Traditional Banks Face Challenges in Digital Lending

Digital lending is a complex ecosystem wherein non-traditional providers are leveraging technology to overtake traditional retail banks. These lenders are combining digitally native solutions with speed, convenience and enhanced customer service to simplify the lending process.

Listed below are the technology trends impacting the Digital Lending theme, as identified by GlobalData.

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Aggressive automation around credit decisions

Lending, particularly mortgage lending, is an infamously manual, paper-based process. There is an enormous amount of low-hanging fruit in applying basic, proven technologies such as robotic process automation (RPA), optical character recognition (OCR), automated document recognition (ADR), Workflow, and machine learning.

Laying RPA over suboptimal banking processes, however, neither addresses nor fixes the root cause of organisational process problems and may well generate new tensions. Most banks, for example, struggle to merge different legacy systems into a single workflow for RPA. Leading incumbent banks have sought to be bold and redesign application processes end-to-end for digital, especially those core decision-making processes such as credit.

Personalisation across all aspects of product and experience

Modern digital lenders compete on personalisation across all dimensions of digital experience. The pandemic accentuated the need for personalisation, as it had a highly individual impact on customers and sectors, invalidating many of the generic assumptions underpinning long-standing credit risk models. Machine learning algorithms that learn over time to inform product propensity models help providers develop customised engagement strategies, in terms of time and channel, to increase conversion rates.

Heightened focus on cybersecurity and fraud

The need to move quickly, especially amid Covid-19, has created heightened fraud and cybersecurity risks for banks. The pandemic created well-documented opportunities for fraudulent access to Covid-19 loans, the full extent of which will only become apparent in time. The pandemic presented a number of attack vectors incumbents were optimised to mitigate, including online synthetic fraud. To get in front of the fraud and cyber issues, defining a playbook of possible cyberattack scenarios, providers can think through issues in advance and implement solutions.

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Ever-more “integrated” lending

The notion of “embedded” finance including insurance, payments, money management, and lending has exploded in recent years. Integration in this sense is not a new idea but driving the development of user experience (UX) improvement and channel innovation over the last 30 years. Embedded finance is the contemporary incarnation of this principle, which creates new routes to market for a variety of lenders. Various third parties without a banking license (i.e. Netflix, Uber, Airbnb) can partner to embed financial services into their proposition.

Banks moving deeper into underlying life goals rather than just products around lending

Faced with more “integrated” lending competition, banks will go deeper into the customer experience to protect market share. Banks are seeking to support broader life goals rather than focussing on just the core lending product whether it be a home loan or car loan. Banks are orchestrating not just financial services but also services that help the customer insure, renovate, and furnish their new home, all integrated into the bank’s platform.

Software-as-a-service (SaaS) delivery model for cloud

SaaS delivery models provide robust automation across all parts of the lending process and can be set-up in days, not weeks or months, even for complex products such as mortgages. The models provide a scalable solution that can handle a diversity of loans types, reduce system costs, and free up staff for more high-value, high-risk consumer interactions. Providers can gain better connectivity within the enterprise and across enterprises by gaining connectivity and reusing and re-purposing data as part of a micro-services architecture.

Tensions between B2B and B2B2C partnerships

B2B2C partnership expedites the time to market with a proven platform that can open a new revenue stream and attract younger clients without impacting providers’ current operating model. Under B2B2C, however, the bank operates as a distribution partner only. The bank’s customer sees the partner’s brand in a separate login within the bank’s digital ecosystem.

Such a model makes sense when the partner has an innovative reputation to drive usage, but bigger banks are typically less happy to buy a pre-made asset management package. On a pure B2B model, the partner provides the software but does not take any assets. B2B partners work on deep integration with banking infrastructure to deliver this pure white label. If providers want to do things properly, they need to be deeply integrated with partners.

Fintech partnership to expedite time-to-capabilities for both banks and big tech

There are many discrete parts to the underwriting, approval, and disbursement of a loan, where banks are partnering with a variety of firms. Long-standing examples of this done well include ING partnering with Kabbage and BBVA Compass with OnDeck. Big tech is also pursuing these partnerships.

Big tech companies have substantive customer data, but they do not have high-performing credit models with long track records, which is a major gap in the context of lending decision-making. Big tech companies have, therefore, partnered with digital lenders such as Google with LendingClub, Alibaba with Kabbage, and KakaoPay with PeopleFund.

Payments firms encroach into digital lending

Stripe started as an e-commerce payments facilitator but pushed into lending last year with the launch of Stripe Capital in order to help online businesses access much-needed funding, the same businesses that Stripe enables to accept payments online. Square is another payments business breaking into lending. Square Capital offers small businesses loans of up to $100,000, helping them grow at a time when many traditional banks have tightened their lending criteria.

Big tech and big banks continue to flip flop on collaboration and competition

Google eventually abandoned Google Plex, amid intense speculation that Google executives worried about cannibalising revenues from large incumbent banks otherwise using Google Cloud services. Strategic questions around when, where, and why to compete or collaborate with big tech continue.

In a lending context, big tech can provide the customer interface and allow for quick loan approval using advanced data analytics, with the bank left to run the regulated aspects of lending and deposit holding. This offers access to banks, particularly smaller banks, while it can be attractive to big tech as their platforms are easily scalable at a low cost.

This is an edited extract from the Digital Lending – Thematic Research report produced by GlobalData Thematic Research.