An excerpt from the whitepaper
Fintechs, who have been this decade’s primary instigators of lending innovation, might seem poised to be the primary and perennial beneficiaries of continued technological progress. But things aren’t so straightforward. Many of today’s fintechs are falling into the same trap established lenders did long ago: They’re launching modern lending programs on rigid infrastructure designed for the present, not the future. We’ve seen the repercussions of this choice over the past decade, as established lenders hobbled by rigid infrastructure ceded market share to fintechs, who have gobbled up about half of all personal loan originations.
It’s become expected for lending cores to bake in assumptions about loan configurations, ancillary software systems and regulatory requirements—these assumptions make cores cheaper and faster to build. But when markets shift and novel lending constructs emerge, established lenders find themselves handcuffed to outdated infrastructure, sometimes requiring years of retrofitting just to launch new lending programs.
To compound the problem, the rate of change in lending—as in all of technology—is accelerating. And so it will take even less time for today’s modern-yet-rigid lenders to be eclipsed by the next crop of nimble upstarts with newer and better ideas. Rigid lenders will once again lose market share in the struggle to keep pace with a rapidly changing landscape.
But lenders have control over their fate, and can prioritize investments in adaptive infrastructure that enables them to 1) continually test and iterate, even at scale; and 2) continually launch new lending programs with speed and flexibility. For those lenders who fail to make these investments, there will be five major headwinds as lending innovation and market evolution continue their forward march.
Risk #1: Competitive innovation
Technology has lowered the barrier to entry in financial services, spurring a profusion of venture-backed startups with nothing to lose and everything to gain. Some of them have succeeded in disrupting existing paradigms and seizing market share from established lenders—one recent example being BNPL. While such innovations are net positives for borrowers, they can exact a heavy toll on existing lenders who can muster only a sluggish response to novel competitive threats.
However, existing lenders with established brands and loyal customer bases hold some important advantages against first-movers. They must complement these advantages with the agility to reconfigure loan behavior and to rapidly launch new products in a wide range of asset classes, including innovative constructs. While no one can perfectly predict the next disruptive trend, with North American fintechs alone having raised $80.8B in 2021 it’s certain that BNPL will not be the last novel construct to sap market share from slower incumbents.
Risk #2: Your evolving tech stack
If there’s one thing that’s certain about the array of software systems and vendors your lending programs depend upon, it’s that what’s ideal now won’t be ideal in a few years. And this is part of the rub with rigid lending cores—when they ossify, so does your tech stack. This means you can be stuck with the same array of vendors long after they’ve outgrown their usefulness to you. The abundance of newer vendors adding value for lenders—from card issuance to fraud prevention to financial data—illustrate one of the opportunity costs of a rigid tech stack.
Instead, seek a core with modular architecture that supports your ability to switch vendors and add new ones over time, and to make other crucial updates to your software infrastructure. In this way, you won’t be handcuffed by vendors you don’t want.
Risk #3: Market disruptions
Recessions, natural disasters, conflicts and pandemics are just a few of the market disruptions we may face in coming years. If 2020 taught us anything, it’s that everything can change overnight. During the COVID-19 pandemic, lenders were forced to enable remote servicing—quickly transitioning call center workforces away from an office environment. Lenders also had to find a way to offer repayment flexibility to borrowers facing hardship on a scale and in ways that were...
lender’s priority list. But that doesn’t mean compliance is straightforward, even for lenders with the most earnest intentions. Often, legacy infrastructure is the culprit, making it difficult for lenders to take the actions clearly outlined in the law. Even regulations that haven’t changed for some time—like the—still present significant challenges for many lenders.
The SCRA grants active-duty service members the ability to request certain protections during the period of their deployment, enabling them to devote their energy to serving the country. These protections include a reduction in interest rate to a maximum of six percent on any pre-service loans. While the SCRA in its current version has been law since 2003, the number of recent enforcement actions indicates just how difficult it is for many lenders to comply with the SCRA’s interest rate protections.
Blunt tools in the absence of a scalpel
For example, in October of 2022 the Department of Justice (DOJ) announced that the financial leasing arm of GM agreed to pay over $3.5 million to resolve allegations in relation to
Peach’s approach to SCRA
At Peach, we brought real-life lending experience to the design of our platform. So from day one, we recognized the importance of being able to make retroactive changes to loans. (There are numerous applications beyond SCRA, including our Supported Portfolio Migration.) In the case of SCRA, Peach has long enabled lenders to retroactively change interest rates and waive past fees—as separate, manual actions.
Peach’s approach to SCRA
This was functional, but the ideal way to implement SCRA is to make these changes simultaneously. We now support this capability by leveraging the power of Peach's Loan Replay™ engine, which can make changes to the ledger at any time, and then recalculate a loan’s history in light of those changes. The new combined functionality is as user-friendly for your agents as processing a payment.
Peach’s approach to SCRA
Specifically, the new SCRA feature allows your agents to perform the following adjustments simultaneously on a loan of an active-duty service member:
- Lower interest rates to 6% (and lower the recurring payment during the active-duty period to account for the interest rate reduction)
- Waive fees, if necessary
- Enact these changes retroactively, if necessary, and replay the loan history with the rate and fee adjustments
- Preview the intended changes
“We launched our first product on Peach in six weeks. Eighteen months later.”
John Smith, CMO
Our SCRA functionality is available via API as well as through our white-label agent tool. The white-label agent interface can be seen here:
Peach’s approach to SCRA
Our SCRA functionality is available via API as well as through our white-label agent tool. The white-label agent interface can be seen here:
For those working directly with the API, this can be as simple as sending the following request body to the SCRA endpoint:
You’ll receive a response with either the actual post-SCRA adjusted payment plan or a preview of it. Below is a comparison of a payment plan prior to the SCRA adjustment, and the expected payments after the SCRA adjustment. The SCRA period is in effect for the first two months, and thus you will see the interest rates lowered to 6% in the response body (and the recurring amount due lowered by the amount of the interest rate reduction for the two relevant months). The origination fee has also been canceled.
The breadth of loan data needing to be adjusted means that rewriting loan histories requires the right design and abstractions, and having a built-in layer of abstraction to handle retroactive changes is the only feasible approach. Because of our team’s combined experience in the real world of lending, we know that the need to edit past loan events is inevitable. So we’ve designed a system that makes these changes as painless and automated as possible.
