FinanceMay 08, 2024

Monetizing loan portfolios in a challenging environment

The financial services industry has been rocked by numerous challenges over the past couple of years, perhaps none more significant than the shocking decline in the number of deposits U.S. consumers are making. From Q1 2022 through Q2 2023, U.S. bank deposits plunged nearly $1 trillion—the longest sustained decline in more than 30 years. Things haven’t gotten much better in the months since then, as five of nine major U.S. banks reported quarter-over-quarter decreases in deposits in Q4 2023, according to S&P Global Market Intelligence.

The failure of Silicon Valley Bank and others played a role, as fear of bank failures made investors skittish about depositing large sums of money. However, other factors also appear to be contributing to deposit declines. There is also increased competition from non-traditional financial institutions (FIs), including FinTechs who are providing savings account like products with much higher rates of return.

Remaining resilient in this type of environment can be very challenging for banks. This will require increased flexibility and an ‘all-of-the-above’ approach to cash flow management strategies that increase liquidity.

FIs must find new ways to mitigate risk and maximize the flexibility of their liquidity strategies.

Increasing liquidity through loan digitization

A good way to optimize sales of loans and increase liquidity is by originating those loans as digital assets, or eLoans. Banks are increasingly digitizing their loan products, including mortgages, auto loans, and so forth. Nearly three-quarters of FIs now use digital channels to serve both new and existing clients.

There are many reasons digital lending has become the norm in the banking industry. eLoans make it easier for both FIs and customers to execute agreements and provide a better overall customer experience. Digitizing the loan process also helps to expedite document creation while minimizing the chances of human error. Indeed, when a loan is digitized, the entire loan process—from creation to closing, from collateralization to securitization—becomes much more efficient and less risky for both banks and consumers.

Advantages of eLoans and digital collateral

Checkmark_Green Digital process efficiencies
Checkmark_Green Better borrower experiences
Checkmark_Green Monetization of loans in the secondary market
Checkmark_Green A new asset class for new cash flows
Checkmark_Green Competitive advantage over less agile rivals

Digitizing the loan process also makes it easier for FIs to sell their eLoan assets into the secondary market as asset-backed securities (ABS). FIs can create eNotes—a digitized form of a promissory note. In addition to indicating asset ownership, eNotes can include a tamper-proof digital asset chain of custody that offers a high level of assurance to potential buyers. Meanwhile, eVaults ensure that all eLoans are authentic, original, secure, and easily transferable.

In short, eLoans allow for faster securitization, greater transparency, and, most importantly, increased liquidity. FIs can quickly package their ABS and sell them into the secondary market in a highly efficient manner. In fact, digitizing the lending process has in some cases reduced the time from loan closing to secondary market sales from several weeks to only a couple of days.

eLoans allow for faster securitization, greater transparency, and, most importantly, increased liquidity.

Expediting cash flow, lessening the impact of lower deposit volumes

The right technology can help FIs digitize their entire lending process, enabling faster access to cash flow via sales into the secondary market. They can, in turn, gain additional agility to fund critical financial risk mitigation activities that can help lessen the impact of lower lending and deposit volumes.

One such technology, the eOriginal® eAsset Management platform, digitizes the creation, closing, storage, and assignation of eLoans and assures that the loans are compliant with all industry standards. The platform also allows FIs to monitor and analyze the performance of their loan products as well as potential risks to those products.

The eOriginal eVault is a key platform component and is part of the management phase of the loan process. The eVault holds authoritative and original copies of each eLoan and ensures eLoans are stored securely as transferable records. The eVault allows FIs to supply immutable records of each of their eLoans—a critical factor that lets them pledge, securitize, or sell their assets.

Unlocking capital in a challenging environment

With interest rates expected to remain elevated for the majority of 2024, loan growth and deposit volume are anticipated to be moderate, at best. Simultaneously, there are real concerns that loan defaults, which have risen steadily over the past couple of years, will continue to accelerate as consumers find it difficult to pay back high-interest debts.

However, continuing to grow revenue in such a challenging environment is highly achievable. The trick is to unlock as much capital as possible, as quickly as possible. Loan digitization is the key that can help FIs increase their liquidity, even in the face of persistent market headwinds.

Ready to unlock your cash flow?

Contact Wolters Kluwer now to schedule a consultation with an expert.

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