The growth of digital lending

It is likely that the most pronounced growth area in the lending market over the coming years will be the digital channel.

The orgination process has been available digitally for several years, but now innovations coming to market that are transforming the back office element of digital lending. This will drive more consumers to a completely digital solution, rather than going back offline to a branch or a call centre to address questions and resolve issues.

There's plenty of evidence in the market that consumers are now ready for digital loans.

Market Penetration

• According to Mintel’s most recent Loans UK report, four in ten of all loans are originated online among internet users (taking into account direct applications, price comparison sites and smartphone apps)
• Digital channels are valued by customers as they can provide information much more conveniently than traditional methods, such as going into a branch or calling up. They also allow easy comparisons between different providers – vital in a price-driven market where customer service tends to be a secondary selection consideration.

As smartphone and tablet penetration continue to deepen and banks increasingly push completely digital experiences, the result should be a further rise in loans completed online. The availability of online statements, balance checks, bill payments and more recently the ability to make payments via mobile phone numbers using Paym are all helping nurture an ever more digital banking customer.

Consumer Demographics

• Mintel says that younger people tend to be more open-minded about purchasing loan products online, especially among 18-24 year-olds, where 60% of those who held a loan applied through a digital channel.
• Conversely, only 18% of over-55s used a digital method when taking out their loan, demonstrating a more conservative approach from the older population.

Interestingly, our own research late in 2014 contradicted this, suggesting less of a gap between generations. In the future we expect this apparent conservatism to erode as tablet price points come down and every other aspect of life requires a higher degree of online literacy.

Disruptive Opportunities

• As customers get used to seeing lower prices, innovative lenders will be alert to offering potential borrowers alternative benefits at different stages of their loan process. Flexible repayment schemes and personal online assistance could become useful points of differentiation in 2015.
• 30% of internet users agree that price comparison websites helped them find providers that they have not heard of or seen before. This is a potentially a valuable selling point in the personal loans market, where many smaller lenders can challenge the brand strength of the high street giants.

Lenders are increasingly taking opportunities to add value to customer relationships that can differentiate them and keep the process digital. A perfect storm is gathering, comprising of growing data touch points (that can also be used for decision making), integration between social media and technology to customise offers to customers according to their shopping habits.

Lenders must also be mindful of the risks social media presents in relation to how customers portray a brand, because bad experiences can be reported on social media and be instantly viewed by a large numbers of target customers. Conversely, excellent service and digital experience can be praised publicly and drive brand value.

A lender able to offer discounts at a customer’s favourite store throughout a loan repayment period for example could clinch a deal at a slightly higher rate for a lender and increase business and brand confidence for the store. Understanding the target customers, reasons for borrowing and propensity to extend a relationship will drive the features and benefits lenders focus on. Getting this understanding early can not only increase numbers through the door, but help extend relationships beyond the first engagement.

The message to lenders is a simple one – focus your efforts on making your lending process cheaper, faster and safer, but choose your technology and implementation partners carefully in order to protect your brand as the competition in digital lending gathers pace.