Digital Transformation: What The Future Holds For Traditional And Alternative Lenders

Back in 2014, investment into financial technology tripled to a total of over $12 billion. Today, the digital transformation has infiltrated almost every part of the financial sector: from client onboarding to internal processes and even lending. It revolves around automation, smarter decisions and more efficiency. So, what does this mean for loan management software providers, both traditional and alternative?

How Digital Transformation Looks For Traditional And Alternative Lenders

Despite the shaky year 2020, the overall lending landscape could be looking up in the near future. One forecast estimates a compound annual growth rate (CAGR) of 6% with a market value of $7.93 trillion by 2023, and the digital lending market is forecast to see an 11.9% CAGR from 2020-2025. The question, as always, is how does the industry get there? Here are some of the most impactful trends that will drive this growth.

Finance Is Becoming More Accessible

We’re used to thinking of banking as a staunch institute, defined by men in suits staring at a spreadsheet packed with numbers. This is no longer the case. Now finance is becoming more accessible than ever with an increase in financial technology by both traditional providers and new fintech ventures. 

For traditional providers: According to EY, 64% of consumers have used a financial technology solution in their lifetime. The message here is if you haven’t updated your tech stack, you need to adapt and quickly.

For alternative lenders: Technology is on your side. What’s not (at least not yet) is complete security. Fraudsters are becoming more inventive with the methods they use to defraud consumers and businesses, and fintechs could be vulnerable, especially with the growth of distance know your customer (KYC) and anti-money-laundering (AML) procedures due to the Covid-19 pandemic. Fraud and identity theft complaints grew from 2017 to 2019, too, which makes security a top priority when developing a solution or selecting a vendor. 

Self-Service Is Growing

Automation in banking is now moving from automating simple processes, such as form-filling, to more sophisticated ones, such as account opening, customer onboarding and transactions. Clients don’t want managers to get back to them. They want service here and now — the simplicity to open an app, get things done and continue with their lives. 

For traditional providers: This means accepting that the move away from brick-and-mortar as the primary source of financial provision is solidifying. Banks and lending providers will need to diversify and ensure their products are more self-service friendly.

For alternative lenders: With 59% of consumers still preferring to apply for a loan in person, it’s clear that a level of distrust of digital remains. To gain trust when offering remote services, fintech providers need to provide reliable, secure solutions that improve customer experience. 

Real-Time Decision-Making

Whether a client is a business or an individual, waiting on a loan decision can be nerve-racking and detrimental to future planning. But how is it possible to grant loans faster without incurring additional risk? By adopting big data, AI and ML, decisions can be well informed yet rapid.

For traditional providers: It’s time to take account of the next generation of lending clients: Gen Z. Today, millennials and Gen Z make up a sizable proportion of the lending market, and this is set to grow. When designing technology solutions, it’s vital to consider the needs of this growing market section and ensure speed and efficiency as standard.

For alternative lenders: Adapting big data technology empowers fintech lenders to make decisions about lending even faster, but it’s vital not to compromise on security.

Data-Driven Decisions

Big data may well be the secret behind delivering loan decisions quickly, but that’s not all. Harnessing data allows a company to go far beyond loan decision-making and inform almost all business areas — from determining where to focus in the coming year to tailoring marketing campaigns to identifying where to invest resources.

For traditional providers: It’s time to see individuals, not groups, in planning. Personalization has long been a trend in other service areas, and now it’s time for it to grow in the financial sphere, too, to save money on inefficient services and marketing. 

For alternative lenders: It may be time to dive deeper and consider how data and AI technology could be used to optimize essential loan services, such as credit scoring, repayment schedules or even making the onboarding process more efficient.

Financial Literacy

The time for incomprehensible finance is over. The market is demanding a change to economics that is understandable by almost everyone. This trend has grown from laws regulating the size of “small print” to complete fintech solutions designed with the sole purpose of financial education and is set to continue. 

For traditional providers: More transparency in fee and repayment structures for individuals is in demand. It’s vital to ensure that the service is as straightforward as possible for your clients, which not only boosts satisfaction, but also increases the likelihood that they will repay their loans.

For alternative lenders: Personalization is the core of future technology solutions. Combining AI technology and financial literacy can help businesses deliver their clients the information they need to make the right financial decisions. This reduces the risk of credit nonpayment and increases the reputation of the business as a reliable provider. 

Transformation For The Better

Last year was challenging, not only for us as humans but for businesses, as well. Unexpected events can create unforeseen risks for companies, and the world of finance is no exception. However, like all situations, there is a silver lining, and that is the drive to develop more human-friendly solutions that deliver no matter whether we are social distancing or visiting a brick-and-mortar branch. 

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By Dmitry Dolgorukov, Forbes Councils Member

Dmitry Dolgorukov is the Co-Founder and CRO of HES Fintech, a leader in providing financial institutions with intelligent lending platforms.