Speaking to Mortgage Business, the co-founder and CEO of Volt Bank, Steve Weston, outlined that the coronavirus pandemic and its associated economic crisis will change how loans are written and assessed.
Mr Weston noted that the majority of banks make decisions that are “data-based”, but given the uncertainty caused by the COVID-19-induced economic downturn – including rising unemployment – mainstream lenders will need to learn new skills in order to assess risk.
He explained: “Most banks make decisions that are data-based, but when you have times of economic dislocation, making purely data-based decisions may not always be appropriate.
“Take non-banks, for example. That sector has traditionally been comprised of lenders providing non-conforming, near-prime and subprime lending, and they look more specifically at a borrower’s circumstances in a more tailored way, particularly where they’ve been in hardship where they’ve missed payments. That is because they need to understand that borrower’s credit risk and determine whether they only defaulted because of some sort of life event that’s unlikely to reoccur, or because they were lacking in discipline. That is not a skill set that banks have, typically it’s non-banks.”
Given the increasing number of delinquencies in non-conforming loans – and some analysts expecting that a “large forecast increase” in the unemployment rate would likely trigger an ongoing deterioration in credit quality over the next 12 months, Mr Weston added that mainstream lenders will need to emulate the credit decisioning methods of their non-bank counterparts.
“So, banks are going to have to develop that sort of skill for the post-corona period to determine who is likely to pay and who’s not.
“We can all look at a tax return and income and work out serviceability requirements, but it’s that willingness of someone to paint a character piece that we’re going to need. Banks will need to look a bit harder than what a quick data algorithm can provide – no matter how smart it is. So that’s going to be an interesting change, and I don’t think banks are thinking about it at the moment, but we will have to in the months to come.”
COVID-19 could make customers more accustomed to digital lenders
As well as changing the way banks assess risk and serviceability, Mr Weston added that the pandemic has also helped further the cause for digital mortgages and digital banking.
Echoing sentiments made by major bank CEOs last month regarding how the rapid move to support digital mortgages amid COVID-19 “will have a dramatic effect” on how people will transact on mortgages in future, Mr Weston said it was a boon for neobanks such as Volt.
“The mother of invention is necessity. We’re seeing that right now in mortgages; things like brokers not needing to interview the customers face-to-face. Hallelujah! We’ve finally come into the 20th century – and we’re in the 21st! So, there will be some benefits coming out of this situation.
“The other part that I think that’d be very helpful for neobanks like us is that customers that may not have considered using a digital bank previously, such as the older demographic, they are now living their lives at home on technology and they’re not necessarily able to use branches at the moment,” Mr Weston said.
“So, this – coupled with things like open banking and these older generations becoming more familiar with banking online or via smartphone – I think that’s going to provide a greater proportion of customers who would consider banking with a digital bank than would have been if corona [had not] happened.
“We now need to make sure we’re best positioned to take advantage of the post-corona market. And that means positioning ourselves well between now and when the time is right to start lending,” the Volt Bank CEO added.
The fintech lender – which became the first organisation to be granted a restricted ADI licence in 2018 before gaining its full licence last year – has revealed that the coronavirus pandemic (COVID-19) and its associated market disruption has led the bank to delay the launch of lending products, which were scheduled to be released from the “middle of this year”.
Speaking to our sister title, The Adviser, earlier this week, Mr Weston revealed that Volt Bank is delaying the launch of its loan products to ensure its foray into lending is done “in a very prudent way”, but it expects to launch its mortgage offering to the broker channel by the end of the year.
As well as delaying the launch, the neobank also outlined that it intends to make mortgages, rather than personal loans, its first credit product on market.
According to the mortgage veteran – who has previously held roles as GM of NAB’s broker platforms and CEO of mortgages at Barclays UK – Volt is in “no rush to start lending” but will “wait until the time is right”, potentially by the end of this calendar year.
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Annie Kane is the editor of The Adviser and Mortgage Business.
As well as writing about the Australian broking industry, the mortgage market, financial regulation, fintechs and the wider lending landscape – Annie is also the host of the Elite Broker and In Focus podcasts and The Adviser Live webcasts.