Funds at your disposal: Digital lending making inroads into traditional lending

The penetration of the internet of things and devices such as smartphones has brought in many advancements. This has made economic activities available at the touch of a button. Among the various sectors, the digital world has evolved the way traditional banking processes are being carried out. A growing number of businesses and individuals are filling applications online for taking loans rather than getting into the lengthy lending process.

Earlier, getting a small business loan was a complex activity. Moreover, the application acceptance rate was on a lower side in particular business segments as compared to others. Aspiring entrepreneurs remained engulfed in the question of how to raise a small business loan? The negative experiences that customers had with filing applications manually resulted in its boom. Also, the many advantages that are available to customers is set to raise the digital lending adoption. The big banking giants such as JP Morgan Chase, Morgan Stanley, and World Bank among others need to up their technology prowess to overcome the impacts of this digital wave.

The shift towards digital loans

The financing industry is undergoing a fundamental change in the way the lending process is being undertaken. The change is basically a shift from the 3-6-3 rule of lending to the new 3-1-0 order. This means that financing institutions have moved from the age-old banking formula of raising deposits at 3%, lending at 6% after 3:00 pm playing golf.

Many finance technology startups have capitalized on the demand of customers to have access to funds instantly with seamless transaction experience. As a result, they have been at the forefront of digital lending. Alibaba, Lending Club, Kabbage are some of the popular companies that have taken up the market share by providing around $160 billion of digital loans in 2017.

In the small business loan segment, companies like PayPal, Amazon and Google Pay are taking up the market that was long dominated by banking giants like JP Morgan Chase, U.S. Bank and Bank of America. Small loans of up to $500,000 are provided to users at competitive rates as compared to what one gets through banks. For instance, PayPal offers small loans typically ranging between $5,000 to $500,000 at very competitive rates. These startup technologies have managed to wipe off a significant share of local companies by providing quicker and easier services. Another online lending platform – Lendio offer small business loans of various sizes, one that actually fits your business. Some of the easily available loans include-:

• Line of credit
• SBA loan
• Short term loan
• Equipment financing

According to research taken up by Federal Reserve, about 24 percent of U.S. small businesses applied for loans online in 2017 as compared to 21 percent in 2016. The key point to note is that many of the online applications actually converted into lending. To add to this, some of the non-banking institutions are leveraging data and underwriting techniques to provide loans to those with a low credit score.

Key drivers

According to the Boston Consulting Group, the key drivers for the adoption of digital lending practices is the change in behavior of customers that is shaped by the experience offered by internet giants. Customers no longer need physical interactions to make a transaction or a purchase. The second is rapid technological advancements such as 4G and 5G that lead to the penetration of smartphones to about half of the adult population. Thirdly, the proliferation of data and the use of big data analytics to understand consumer behavior and creating algorithms has resulted in a digital wave. Fourth, there are constant changes in the regulatory environment which is providing an impetus to the digital lending market. Moreover, the innovative operating models such as independent platforms or collaborations are being adopted. For independent platforms, companies directly lend to customers without getting into partnership with an incumbent bank. Kabbage is one such platform that use proprietary techniques to lend small amounts directly to customers. On the other hand, TD Bank partnered with Amount to launch digital lending platform.

How does it help

Digital lending helps transform the inefficiencies and long drawn process of getting loans into faster, omnichannel, paperless and customer-oriented experience. The application filling becomes quicker. For the bankers, the automated process allows better decision making through digital credit scores and rule engine. The humongous data available at the disposal of the banks can be leveraged to reduce the cost of customer acquisition, improve underwriting models and create early warning systems in case of delinquencies.

The Way Forward

As per Juniper Research “about half of the adult population will use smartphones, PCs, tablets or other smart devices to access financial services by 2021. This will greatly drive the online lending market and provide a plethora of opportunities. Some of the banks might try to turf the digital lending wave by dropping interest rates and offering more loans. However, this will only work in the short term. In the case of market slowdown or economic slowdown, lower interest would make the business unviable turning loans into delinquent ones, thereby forcing banks to return to higher lending rates. To prepare a solid framework, banks need to bolster their technological prowess and act according to the changing tide rather than going against it. The processes can be streamlined with customer needs and end-to end digitization can be deployed.