The Future of Digital Lending
The term digital lending basically means lending through a digital platform – from receipt of a loan application to disbursement. Although gaining momentum, digital lending (also referred to as alternative lending) is very much an emerging discipline.
“Around the world, lending models in the last few years have seen frenetic activity,” notes the Boston Consulting Group (BSG) in its analysis ‘Digital Lending: a $1 trillion opportunity over the next five years’. “Initially, the revolution was led by FinTechs, but a few traditional lenders have followed suit.”
Social Finance, Inc. (commonly known as SoFi) was founded in 2011 in US. Sofi is a digital lending company has originated a whopping amount of $22billion in student loan refinancing, mortgages, personal loans. They recently also extended in investing and wealth management products. The company has raised a significant amount of funding of $2.5billion from Venture Capital (VC) and Private Equity (PE) firms to-date. Since then, there are a couple of FinTech firms in the digital lending space emerged like Prosper, Lending Club (which operated in P2P lending model) and Better.com which focused on digital mortgage offering.
Over to the Asia Pacific region, we noted an emerging FinTech company founded in Australia in 2017, Athena Home Loans, the digital lending platform is shaking up the mortgage market where their recent funding values the company at $230 million and will fuel the start-up’s expansion into home loans which a much larger market than refinancing. Athena’s mission is to save customers money and help them pay off their home loan faster.
Customers switching to Athena since their launch in February 2019 are benefiting from cumulative savings of over $70 million over the life of their loans. Athena offers a competitive interest rate, which should spark consumer interest. Athena Home Loans is able to keep its prices low due to its digital platform, which saves it money that helps it reduce prices for customers. This shows that the FinTech ecosystem in Australia is heating up!
To respond to the needs of current borrowers and to serve the needs of future borrowers, digital lenders must simplify borrowing and provide more options for consumers in need. Digital lending has significant advantages over traditional lending, with the potential to address prevalent credit-related challenges.
Covid-19 has educated the consumer on how data, analytics and digital technology can digital lending process. The basics of digital lending in the future include the following:
There have been some rapid technological advances, led by the ever-increasing penetration of smartphones as well as the proliferation of data. Customers are turning to mobile banking as a way to take control of their finances and plan for their economic future.
With increased consumer engagement across mobile banking applications, FinTechs have the opportunity to not only deliver a great user experience, but also to provide meaningful advice and guidance that’s critical to the financial wellbeing of consumers especially during times of economic uncertainty.
In order to reinforce the attractiveness of digital lending, Fintech adopting software as a service (SaaS) delivery model. Intelligent SaaS solutions provide robust automation for every step of the lending process and flexibility sufficient for it to be tailored to any specific needs. The optimal way to automate the work of a lending operation is to deploy an end-to-end solution that addresses the needs of both the lenders and the borrowers.
Quick Initial Decisioning
Most loan application processes are tedious and time-consuming. Winners in digital lending will eliminate steps using data pre-fill and intuitive design, and will evaluate legacy steps that can be modified or completely eliminated. The goal should be to move to single click assessment.
The ability to provide immediate pre-approval decisioning pending required documentation stops the borrower’s shopping process, increasing the potential for positive outcomes for the consumer and financial institution.
FinTech companies utilize digital footprint as a substitution for physical documents for verification and/or usage of third-party data (e.g. e-commerce) in order to define eligibility, which lowers operational costs compared to conventional lending.
With an advanced digital lending platform, more data can be processed faster, with advanced metrics used to better understand portfolio and process performance. FinTech also enables applicants the opportunity to track where they are in the application and funding process.
Lower Cost, Better Rates
Leveraging on a FinTech business model, the cost of lending comes down drastically and the recovery of a loan is also simple and cost-effective. FinTechs are able to attract new age customers, as well as retain existing ones. Digital lending helps FinTechs process and approve loans faster, reduces credit risk, cuts operational costs and increases customer lifetime value and offers almost instant disbursement and fair rates.
Most FinTech companies compete with each other by perpetually adjusting their loan rates. This will eventually give borrowers the benefits of inclusiveness, affordability, speed, convenience, simple procedure and documentation.
Digital lending processes the underwriting assessment through a digital processing platform with various data points, to identify typical attributes for interest rates to be charged, without prior collateral. The use of the cloud enables integration with credit bureaus, alternative data sources, risk services and internal decision and underwriter rules for deeper insight and speed of decisioning.
Holistic Credit Assessment
FinTech players play a delicate balancing act between grant loans in a flexible, but prudent manner. Credit officer has thus been using “good old human common sense” along with data analytics. Digital lending, unlike the traditional form of credit lending, is more inclusive in nature especially customers that do not have a credit history or are deemed to have a low creditworthiness.
Some FinTech companies adopt machine learning and AI to develop suitable algorithms to evaluate customers’ ability and willingness to pay, in addition to traditional credit scores. FinTechs have to equip their workforce with the digital knowledge and skills to facilitate effective implementation of tech-based credit processes, as well as adequately invest in digital infrastructure. Bad loans are also less likely with digital lending, as users are checked for their credit behaviour through traditional, as well artificial intelligence (AI)-based, algorithms.
The 2008 global financial crisis didn’t just trigger the start of an era of consolidation and low rates that reshaped the banking industry globally, it also coincided with the mass adoption of the smartphone and a shift to digital banking. In the wake, a crop of web-first lenders emerged to challenge the world’s biggest banks and made offering end-to-end mobile banking features a matter of survival. The Covid-19 pandemic only affirmed that digital lending solutions are no longer an option.
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26 June 2020 | by HomeCrowd team