Reimagining Lending for the Next Generation using AI

Author: Prateek Samantaray


A recent survey of borrowers across the USA revealed that only 47% of Gen Z respondents (age 15-24) in the USA claimed to have an account with a traditional bank, neo bank, or credit union.


The above statistic highlights the generational differences in banking habits and expectations between banks and credit unions. In the next decade, Gen Z and millennials will become the most influential consumer groups, so lenders must cater to their expectations regarding personalized recommendations, instant decisioning speed, and ease of application.


Lenders who understand the lending landscape better and go beyond usual data sources and lending models to gain a deeper understanding of their borrowers can grow sustainably. Artificial Intelligence is increasingly being used to live up to modern borrower expectations. AI strives to leverage and consolidate multiple sources of seemingly unstructured data into actionable credit decisions. This enables lenders to lend to more deserving borrowers and personalize offers to meet modern-day expectations.


Changing Demographics, Changing Expectations:

As the world of finance evolves into the 21st century, banks, credit unions, and fintech companies are building sustainable solutions to reach as many customers as possible. However, challenges such as the downturn effects of the pandemic, recurring political instability, aging demographics, wealth transfers, and constant technological innovations complicate the task for financial institutions (FIs) and fintechs to connect with and serve their customers better.


Moreover, there is bound to be a shift in generational borrowing habits and expectations as the wealth transfer from baby boomers and GenX to younger millennials and GenZ becomes a reality.


Kirk Drake, Founder, CU 2.0, quips “From an approachability perspective, what worked for baby boomers and older millennials won’t work for Gen Z and younger millennials. Being in the middle of what can be termed history’s largest wealth transfer from Baby boomers and Gen X to Gen Z and younger millennials, the preferences of customers/members will witness a sea of change. Gen Z wants to be a part of the experience, and they want to be educated about otherwise transactional processes. As such, they want lending and banking to be transparent.” At the same time, the newer generation has been known to have had access to what they need at the touch of a button. As such, along with transparency, seamless and fast digital access top their priorities when it comes to banking and lending expectations.


But there is a twist in the tale. According to Michael Barnhardt Jr, Chief Lending Officer at Meridian Trust Federal Credit Union, “Most Gen Z and younger millennials indeed grew up in the digital space, with an Amazon or Apple-like seamless digital experience for almost every need. While digital adoption is critical, credit unions and other lenders can’t miss out on the experience in a quest for going digital. Taking a suboptimal process and making it digital just doesn't cut it. For the modern borrower and the future borrower, a seamless lending experience is not just limited to a fast process. It extends to understanding the member better, and making the process as fast and easy as possible, with minimal touchpoints.”


Jack Imes, Chief Consumer Lending Consultant at Allied Solutions, adds, “ When you think about it, the expectations of the future generation of borrowers can be summed up in 4 terms: Fast, Personalized, Convenient, and taking into account Anticipated Needs.


The Challenges of Lending to Gen Z

Gen Z and younger millennials have had a lack of trust on some level when it comes to financial institutions. Furthermore, there is a rooted belief among future borrowers that current processes aren’t aligned with their expectations and needs, and are more suited to Baby Boomers and Gen X. Financial institutions will have to dispel these beliefs by strengthening their processes and taking Gen Z’s considerations into account.


Kirk Drake says, “ Gen Z’s expectations are simple: If a credit union or bank claims something about their processes, they should be completely true to their claim. If there’s a mismatch between claim and expectations, they won’t play ball. Gen Z is trained to experience high responsiveness in all walks of life, and they carry these expectations to lending and banking processes as well.”


In this scenario, both Imes and Barnhardt Jr argue that credit unions stand to benefit a lot, contrary to expectations. “Credit unions have increasingly started using disruptive technology to understand their members better than they already do. Once these AI models are in place, credit unions are perfect for making these journeys customized, and try to bring in the HENRY segment (High Earning, Not Rich Yet), and the underserved thin file younger population into their fold.” But how are credit unions well placed to take advantage of the Gen Z opportunity? Barnhardt quips in, “ Gen Zs and young millennials have been using neobanks on a large scale. But the reality is that they are using neobanks, not preferring neobanks. Gen Z abandons transactions much faster than boomers if they find resistance in any of the processes, and this is where credit unions can capitalize. Credit unions have the benefit of knowing their members’ transactional habits much better than their counterparts, and they can capitalize this knowledge to make processes personalized, fast, and intuitive for the next generation of borrowers”


How is AI changing the playing field?


AI-enabled tools have found favor among financial institutions in recent times. AI-enabled lending helps credit unions to develop patterns, and identify and consolidate member needs. AI not only helps to make more individualized and personalized decisions but also does it in <5 seconds. With a lending model that self-learns over time, and is consistent, explainable, and objective, the lender gets an added advantage of having a true and complete picture of risk.


Kirk Drake believes that the major challenge that AI will solve is that of immediacy. “Immediacy is essential to the younger generation because they tend to drop out of processes faster. AI-backed automated approval systems being brought down will help in the straight-through processing of a greater number of loans. The key result for credit is not only will it cater to Gen Z needs, but will also give credit unions time and bandwidth to focus on newer initiatives. Time is of the essence, and AI will help streamline processes and bring down approval time. A ‘fast no’ may be better than a ‘slow yes’ when it comes to Gen Z.”


Barnhardt Jr. believes that reorienting the human touch to where it is needed is where AI can make a visible impact. “With difficult economic times on the horizon, and impending recessionary trends, one of the harder problems to address is that of human capital, and AI goes a long way in solving this challenge for lenders. By allowing for easier assessment of a majority of applications, AI helps save the underwriter’s time, focus, and energy in connecting with members with unique stories, and give the human touch where it is required.”


He adds, “And AI-led lending models which leverage diverse sources of alternate data are especially important when it comes to including Gen Z in your credit fold. For younger borrowers, the lack of credit history poses a major challenge in securing credit at mainstream rates. But with the advent of AI and alternate data-based lending models, lenders transition from considering Credit History to having a look at Credibility History. If we think of non-credit attributes, we think of credibility. Gen Z does have a history, it’s just not traditional history. And this is where AI models are stepping in, helping identify and pinpoint responsible and stable financial behavior. This is especially useful because a lot of Gen Z and young millennials are freelancers, or part of the gig workforce, with a fluctuating paycheck. Due to this, identifying financially responsible behavior for credit risk assessment becomes critical for this population”


For Imes, the most encouraging aspect of AI is its dynamicity and adaptability. “The most exciting thing about AI, it’s changing in the half hour we discuss AI. With data getting more and more accessible, trustworthy, and predictive models married with alternate data, lenders will be able to strike a chord with Gen Z.”


Beyond Lending: AI for a seamless banking experience

AI has spread its wings in the last decade, finding multiple use cases in the world of banking, and not just limiting itself to conversational AI for customer support. AI is being extensively used to streamline the onboarding process for new customers and members. The ability to onboard new customers at low risk with limited information asked of the customer is what makes AI the go-to solution when it comes to onboarding. AI-enabled tools are also seeing increasing traction in fraud prevention. Kirk Drake reports a unique use case for AI in banking,” There’s been a recent emergence of solutions that can be termed as lifestyle AI, which automate your banking, saving, and credit habits based on your preferences, and deliver financial wellness on a much better, quantifiable scale”.



In Conclusion


Gen Z, Millennials, and Baby Boomers each show some differences in their perspectives and preferences, however, many of their expectations or experiences overlap, highlighting the intersectional needs and desires that most consumers share. And AI is in a unique position to meet these intersectional needs and desires. Among the many areas to explore, credit unions and other lenders may benefit from investing in disruptive solutions that help them understand their members better, and offer hyper-personalized offerings that consolidate their customers' trust. The greatest opportunity for banks and credit unions to capitalize on is the level of trust they’ve already established with their customers. And AI could change the game here, providing even more opportunities to secure trust, offering competitive and valuable services and products, and keeping the human touch even as interactions move into digital channels. AI is bound to be the future, and it’s not a question of if, but when lenders are going to integrate AI into their lending and banking processes to meet the expectations of the borrower of the future.



You can watch our complete webinar on Reimagining lending for Gen Z and younger Millennials using AI here.


Watch the recording of this webinar here.



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