced plans to invest in automated originations. “We are working on the system now, but we are a good three months away from really making a splash in the market,” he said. The automated originations will add to the company’s automated underwriting system by enabling the deals to be validated and funded electronically, which eliminates the need for human decisions.
Westlake attempts to be “as innovative as possible,” Anderson said, but the lender — in many aspects — falls in line as a fast follower. The problem with boosting technology investments is that lenders need to weigh the risks and research constraints before proceeding to innovate in a given area, he said, and Westlake has taken plenty of risks over the years. For example, Westlake inked deals with both online dealership Car Harmony and Uber last year. While its partnership with Car Harmony is progressing well, Westlake’s Uber deal has begun to phase out in recent weeks as a result of a volume slowdown caused by the launch of Uber’s own leasing company.
There will be risks involved when a lender invests in innovation, but “I would rather take risks than not try anything, otherwise your competition ends up outpacing you,” Anderson added.