Under Inflationary Pressure: Reshaping Strategy

0:02 You are listening to Leaders in lending from Upstart, a podcast dedicated to helping consumer lenders grow their programs and improve their product offerings. Each week, here, decision makers in the finance industry offer insights into the future of the lending industry, best practices around digital transformation, and more. Let's get into the show. Hi, We're here live from CBA and Washington, DC, and I have Matt Herna here to join us on the podcast and talk about the inflationary pressures and market volatility that are impacting banks today. Thanks for joining us on the podcast today, Matt, sure thing, I'm glad to be here. Thanks for having me great. Well, could you introduce yourself a little bit, talk about your background and kind of what you're doing and in the banking industry right now. Sure? Absolutely so. I'm with Regent's Bank, have been there about eleven years. I have a team that sits within the consumer Product team. Within the first line. We collaborate with the consumer bank on product design, launch, any of the credit risk related items. We work with our second line partners on things like refining credit policy, understanding impacts that may come from capital changes, and things like that, as well as understanding when we watch a new product, loss expectations, pricing and things like that. Great, great, Well, I know you presented on a panel yesterday talking about similar topics, and we'd love to hear let our listeners kind

1:37 of hear some of your thoughts that you shared with it with the group here at the conference. So, just as you think about kind of inflationary market pressures, market volatility impacting our banks today, what are some of the key challenges facing lenders, but especially in the banking industry. So I'll touch on three things. One of the most obvious ones is that with the rates of the level, loan demand has continued to be dampened. There really isn't interesting. It was an interesting phenomenon though in twenty twenty two. It's really the first year where we began to see home equity production increase. Now rates have continued to accelerate since that point, so we've seen that slow quite a bit as well. But I think that's an interesting point that kind of proves out the concept that when customers have their first mortgage locked in at such low rates, they really just need to see record equity levels, which we've seen today.

2:31 And then a slight margin above mortgage rates to choose equity. So that's really one interesting thing, although it's since declined again. Credit Card is another area that's interesting, though transactors aren't as rate sensitive, so we continue to see robust card demand. Aside from that, loan demand remains pretty dampened across the board. Really related to that as we think about funding costs capital deployment, so as rates continue to increase, that means that the marginal cost of funding those lines is also increased, So we have to remain prudent about where we're deploying that capital and making sure that it's profitable, that it's sound in this economic environment with a lot of uncertainty. And then since my background is credit, I have to throw in as well the credit impact. You can look out in the industry and see we know a lot of stimulus from government and that other areas hit a lot of consumers in twenty twenty, and we've been waiting on a lot of this stimulus to normalize. We're now at a point where we're seeing subprime performance to curate pretty rapidly. Luckily we don't play in that space, but you can certainly see those excess liquidity levels normalizing in the impact credit fufilio, So that's really a key emerging risk everyone should keep their eye. Yeah, I think we've seen that and it's been, you know, kind of interesting that the stimulus seemed relatively modest but was really impactful

4:04 to a group of people in the country. I think the interest of helock versus first mortgages, you know, with how rates have changed over the past few years, what are your thoughts with what are people doing with the helock money? Like, are they improving their home because they don't want to move because they'd be moving and taking out a mortgage at a higher rate. Are they using it to consolidate debt? Like do you have any insights in that? And what is kind of driving that that helock increase that you saw. Yeah, I think that's a great question. It's something I think the industry has been asking as a whole. What is the primary use of the helock and how do we get better customer engagement to drive growth Because we have a recipe for growth, we have re equity levels, we know it's available.

4:49 To your point, home improvement would be an ideal area, but in general, we know customers are using it for all of those we know that is in this right environment, customers walked into their home, they don't want to give up their low interest rate, and that provides an excellent vehicle for them to fund things like home improvement. We know a lot of customers use it as a potential Randy Day fund as well, so they're just holding it out there to have that access to liquidity as they need it and have pretty low utilization. And then also to your point, debt consolidation, so running up the credit cards and then want to pay them off and which we've certainly seen before and sometimes ends well and sometimes doesn't so well. Helocks can have features too, like locking it into a termline, which can provide for unique features for debt consolidation. Sure. Sure, So you know with all the kind of ongoing economic and certainty and banks and people kind of in your role and related roles have to make decisions about strategies and product going forward, Like how do you see the current and economic uncertainty of what not really knowing what's next impacting how decision makers banks are planning what twenty twenty four and beyond looks like, yeah, certainly an interesting question. Well, the first thing is to all the banks have risk frameworks in place for this exact reason, so we can think about our appetite overall, how we can deploy the frameworks, what

6:24 kind of emerging risks we're monitoring to ensure that we're capturing those risks, We're factoring that into decisions like capital deployment is in asking questions like, given this uncertainty, is now the right time to lean into certain possibly let's say non core products, Probably not, and focusing more on primacy and relationship. Okay, so kind of retaining the existing customers and expanding that chair of wallet and that relationship with those customers versus maybe a net new unknown customers that're out there. That's right. I think we're in an environment where expanding prospecting, especially in let's say ID secured loan space, the personal line space, it's probably going to be a more volatile time for that. If you're already talking about optimizing capital and higher funding costs, I think that just leads you back to the core of privacy, relationship deepening, and focusing on those core products in the profitable way. I'm going to kind of throw in a new new question here that came up as I was thinking about it, what do you see with the There's been a lot of talk as certainly with you know, kind of an aftereffective stimulus and the student loan moratorium, repayment moratorium and of course the student loans of entered repayment now, but there's really no consequences for people who don't pay because they're still protected by being reported delinquent and additional collection activities, I think, and through later this year. Is that something that's kind of on your mind or you you know, how would you kind of advise

7:58 banks to think about that who do play in the consumer space, even with helox or things that could be impacted by someone suddenly having a large monthly payment come due that they may not be making now, which we know a lot of people are not. Yeah, that's the big unknown right now. Because we were sitting before October when the repayment began, thinking through what those impacts might be. I would say I thought it would be a much bigger impact than we've seen. So that could be to your point that there's a one year on ramp period, but it's just something we'll have to monitor closely. I think given the demographics of that population, you would certainly expect to see some uptick in unsecured loan demand, possibly some different credit card behavior. I would suggest monitoring any unsecured lines of credit to see what where are those customers that have student loans, whether they have them through you, through the government, or wherever, and then monitor their performance to see what the impacts are, and also looking at their deposit levels to see how stress they are.

9:01 But as of right now, we've seen pretty minimal impaths and I know, certainly something we talk a lot about well, both at our company and with partners, and I think we've all seen a lot less impact to it then maybe anticipated, and maybe that's good and maybe we just will wait it out a little. So, you know, what do you see as some you know, tactics that banks can use as they think about navigating the current market, Like what are some of the tools in the toolkit to deal with inflation, market volatility, deposit levels? Being well right now? Well, I think the first thing is to make sure you have a recession playbook. So this is hopefully an exercise you don't have to deploy, but at least making sure you have all the players thinking through and talking through those possible scenarios and documenting what is possible or for deployment your toolkit, and so that would involve talking through balance sheet pressures, credit pressures, When is the right time to deploy certain account management features one is the right time to pull out of certain areas or lean in potentially. So I think that's the first thing, having those conversations firm wide, getting the right risk players in so that whenever the next next thing does move, we have that on the shelf. All those conversations have occurred, we've had the right committity, approvals and governance, and they can be deployed as opposed to scrambling. Sure sure, so kind of stress testing like where are risks? What do we see is scenarios that could happen and making sure that you know what to do in various scenarios so you

10:33 can trigger it versus figuring it out when you're already in that stress scenario. Yeah, that's right, And I think a good example of that would be just picking on one would be when would you deploy something like a credit limit decrease or the reverse of that, When would you be comfortable changing your strategy around credit limit increase? Sure, Hey there, former host Jeff Kelviner here to let you know about an exciting opportunity to strengthen your understanding of artificial diligence and financial services. If you want to better understand the fundamentals of how AI models work and how they will impact the financial services industry, your in luck. Upstart is launched an online course and certification designed to do just that.

11:13 This course will give you the knowledge you need to leave the conversation about how your organization can best leverage and manage this revolutionary technology. If that sounds interesting, check out the course as it's currently free for a limited time. You can learn more at upstart dot com slash AI Certification. Again, that's Upstart dot Com slash AI Certification. Thanks and now back to the show. So, you know, I think we there's certainly kind of the risk side of thinking about like how to worry about in different areas and different impacts of market volatility or inflation stressing consumers or even even companies that are that are buying consumer goods or things for their their company. But I think there's certainly an opportunity for banks to think about kind of adapting and evolving. So what is next, Like not just a defensive but opportunistic what can they do? How important do you think it is for banks to be I think if you had to kind of compare contrasts, like being defensive and protecting what they do today or really kind of adapting and evolving new long term strategies to plan for what's next, I think banks should be doing both. So obviously, adapting for this economic environment, you want to be defensive and protect the core focus on primacy, you know, protect the balance, et cetera. But to your point, consumers are demanding new ways to interact with the bank, and so we have to be doing both. We have to think about convenience for the customer.

12:41 We know online and digital is a pretty big component to that. The branch network is still vital turks success, but we know that customers want that digital experience. And I think the other thing I've hit on a couple of times now is what doesn't change the customer focus focus on primacy no matter how you interact with customers. I think that's key as well. Yeah, it's really been interesting. I think seeing there's you know, it seems like the smaller, kind of more community banks have kept maybe kept their branch footprint. Some of the middle ones, middle sized banks regionals have reduced their branch footprint. And then when you see the largest banks actually increasing that branch footprint, which I think is super interesting to watch as the move to digital move to digital, but the branches still still hold a place, and I think it's that in deepening that customer relationship and providing that place for people to get advice because they do sometimes need in person advisor, need ways to transact. So what do you think you know when you think about adapting and kind of growing for the future, maybe adding new asset classes or adding new features for consumers, or internally, what role do you see the really technology providers fintech partnerships playing and really helping banks both mitigate risk but then also going to capitalize on new opportunities in the market. I think there's really two roles that they play.

14:07 The first is probably the most obvious, thinking about capabilities that banks don't currently have or that may cost too much, may not have the economies of scale to deploy. So when you think about online origination channels, enhancing the application process and making it more efficient for the customer experience. So there's a lot of FinTechs out there that banks can partner with today to help alleviate some of the pain points in that process. So that's one. The other, as we begin to think through, would be you mentioned different asset classes, So are there certain asset classes that banks haven't traditionally played in that they would like some experience and they would like to ensure that they have those guardrails up with someone who's more experienced. So we think it regions as an example.

14:56 A couple of years ago, we partnered with so Far and also with GreenSky to play into some new asset classes to understand what that credit performance was like. Sure, yeah, and it's definitely I think a challenge, particularly for a bank that may not have a new asset class like that's a big risk to take career wise, even for the people who are kind of promoting that and being the champion internally. And I think getting it through the kind of new business initiatives committee or whatever that that process looks, particularly the larger banks can be can be daunting. Do you have any I guess kind of words of wisdom, wores of caution for a bank that may be entering a new asset class or considering it, Like, what are some of the things to look out for some of the maybe pitfalls you've seen banks make in choosing those partnerships. I think one of the first first, that's a really good point.

15:48 I think back to comparing the business models, so in most cases you'd need to check to make sure that that aligns with your own business strategy, comparing how different their credit policy might be from yours. I'll give you a really good example of that. One of the areas where we learned quite a bit was in our so fire relationship. So far is well known to use a lot of machine learning, and at the time that was an area that was relatively new for us, and so that's something we had to get comfortable with to understand the impacts and bring through their appropriate governance channels. Yeah, and I definitely think that being visibility understanding of maybe model construction, model risk management, it can and it can be a challenge because the transparency of what you have access to with different partners may be different. But I did like what you said about, you know, thinking about maybe complimentary things that if the bank doesn't have that core competency internally, how do you partner to bring it in versus versus hiring to bring it in, which can happen but can be very expensive. So I think that you know. The last question I had for you today is a little bit off topic, but kind of a hot take question. So I noticed that you worked in politics before you became a banker, So, uh, which one is more volatile as a space to be in banking or the political arena? Definitely the political arena. Yeah, yeah, do you uh? Do do you uh? Did you enjoy

17:21 working in politics or or was it a short term thing that then you became a banker after and didn't look back. So that was right after college. I've always been interested in data and analytics, and I found a niche that I could work in there to help support some of the legislative items and and really do a research and analytics role. But I don't think most people would be surprised. Politics is relatively toxic environment. So there's a reason I'm a banker now. I haven't really looked back. Yeah, great, well, good well, thank you, thank you for joining us today. It's definitely been interesting to hear your take on the market. And I think there's no shortage of interesting things happening right now, both in the industry and with the regulators, so there all of them are keeping us, keeping us busy.

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