Danielle Sesko discusses Payment Guard’s role in reshaping digital lending, tackling delinquency risks, and driving financial inclusivity.
Hello Danielle, please tell us a bit about your role at TruStageTM and the work you’re doing with Payment Guard.
I currently serve as the Director of Product Management and Innovation at TruStage, helping lead teams in developing innovative financial solutions to enhance the financial well-being of millions of Americans nationwide.
Specifically for TruStage Payment Guard Insurance, our innovative solution is helping transform the digital lending landscape as we know it. It’s an embedded insurance solution helping to mitigate delinquency and default risk, addressing a critical gap that has formed in today’s increasingly digital consumer credit ecosystem.
As digital lending has become more ubiquitous and more loans become digitized, Payment Guard provides coverage for a fully digital lending event. A truly unique product designed as a component of the loan, Payment Guard can be applied to any loan class, adding an extra layer of protection for both borrowers and lenders. Long-term it is designed to help improve financial equity and inclusion by influencing lenders’ underwriting models to adjust by lowering borrowers’ credit risk.
The product has enabled TruStage to expand its efforts into the digital insurance markets, meeting the demands and needs of modern borrowers and lenders alike.
Since its launch in 2023, Payment Guard has continued to grow rapidly, gaining strong market interest and adoption with expectations of continued exponential growth across all types of digital consumer loans – small dollar, Buy Now, Pay Later (BNPL), auto finance and more. 1 With several current digital lending partners and growing, these partnerships will help us provide greater peace of mind for more borrowers and lenders, while enhancing the financial well-being of both.
With digital lending platforms expected to reach a value of $46 billion by 2032, what do you think this means for consumer lenders in both the short and long term?
Virtually all lending will soon be digital. In the short term, this shift means lenders should consider the adoption of proven strategies like an embedded Digital Lending Insurance (DLI) approach to not only protect themselves and their borrowers but also to reduce risk and costs and seize immediate digital opportunities while streamlining operations.
In the long term, embracing DLI will be crucial for lenders’ success in the increasingly crowded market, helping them differentiate themselves from competition and ensuring they can thrive as the industry continues to evolve towards a digital lending and embedded finance dominated future.
In today’s environment, we’re seeing varying impacts on different digital lending categories due to delinquency and default rates. How does a DLI strategy help mitigate these challenges?
Fluctuations in key economic areas, like wage growth, are pressuring borrowers, impacting their creditworthiness and increasing demand for credit. As many borrowers continue to seek credit to cover issues like unexpected expenses or job losses, digital lenders are often left struggling to meet these demands in a cost-effective and risk-responsible way. This affects the health of existing loan portfolios and can create a drag on capital markets as investors struggle to accurately assess the true delinquency risk that exists within loan tranches.
A DLI strategy can help mitigate these challenges by providing the necessary level of protection against future delinquencies. By better safeguarding both lenders and borrowers, DLI reduces the risk within loan portfolios, enabling more accurate assessments of delinquency risk. This also allows investors to become more active in capital markets, helping maintain liquidity and support the continued growth of digital lending.
Which consumer lending sectors do you see the most immediate impact from DLI strategies, and how is this influencing broader access to credit?
A DLI strategy is unique in that it can be ubiquitously applied to any consumer loan class, such as personal loans, open-lending installment loans, small dollar loans, auto finance and more. Even with inflation numbers dropping and the recent rate cuts from the Fed, liquidity is still tight. This means digital lenders are facing significant challenges, not only to operations but to their lending capacity and appetite. When liquidity becomes scarce, it can lead to a vicious cycle of reduced lending capacity.
Since the digital lending industry serves a wide range of borrowers who often have limited access to traditional banking services, this also could disproportionately affect underbanked and underserved populations, exacerbating financial inequality. This is how a DLI strategy can help lenders mitigate the risks from defaults during these difficult periods and ensure they can continue to offer access to credit to those who may need it most while also preserving broader access to financial services despite market challenges.
Personal loans and open-ended installment loans are critical areas in consumer lending. How are DLI strategies transforming these particular sectors?
While personal loans and open-ended installment loans are used for a variety of purposes, such as debt consolidation and medical bills, they also often cover more traditional, prominent areas in consumer lending. And as these types of loans are increasing in popularity, they are also experiencing a significant increase in outstanding balances, which can increase the amount of potential defaults and delinquencies.
A DLI strategy is helping to transform this particular sector by offering flexibility and accessibility to a broader range of consumers. A DLI strategy integrates seamlessly into the diverse range of personal loan types sought by today’s borrowers, supporting all their digital lending needs. It provides access to credit to a more diverse group of consumers, particularly those who may have previously faced challenges in securing credit.
By easily integrating insurance into the lending process, DLI ensures borrowers can access loans tailored to their unique financial situations while helping lenders mitigate the risk of delinquencies, protecting borrowers in the event of unforeseen events like job loss or disability by allowing them to still meet their loan obligations, all without adding friction to the lending experience.
Small dollar loans and bridge loans often serve as crucial lifelines for many consumers. How is the digital lending landscape evolving in these areas, and what role does TruStage play in this?
In today’s uncertain economic climate, small dollar loans and bridge loans have become increasingly popular as a short-term financing option. However, the risks associated with these short-term loans can be significant, especially when liquidity is tight. This poses a challenge for digital lenders, whose lending capacity can be squeezed by this crunch, potentially reducing access to credit for borrowers, particularly in underserved communities.
The digital lending space is evolving to address these critical challenges, and a DLI strategy is playing a key role in this transformation. DLI can be applied across all loan types, including small dollar and bridge loans, to help mitigate the risks of default while maintaining credit accessibility. By seamlessly embedding an insurance product directly into the digital lending process itself, DLI enables lenders to continue offering loans even during liquidity crunches, ensuring borrowers are not left behind.
TruStage is supporting lenders in this evolving landscape by providing a flexible, borrower-centered solution that enables these lenders to serve a wider range of borrowers, ensuring crucial loan options remain accessible to those who need them most, even in uncertain times.
Auto finance and refinance have always been significant in consumer lending. What trends are you observing in this sector, and how is a DLI strategy shaping its future?
In the auto finance and refinance sector, several key trends are emerging, particularly around the rise in delinquencies. As with credit cards, auto loan delinquencies are also rising and at their highest rates in over a decade, with younger generations especially struggling to manage debt. As delinquencies surpass pre-pandemic levels, this growing financial strain highlights the need for lenders to embrace more proactive strategies like DLI to help mitigate loan risk and improve their portfolio resilience as well as protect borrower’s ability to meet their loan obligations due to unexpected life events.
Lenders recognize many borrowers often seek auto loans not out of desire, but necessity, and a DLI strategy enables them to better understand the challenges, economic drivers and demographic variations impacting consumers, helping them address borrowers’ needs while reducing delinquency risk. Additionally, this can strengthen borrower loyalty and enable auto lenders to differentiate themselves in an increasingly competitive market.
Looking beyond loan origination, could you share how the initiatives you’re leading at TruStage are influencing the secondary market and loan securitization?
At TruStage, the initiatives we’re leading are directly influencing the secondary market and loan securitization, particularly as we see this year shaping up to be one of the biggest for ABS securitizations across all markets. According to many data sources, the secondary capital markets are currently being leveraged more than they have been in decades, a trend that seems to be continuing.
This shift makes sense in the current economic landscape, where even with the recent rate cuts, the country is still purposely reducing cash flow and liquidity while increasing the cost of capital. As a result, financial institutions are restructuring and engaging in more complex structured financial transactions to free up balance sheets. This approach allows them to continue lending while also protecting themselves against interest rate risk.
At TruStage, we’re aligning with these current market trends through Payment Guard, which is increasingly being applied to portfolio securitizations and structured assets. This ensures we not only stay ahead of the evolving market but also help our clients manage risk and maintain lending capacity as they navigate these changes.
As we move through the remainder of 2024, what key trends or industry issues are you closely monitoring that could impact the digital lending space?
As we near the end of 2024, there are a few key trends and industry issues on my radar that could significantly impact the digital lending space as we head into the new year. One area I’m closely monitoring is regulatory changes. With potential updates on the horizon, especially around BNPL, data privacy and lending practices, staying compliant will be essential for lenders to continue operating smoothly.
Another trend top of mind is the growing preference for embedded finance options. As these become more popular and ubiquitous, this will also in turn increase the number as well as risks for defaults and delinquencies. And, as more traditional lenders begin to explore expanding into new digital loan products, those lenders will need strategies like DLI to help ensure they can get the most from digital loan products while protecting their portfolios.
Finally, financial inclusion remains a critical focus, particularly in ensuring underserved communities have continued access to credit. With economic pressures continuing to rise for so many consumers, ensuring embedded digital lending options can meet the needs of these populations without exacerbating financial inequality will be a top priority throughout the financial services industry.
How do you see TruStage’s vision and strategy with Payment Guard evolving to meet the needs of the future lending landscape?
TruStage’s vision for Payment Guard is aligned with the evolving needs of both today’s as well as the future lending landscape. As a digital-native insurance solution, Payment Guard is designed to support both borrowers and lenders by addressing the challenges of credit access, debt management and financial security in an increasingly digital lending landscape.
We are committed to evolving Payment Guard as a vital tool for both lenders and borrowers, helping foster stronger loan portfolio health, enhance lending capacity, and contribute to a more inclusive and resilient financial ecosystem. As digital lending continues to expand, Payment Guard will remain integral to TruStage’s strategy for meeting the future needs of the lending landscape.
1 TruStage, Internal/Proprietary Data, 2024.
The views expressed here are those of the author(s) and do not necessarily represent the views of TruStage.
TruStageTM Payment Guard Insurance is underwritten by CUMIS Specialty Insurance Company, Inc. CUMIS Specialty Insurance Company, our excess and surplus lines carrier, underwrites coverages that are not available in the admitted market. Product and features may vary and not be available in all states. Certain eligibility requirements, conditions, and exclusions may apply. Please refer to the Group Policy for a full explanation of the terms. The insurance offered is not a deposit, and is not federally insured, sold or guaranteed by any financial institution. Corporate Headquarters 5910 Mineral Point Road, Madison, WI 53705.
