A study by Goldman Sachs revealed that “Financial institutions stand to earn $30 billion in the next eight years (driven by a $600 billion loan market) by utilizing digital lending technology “. A Credit Suisse report further stands to forecast the growth of this ‘600 billion worth loan market’ to grow up to $3 trillion in the next 10 years in a report published as of July 2016.
While the numbers may distract, the essence lies in the phrase ‘utilizing digital lending technology’. Is digital really the secret sauce to the pie?
And what is digital lending technology, anyway? Are we talking products, platforms or solutions a bank can go with when it comes to digital l ending? How does it really differentiate?
To quickly box the definition of Digital Lending, it is characterized by a focus on making cheaper loans available through completely digital means but it does not end there , digital lending also focuses on automating the entire processing of this low cost asset. Typically, characterized by the following :
- Newer Segments – Targets a completely new set of borrowers (typically small loans for the traditionally undeserved)
- New Data Sources – Identification of new markets through new data points – social media clues , behavioral analytics , data analytics
- Intelligent Algorithms – Higher reliance on data technology and complex algorithms on aggregated data
- Automation Technology – Solid reliance on automation technology in the automated Underwriting Process with a no rip/replace method
- Continuous Digital Dialogue – The lender , borrower and guarantor/aggregator are in continuous sync through real-time notifications and event based alerts making it seamless
While banks offer traditional loan products, the market is strife with new and aggressive fintech players who are upping the game by introducing new business models.When banks explore ‘digital’ to boost the lending business, what is it that really that they seek ?
A New Sport , To Stay in the Game or Play the Champion’s Game ?
While the use of technology can help the bank modernize, the success and proof of value can be realized only by the forces that drive. It is important to ascertain the end goals of digitization – is it an experimental and exploratory decision for the business or a definitive conscious one aligning to the larger business goals which could be anything from creating a new space in the market, achieving scale or building better customer stickiness.
Choosing the Right Fit or Fitting In
Alternative lending models such as P2P lending and B2B marketplace lending make cheap loans available to an audience that is either cash strapped or traditionally deemed credit-invisible. The fintechs may have uncovered a new segment and created a new ecosystem but banks are still key for the entire lending cycle to thrive and grow.
The P2P lending is the most popular alternative lending model that is attributed to have democratized lending. Individual borrowers take unsecured loans from other individuals who have surplus cash and are willing to lend for return on value. Similar to P2P , B2B lending enables and empowers SMEs to receive necessary funds from a set of online direct individual and institutional investor. However, the bank still plays a key role in the entire chain.
Another model is Crowd Funding which is typically used to raised funds for a common interest and against reward or equity. Individuals and businesses have used this to raise early-stage investment, presell products, obtain market validation as well as to crowdsource ideas, engage customers, secure partnerships and build loyal communities.
On the other hand , equity based crowdfunding enables entrepreneurs/startups to raise early-stage capital in an online marketplace directly from individual investors, angel investors and VCs in barter for equity in the company. The bank relegates into the oblivion in such a model.
Collaborate and Compete
It is important that the battles are chosen wisely the in digital lending . With emerging models , competition from disruptors the bank needs to strategize on its feet. Here are some options to choose from basis the competency of the bank in terms of current integration capability , investment at hand and time to market.
Digital Build or Digital Buy? Unbundle and Latch On!
Typically, technology decision makers often take calls in terms of whether the solution should be completely developed in-house or ready off-the-shelf solutions be used. However, in the age of digitization, this no longer remains a build-buy-partner decision restricted to tech anymore. It is increasingly becoming a business call.
Today, there are ecosystems in place which bring the borrower, lender and guarantor together into a single marketplace. With no investment for lead generation or customer acquisition, or even creating a differential customer experience, the FI can simply focus on creating the best product offering on such platforms. Latching on to the ecosystem can be the simplest digital lending strategy to be adopted. This however, is not the prescribed leader’s game. It can only be one of the levers.
The most effective approach for a FI that looks at latching on to multiple lending ecosystems as an option and is open to offer products through diverse digital channel partners and aggregators is that of the ‘Unbundling’. Looking at each business process in isolation to create the most effective stack of APIs available to the marketplace is an approach that most banks are aggressively adopting.
Product , Platform or Technology
Well , digital lending is a combination of all of the above . Attempting to jot down a few of the key technology investments that are required in the cycle
The Adoption of digital technologies in the various stages can be visualized as below (Degree of Adoption Represented as Green – High , Blue – Moderate , Grey – Low)
End Note : Digital Lending is going to be the future as it operates with an intelligent understanding of customer’s need for funds and reaches out to ensure pro-active lending thus making loans quick and accessible and offers a bouquet of cheap and practical products. The right strategy at the right time is the key differentiator – biz models and technologies are only levers.