Lending revolutionized: The advent of digital lending

Published on December 2, 2019 by Supuni Dharmasena

Sophisticated and simple: Digital lending affords the best of both worlds

Digital lending refers to the digitization of all end-to-end lending processes, mainly using big data and analytics, basic automation, and machine learning. Digitization can be implemented from customer onboarding to loan disbursement, administration, and relationship management, and may even be stretched to product designing and pricing, with algorithms built on a potential borrower’s meeting the criteria to qualify for credit and the borrower’s needs. Digitization, which enables an experience akin to online shopping, is largely influenced by socio-economic and political factors.

Evolving socio-economic and political factors laying the groundwork

• Customer preferences evolving in tandem with technology: With the advent of the smartphone, coupled with the rapidly evolving mobile and fixed broadband technologies, the world has become increasingly digitized in both the developed and developing markets. Digital lending can cater to these evolving socio-economic factors through the development of new lending Application Program Interfaces (APIs) that enable an increased availability of information and, in turn, greater transparency for potential borrowers, improving customers’ decision quality.

• Regulatory policies: With the implementation of the EU’s second Payment Services Directive (PSD2) and the UK’s Open Banking Act, banks are forced to adopt an open-banking approach that facilitates customer data sharing (within regulatory bounds) and a smoother customer experience.

• Intensifying competition: While traditional banks have been slow to adopt digital lending, other financial institutions (especially micro-financing institutions targeting small and medium-size enterprises) and fintech companies have already rolled out their digital lending platforms. By not responding to these digital challenges/opportunities in time, traditional banks risk customer migration to such competitors.

Opening doors to new avenues of efficiency and effectiveness

Higher revenue at a lower cost drives the profit and growth prospects of digitization. Digitization would result in more customer wins, driven by less time taken to make decisions, and reduce cross-selling costs. Improving APIs and enhancing the customer experience make customer onboarding easier and more efficient, while translating into more customer wins at a lower cost. According to management consulting firm McKinsey, ‘a bank with a balance sheet of USD250bn could capture as much as USD230m in annual profit, of which just over half would be derived from cost efficiencies (such as less “touch time” and a lower cost of risk) and the remainder from revenue gains (increased applications, higher win rates, and better pricing).’

Higher-quality decisions reduce risk: Information availability, driven by the adoption of an open-banking approach, results in better decision-making, reducing risk. Furthermore, digitized covenant-monitoring and portfolio-management systems are useful not only in terms of providing early warning signals but also to indicate the quality of diversification and to find opportunities to increase exposure to borrowers, where suitable.

Expertise in digital lending:

At Acuity Knowledge Partners, we have the expertise to cater to digitization requirements in terms of automating the covenant-monitoring process, conducting credit reviews, managing portfolio risk, building financial models, and performing predictive analysis.

This enables corporate and investment banking professionals to utilize their time more effectively, leading to increased customer acquisitions, lower risk due to more informed decision-making, lower costs, higher profitability, and business growth.

References:

https://www.mckinsey.com/business-functions/risk/our-insights/the-lending-revolution-how-digital-credit-is-changing-banks-from-the-inside

http://image-src.bcg.com/Images/BCG-Digital-Lending-Report_tcm9-197622.pdf

https://www.microfinancegateway.org/sites/default/files/publication_fiels/1123_digital_lending_r10_print_ready.pdf

https://www.abrigo.com/blog/2018/07/26/what-is-digital-lending-and-how-can-community-banks-credit-unions-benefit/

https://www.pwc.com/us/en/industries/banking-capital-markets/assets/pwc-commercial-banking-business-model.pdf

https://www.pwc.in/assets/pdfs/publications/2016/alternative-lending-key-considerations-from-a-technology-perspective.pdf

https://www.wired.co.uk/article/open-banking-cma-psd2-explained

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