In a world where real-time digital credit is accessible with just a few clicks, the need for in-person visits to bank branches or face-to-face interactions have reduced substantially.
Real-time credit is now at the consumer’s fingertips, anytime, anywhere.
While it started with fintech lenders offering instant unsecured personal loans digitally, the trend has quickly been adopted by credit cards, auto loans and even traditional home mortgages.
More than ever now, with digital, Community Financial Institutions (FIs) are losing their competitive moat as prospects or existing customers have more choices from advanced institutions and fintech’s in a few clicks (more on this in the next section)! Customers are comfortable having multiple banking relationships with a best-of-breed approach.
A pressing question is: How can Community FIs adopt digitization to keep pace with the best-in-class institutions? Especially when instant credit introduces fresh risk and control complexities, which is worsened by the unpredictable payment behavior of consumers in the post-pandemic landscape.
Welcome to the Digital Lending Revolution. Let’s dive in.
Impact of Digitization on Consumer Expectations and FIs
Today’s consumers expect instant gratification, including better contextual offers, quicker approval cycles and disbursement times. Should institutions lag in delivering on this expectation, they risk falling behind.
For the consumer – the landscape is rich with possibilities, as they are presented with many credit offers in real-time and have the freedom to select the optimal choice tailored to their specific needs and preferences. This means that Community FIs and sophisticated lenders are now contending for the very same consumers.
The competition to win and retain customers has intensified, prompting a continuous cycle of industry-wide innovation. Community FIs need to now rapidly invest in advanced digital technologies including decisioning and streamlined processes for acquisition/retention for the best consumer experience. In a mature market, FIs now must set themselves apart to attract and retain consumers, as an exceptional digital consumer experience can be a crucial factor for their success.
Certain FIs, often the first movers, have gained a competitive edge by already spending a few years upgrading talent, processes, and infrastructure. For the majority of the FIs that opted to follow suit, it becomes apparent that the transformation needed to compete effectively is anything but quick, especially when hindered by legacy processes and technology.
Digital Lending: The What?
Digital Lending refers to an automated lending process, facilitating instantaneous loan discovery, approval and disbursal and subsequently digital customer management for servicing.
As the digital landscape continues to evolve, institutions are progressively depending more on sophisticated real-time analytics, automated approvals and workflow automation to run their lending lifecycles. By achieving faster turnaround times and expediting time-to-market, digital lending is enabling institutions to enhance and automate either the entire lending process or specific segments of it.
However, where did this all begin?
The initial phase centered on automating loan originations – streamlining the assessment of applicant creditworthiness. Subsequently, the focus shifted to enhancing the customer experience, transitioning to a paperless approach with digitized e-signatures and contracts. This not only expedited processing but also enabled the tracking of compliance-related documentation.
Now, best-in-class digital lending has developed into a complete end-to-end loan origination process – a seamlessly integrated solution that enhances the consumer experience, driven by all digital front-end orchestration and CRM, middleware decisioning logic and backend fulfillment, leveraging all digital tech.
Major Growth Factors
Numerous factors are driving the expansion of digital lending and augmenting the customer experience.
1) Tech-Savvy Millennials & Gen-Z Reshaping the Market Dynamics
The post-pandemic era witnessed a rapid transformation in consumer buying behavior. With the necessity of visiting physical stores diminishing, consumers now anticipate instant gratification across various domains, spanning from online food delivery and everyday essentials to instant credit.
Combine this with the fact that tech-savvy Millennials and Gen Z now dominate as the largest generational groups in the U.S., and we’ve got ourselves a seismic shift in the expectation of the financial industry. According to a Morgan Stanley research, Millennials are now the largest driver of net new-loan demand, and will remain so for the next decade.
This is both an opportunity and a challenge for Community FIs.
Upgrading decisioning capabilities, driving process efficiencies and enhancing analytical talent have become imperative steps for Community FIs to level the playing field effectively.
2) Data and Analytical Sophistication
Digital data is everywhere. With nearly two-thirds of the global population having access to a smartphone, we are in the midst of a groundbreaking era of digital engagement. The result? A wealth of financial and non-financial data that FIs can harness for enhanced decision-making.
Analytical sophistication can drive data-driven offers and recommendations, dynamic pricing, early-detection of fraud, more precise risk assessments (credit, KYC, Fraud etc.) and better decisioning for prospecting and cross-selling. Amidst this wealth of data, FIs possess the potential to revolutionize the consumer experience.
3) Optimization of Speed and Cost
Harnessing technological advancements, digital lending has eliminated operational inefficiencies while significantly expediting the credit approval and dispersal process.
By implementing automated underwriting and approvals, financial institutions can now provide real-time credit offers, effectively eliminating time inefficiencies and significantly enhancing customer engagement. Moreover, they can easily monitor, test, learn, and adapt their strategies to ensure optimal outcomes. It is critically important to be nimble and react quickly to marketplace and prospect/customer dynamics in real-time.
This process not only ensures shorter time-to-market, but also proves highly cost-effective, as automation mitigates the manual inefficiencies that often burden legacy lenders.
How Does Digital Lending Differ from Traditional Lending?
Digital credit consumers possess the agility to swiftly switch to their preferred lender – facilitated by the simple process of applying to numerous digital lenders at the same time. This stands in contrast to traditional lending, where consumers typically applied for loans physically, often at the bank where they held their deposits and payroll intake, through paper applications that took several days for a decision. If approved, consumers received the loan or credit card, which they then began utilizing.
Today, consumers can simply go online, receive instantaneous offers from multiple banks upon submitting their application, and accept the most favorable one in real-time. For instance, they might choose one offer out of the four available. This scenario underscores the concept of acceptance rate: if a bank approves and extends offers to four consumer applications and one of them accepts, the bank’s acceptance rate stands at 25%. This poses a significant challenge for all financial institutions. We will delve deeper into this concept in our next blog.
Challenges of the Digital Lending Revolution
Having navigated through the landscape of digital lending, let’s now pivot to the challenges that Community FIs may encounter when embarking on this transformative journey.
1) Adopting a Fragmented Strategy over a Holistic Approach
The most significant pitfall that financial institutions can encounter is tackling digitization in a fragmented fashion. Mere digitization or automation of isolated processes to address specific issues can lead to complexities, potentially necessitating a return to manual operations due to inadequate integration of these automated processes within the system. While the significant costs – in terms of both time and resources associated with a complete end-to-end transformation of lending solutions are understandable, it’s often wiser to adopt a modular approach. This approach focuses on enhancing all the facets of a particular process – whether it’s prospecting or underwriting.
2) Siloed Processes
Financial institutions must prioritize the integration of all decision components within their ecosystem for seamless interaction and coordination. Siloed processes can lead to multiple inefficiencies and effectively delay time-to-market. In an increasingly competitive landscape, lenders should have the capability to access all necessary information on a unified platform in real-time to deliver hyper-personalized services to customers that can truly resonate with their financial needs and preferences. Without a comprehensive 360-degree customer view, financial institutions might struggle to enhance customer engagement and miss out on opportunities for effectively cross-selling new lending products.
3) Staying Compliant – ‘Speed with Safety’
Given the dynamic nature of rules and regulations in the consumer lending industry, FIs may find it challenging to stay compliant without the support of a robust governance platform. Digital borrowers often divulge significant amounts of sensitive information while applying for loans – and automated processes, not humans, often drive loan decisions. Having system driven guardrails on a configurable platform to stay in compliance is critical – we call it ‘speed with safety’.
While these represent the primary challenges faced by Community FIs, we’ll delve deeper into these aspects in the upcoming second part of our series. Stay tuned as we also examine the fundamental Impact of Adverse Selection in the next blog as it relates to digital lending.