Traditional banking systems are largely cluttered with legacy systems, and devoid of innovation, so much so that they lack agility and technology expertise to develop and offer advanced financial products. In contrast, fintechs are technology-enabled financial service providers, using advanced technology to provide efficient financial services to the masses, thereby, disrupting traditional financial service providers.
The lending revolution: wake-up call to digital lending
Talking about the traditional ways of lending, when in need of capital, an individual or a business approaches a bank or a traditional financial institution like the NBFCs for a loan. FSPs/Traditional lenders fall under one umbrella that fits all loan products, and are unable to meet specific and different credit product requirements.
For example, house renovation loan, travel loan, etc. Also, the cost of service is much higher, making it economically viable only for larger loans like corporate loans or mortgage loans. In addition, the requirement of a collateral is a must for the credit access, while they may take anywhere between 10–15 working days to approve the loan, which is time consuming and deters the urgent requirement of the credit seekers.
Easy access to credit has been the biggest challenge both in India and abroad.
Digital lenders being the new addition to the lending industry have disrupted the problem of delays in credit access. These lenders have made use of digital payments data to underwrite in almost real time fashion in an efficient manner.
They primarily use advanced analytics, machine learning models on customer data, and cost effective digital channels to remotely deliver lending products in the shortest possible time.
This allows all real time transactions happening over the internet companies to be replaced by fintech’s credit-based payment products, such as Buy Now Pay Later (BNPL) or Convert to EMI Products. Fintech companies make use of their customer’s financial and transactional data to underwrite digital loans over an API-driven approach, lowering the time required to access personal or payday loans.
The rise of digital lending
Digital lending is a global effort to create a more financially inclusive world and provide nearly three billion people excluded from these services the access to a wide range of financial products. By enabling easy access of credit to the masses, unlike the traditional ways, underserved customers or businesses can be offered better and quicker products and services in a very cost effective and engaging manner.
The innovations in digital lending is driven by heavy research and development by new age fintechs or financial service providers. Even the political bodies are encouraging the growth of such products to help promote financial inclusion and bring good quality credit products to the underprivileged communities and cash-strapped businesses.
Fintechs across the globe also gain competitive advantages by introducing digital lending. The use of technology, access to internet, and increased smartphone usage raises customer expectations, which can constantly change based on their experience. Adding digital lending offerings to the current product portfolio will help fintech compaies stay ahead in the game.
The power of new-age lenders
New-age fintechs do not require mortgages to underwrite a loan application. Rather, they use financial transactions and CIBIL scores to calculate risk factors. There are several structures around repayments in digital lending—from advanced ways of incorporating real time payment deduction mechanisms from customer transactions on POS, to normal EMI/timely repayments on their apps/websites.
The fintechs also get the opportunity to gather additional data about their customers, helping increase the credit line limit, defining customer persona, and cross sell other financial products. Digital lenders are focused more toward unsecured loans, and possess underwriting engines, which are able to process the loan applications in a matter of minutes.
Fintechs with neobanking products, insurance, equity trading, and finance management applications, among other financial products, can leverage digital lending to expand their topline. This gives access to their product catalog by providing credit in a very seamless manner.
Designing a successful digital lending transformation
However, the adoption of digital lending methodology brings a new set of challenges and risks which can have damaging effects to both customers and fintechs. Digital lending must be implemented in a very sustainable manner or it could have adverse effects as the risks involved are higher.
The development of such lending systems and product financing design should incorporate appropriate risk factors, have advanced underwriting processes and advanced systems to mitigate defaults, and put substantial efforts in building collection systems for digital loans.
Some of the digital lenders struggle with the required risk management changes and optimisations in loan repayments cycle. Many of these are yet to achieve any profitability.
While digital lending is making credit accessible to the masses beyond demographic boundaries, the topic of collection process is the elephant in the room. The probability of non-repayment is high in case of unsecured digital loans, thereby impacting the Non-Performing Assets (NPA).
So, probably the simplest solution is to ride on the advanced technology to evolve the collection process and add/evolve an ethical collection system.
It is a matter of time before the fintech companies will be issued a new set of regulations from the Reserve Bank of India (RBI). In the meanwhile, there is hope that these regulations will boost businesses, allowing them to continue their financial reach and services to financially underserved communities and businesses, and establish a smoother collection process as well.
Digital lending is set to transform the lending segment in the near future, effectively fulfilling both customer and businesses’ credit requirements.
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YS.)