Untapped markets: doing well by doing good
Having a successful ESG (environmental, social and governance) strategy is about embedding goals into your core business – whether it’s reducing your carbon footprint, increasing inclusion, or empowering new communities.
There are significant untapped markets and potential that underpin the need for an ESG strategy, as shown in 2021 when the sustainable finance market grew to reach $1.6 trillion globallyi. That’s where technology comes in – by enabling financial institutions to provide innovative services at a much lower cost base and reach new markets.
I was a guest on the Lykken on Lending podcast and discussed with David Lykken in depth about this topic. Listen to the podcast here.
The rise of sustainable finance
While sustainability-linked lending has been around for several years, it’s now coming to the forefront as a means to combat our society’s impact on the environment, using technology to scale. From 2012 to 2018, $18 trillion moved into “ESG”-related fundsii, where the underlying component parts of those funds is equity from businesses with transparent, measurable and proven positive impact on the environment.
The heightened demand for ESG-related funds in the financial markets is mirrored in the demand for ESG-related finance and there is a movement from financial institutions to scale the volume of these loans, and to do so more efficiently.
Sustainable lending and ESG-linked loans are issued at lower rates, making them more affordable to the end-user, thus create new market opportunities to extend capital. This lower cost lending model for borrowers can be particularly interesting to financial institutions, because they have potential to explore un-tapped lending opportunities for traditionally underserved communities at the same time as developing sustainable lending practices.
Next generation mortgages for the new generation of people
Alongside the rise in importance of sustainable finance, lenders are also having to adapt to changing buyer behaviours. Today, with a diverse customer base comprising Gen Z, Gen X, Millennials and Baby Boomers, purpose-driven capabilities and frictionless digital experiences are more important than ever before. And so institutions need to be able to support anywhere, anytime transactions.
In the US, 63% of all mortgages are now originated by fintechs rather than banksiii, reflecting the ever-increasing demand for seamless, fast and digital experiences – a servicing model which is particularly demanded by digital-native consumers.
It’s not only the demand from digital-first generations that is driving technological change in the market, but historically underserved communities also represent a real opportunity for social impact and a market opportunity for financial institutions.
Mortgage lenders have the opportunity – but also the challenge – of becoming a one-stop shop for consumers throughout every part of the mortgage journey – from application, through to servicing, refinancing and all the microtransactions that make up the entire process. As a result, we’re starting to see lenders offering immediate mortgage options with pre-approval, thereby enabling more inclusive automated credit decisioning.
Sustainable lending in action
Finastra places the principles of Environment, Social & Governance (ESG), and our business mantra of ‘doing well by doing good’ at the heart of our OPEN and inclusive culture. Our corporate purpose is to orchestrate the sustainable financial empowerment of every single person on the planet through the collaborative power of our technology, diverse talent and ecosystem.
Recently a new purpose-driven bank in the United States, Climate First Bank, has worked with Finastra to offer climate-focused programs, including an unrivalled solar loan option. The loans are offered with lower interest rate incentives as part of their terms, to help drive a measurable impact on a more sustainable environment, fulfilling a growing demand for more socially responsible institutions.
Getting ahead through sustainability
For banks to get ahead of the competition and build their own sustainable model for innovation, they must embrace open ecosystems and fintechs. Having access to a broader ecosystem of pre-integrated solutions enables rapid deployment and faster time-to-value for financial institutions. Through an open ecosystem, lenders can keep their offering up-to-date and improve the mortgage journey for their customers and members in an efficient way.
Financial institutions have a responsibility to minimize impact on the environment, and to reduce emissions in the financial services sector. Through the digitization of banking processes or the digitalization of financial services, we are committed to reducing emissions within our sector, in collaboration with our customers and partners.
i Refinitiv data January 2022 ii Investment on environmental, social, and corporate governance worldwide from 2012 to 2018 iii Reuters
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