By Kirill Zorin, Senior Business Analyst at global technology consultancy DataArt
Five years ago, many banks viewed digital lending merely as an alternative sales channel or simply an additional option to their existing credit products. Fast forward to today and across the banking sector retail lending is moving from offline to online. The digital lending market continues to expand at a rapid pace with big-name banks regularly announcing new initiatives, the most recent announcement coming from HSBC Bank USA, which in August this year launched its new digital lending platform.
Why do banks bother?
Banks are highly incentivised to make the shift to online lending. There are two main motives driving this change. The first is the pressure of a highly competitive environment and the second is the potential for substantial increased profitability. Digital lending significantly reduces costs for branches, e.g. staff and paper storage costs. Moreover, new players like non-bank credit companies have found success in digital lending which accelerated the process for retail banks to make the shift in a race to remain relevant.
Digital lending vastly improves a bank’s opportunities to obtain new clients For example, millennials who highly appreciate fintech and dislike paper-heavy and time-consuming processes. It also creates more secure and accurate client profiles for targeted marketing, establishes a fully automated credit flow approach, and fulfils the promise of round the clock online banking.
Customers and banks – two sides of the digital lending coin
From a client’s perspective, digital lending is an easy, clear and user-friendly process. The applicant goes directly to a website or mobile app to complete a short application form and quickly receives credit offerings.
Digital lending ranges from a final credit decision for consumer credit like a cash loan, credit card or overdraft request, to a pre-decision for secured loans like a mortgage. For some lending, customers are able to compare offers from different banks in real-time, select the most attractive offer and get money on their card within minutes. On average the application process takes less than 15 minutes.
However, from a bank’s perspective, online lending has significant differences to offline lending and is a very substantial undertaking.
Banks have to rebuild their credit processes, credit policies and upgrade their core systems to remain competitive in a digital marketplace, specifically with regard to the reduction of paperwork and time to decision (TTD).Offline lending required a lot of paperwork – borrowers had to prepare and deliver a lot of documents and references with wet stamps, i.e. ink stamps that are not printer generated, to banks as part of the lending application process and due diligence. Bank employees then verified and validated all of these documents, partially by hand. Therefore, in its entirely, the time to decision (TTD) took a long time. Digital lending will reduce the number of hard-copy paperwork. Banks will instead verify borrower’s data using the Credit History Bureau and other online databases.
As part of credit processes and policies changes upgrade,banks must create new anti-fraud systems and new credit metrics based on online customer behaviour. They would also need to collect new types of client information from social media platforms, develop new behaviour, scoring and anti-fraud models and launch new communication channels for clients such as chatbot software and voice recognition options.
What can possibly go wrong?
Of course, with big opportunities come big challenges. If a bank does not have well-structured credit processes, software, scoring systems and expertise in online lending, then this channel might initially bring in losses for the bank due to the investment required to perform at a competitive level.
Digital lending platform must haves:
- User-friendly portal for applying electronic application forms and paperless processes for sharing documents
- Customised products catering to a customer’s needs
- The ability to credit funds to any bank account and a convenient tool for credit repayment
SMEs enter the arena
Digital lending has a big impact on retail lending, but we will also see more and more progress in the SME sector. Digitalisation is also advancing in corporate lending, but the players are moving more slowly and with less urgency, given the relatively lower numbers of transactions that can be noted in this segment.
One of the reasons for the lag compared to retail lending is that decisions on SME/Corporate credit applications are typically made on an individual case-by-case basis or by a committee. SME/Corporate credit divisions do use some of the products and processes from retail digital lending to improve and reduce the cost of their credit decision processes, but it is currently further behind in the journey.
Digital lending will continue to expand at pace with a focus on the newest and the most effective technical solutions from facial recognition for user identification to voice recognition for effective and quick support to machine learning for product customisation and decision making systems.
Primarily, we will see more and more banks and fintech companies working together to unite their efforts in digital lending, looking for win-to-win strategies that play to their respective strengths. Banks are going to cover risk-management, accounting and reporting as they are strong in those areas and have huge expertise, while at the same time fintech companies will be an ‘Interface’ for consumers providing them with easy access to information and products.