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The term “lending” is as old as money itself. Traditionally, loan application and lending processes have always been too lengthy, stressful and time-consuming. But now, the lending landscape is being disrupted by new players and the rising consumer demands; experiencing a paradigm shift towards digitisation and automation. Over the past few years, digital lending has become a rapidly growing global phenomenon. For example, borrowers nowadays want the onboarding and lending processes to be quick and easy, with an increasing number of customers expecting it to be done digitally without needing to visit physical bank branches.
Primary drivers of digital lending
- Tech-savvy customers
One of the primary factors that are moving the digital lending landscape is the tech-savvy Millennials and Gen Z. After all, these groups of banking customers are reported to highly prefer conducting their banking activities digitally, with 98% of Millennials and 99% of Gen Z mentioning themselves using a mobile banking app for their banking activities. This generation values ‘instant gratification’ and digital habits such as online food delivery, cab booking, online grocery shopping, etc., heavily reinforced it. Besides that, both Millennials and Gen Z also have a stronger emotional connection with technology, where Millennials grew up developing the technology and Gen Z practically lives and breathes the digital world. This is why, it is no surprise that they prefer digital banking experiences over physical visits to bank branches as online banking enables them to conduct any form of banking activities whenever and wherever.
- Increasing operation speed and lower costs
It’s no secret that businesses are always looking for ways to improve the efficiency of their operations and lower their costs. Digital lending, backed by advanced technologies, can reduce operational bottlenecks that slow down the loan approval and disbursement process in conventional lending. What took several days to complete can now be done within a few minutes with digital lending. For example, digital data captures replacing manual form filling helps to reduce the time taken when applying for loans, and also minimises the number of visits to physical branches. As a result, lenders will be able to:
- Execute real-time assessment for approval or rejection of loan applications,
- Speed up the decision-making process which would improve customer engagement and experience, and
- Constantly monitor borrower’s creditworthiness.
On the other hand, digital lending business models are so much more cost-effective than conventional lending models. This is because lenders are not required to maintain brick-and-mortar structures or pay for costly legacy IT systems. With that, customers will be able to access more affordable loans and financial products and services.
- Technological advancement and data analytics
The advancement of smartphone technology led to the rise of smartphone adoption, reaching 6.64 billion users globally as of May 2022. 83.72% of the world has access to mobile services, creating a world of economic opportunities at our fingertips. As consumers have access to a wide number of digital services, the amount of data generated that can be utilised is huge. Banks and financial institutions take advantage of the situation by harnessing new technologies like Robotic Process Automation (RPA), blockchain, artificial intelligence (AI), machine learning, etc., to collect and analyse important customer data so that they can develop an even better understanding of their customers, which is the key to achieving core business goals.
Benefits of digital lending
- Enhanced customer experience (CX)
Customer experience (CX) is critical to businesses, and the financial industry is no exception. Gone were the days where low rates were more than enough for banks to attract or retain customers. The modern customers, especially the Millennials that are predicted to be the largest driver of net new loan demand for the next eight years, value CX more than all other benefits combined. So, how does digital lending enhance the banking experience? Let’s take a look at the onboarding process.
For lenders, onboarding is the most important part of the lending process, hence ensuring a smooth, frictionless customer onboarding leaves a lasting impression and also builds trust with the customer. The conventional onboarding process has always been heavily manual, requiring customers to approach banks directly to obtain loans, and deal with mountains of paperwork. Furthermore, traditional onboarding processes also have a relatively lower rate of loan approvals. This would negatively impact the customer experience which, in turn, would ruin customer satisfaction.
On the flip side, employing digital lending technologies can help to overcome all these obstacles while enhancing CX at the same time! There are a multitude of strategies lenders can employ from making use of such technologies. For instance, lenders can enable real-time data synchronisation to credit bureaus and other banks to make sure that all uploaded documents are verified. Real-time data synchronisation helps in the consolidation of data across different sources and software applications. From a CX point-of-view, customers do not have to repeat or re-enter the same data even if they switch channels during the onboarding process as real-time data synchronisation ensures consistency across all systems.
To sum it all up, digital lending provides better customer experiences. This means higher win rates for banks, which translates into increase in revenue. What’s even better is that lenders that offer superior customer experiences also have more pricing power. So, if you are able to put an offer on the table to your customer in 24 hours while your competitors are taking weeks, you will have a greater competitive advantage.
- Enabling quick, quality decisions
According to McKinsey & Company, the average ‘time to decision’ for small businesses and corporate lending is between three to five weeks, while the average ‘time to cash’ is nearly three months in conventional lending models, and this will soon be deemed ‘unacceptable’. Long delays during loan application pre-screening and approval process may drive your customers away to other competitors. No right-minded organisation wants that! Conventional lending models usually require credit managers to execute the underwriting of loans, where the processing speed may also depend on the skills and abilities of the said manager which explains the long processing time.
On the other hand, digital lending has an upper hand in this area as digital lending technologies make use of specific underwriting algorithms, workflow systems and decision rules to analyse different parameters, enabling lenders to automate the decision-making process. This way, not only ‘time to decision’ and ‘time to cash’ are reduced significantly, but it also ensures improved lending decisions.
- Providing loan options to customers with no credit history
Conventional lending models rely heavily on credit data during credit scoring as it provides lenders with in-depth insights on applicants’ borrowing and/or spending behaviours. Individuals with good credit scores have a higher chance of getting approved for a loan and those with bad credit data or lack thereof, would most likely have their applications rejected due to being classified as having high risks of default. Be that as it may, banks and financial institutions refusing to lend to borrowers who lack an established credit history may also be losing out on a big pool of customers, especially first-time loan borrowers.
With digital lending, however, banks and financial institutions can tap into the unserved and underserved market by making use of alternative data, which can also enhance the credit scoring and credit reporting process. Digital lending enables non-traditional ways of doing credit scoring, allowing banks and financial institutions to create their own alternative data and make use of them to rate a loan applicant’s creditworthiness before approving or denying their applications. By removing credit history-related roadblocks from the loan approval process, lenders can also expand their customer base and supply more loans, resulting in greater revenue as well. Besides, having access to alternative data can provide lenders with highly valuable customer insights to help them offer loan products and services that are tailored to their needs. After all, companies that personalise their products and services are proven to achieve more revenue growth compared to their slower-growing counterparts.
The lending landscape has changed, going hand-in-hand with digital transformation in the financial industry. Digital lending is witnessing continuous global growth, and the global market size of digital lending platforms is expected to grow from USD 5.1 billion in 2018 to USD 12.1 billion in 2023. Customers are demanding fast and simple lending processes. Easy application submission, quick approvals from automated decisioning, compliant lending processes and the capacity to continuously improve process efficiency are a must. Those that fail to meet these expectations are at a risk of becoming irrelevant in the long run.
JurisTech (Juris Technologies) is a leading Malaysian-based Fintech company, specialising in enterprise-class software solutions for banks, financial institutions, and telecommunications companies in Malaysia, Southeast Asia, and beyond.
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