Banks and non-bank lenders: Adoption of “Lending as a Service” (LaaS).

LaaS vendors have been packaging the latest top-notch lending platforms often with included expertise and operational services lately. The Market Leaders’ survey, conducted by LendIt Fintech, embraces the insights based on industry research and interactions with software providers.

LaaS market growth

In 2017, the market of lending software was estimated to be worth $2,615mn both in software and services. By 2024, it is expected that the market will reach $5,580mn. LaaS solutions are largely spread in the U.K. and the U.S., while Europe is only opening the possibilities of them because the regulatory framework is more constrained in the region. 

The studies of LaaS impact reflect that expenditures for the acquisition, decisioning, and servicing loans can be reduced by up to 80%. Banks and non-bank lenders could not miss such dramatic benefits and started replacing legacy applications with a natively digital LaaS platform and reshaping business processes. Now, loan approvals for certain types of loans can be completed in minutes. Funds are disbursed in hours. Consequently, the interest in LaaS platforms has led to the growth of the market they are offered in.

Areas of application

LaaS solutions' prime segment is SMB lending. Consequently, they are primarily used for SMB loan types like working capital, factoring, equipment, franchise, etc. 

Another major segment of application is residential mortgages. LaaS solutions can be applied to consumer loans, too. Lending-as-a-service platforms are helpful for providers with extensive experience in niches such as auto loans, for instance.

Now, large and small banks, credit unions, and private lenders are paying close attention to turn-key LaaS solutions. On the contrary, all-digital “neo banks” and most innovative financial institutions prefer developing their own solutions.

LaaS solution features

Generally, the most robust solutions are developed and delivered by the largest marketplace lenders. The solutions either perform specific functions within a bank’s lending process or cover the whole lending process end-to-end.

The latter LaaS solutions usually support the following features: 

• digital demand generation;

• online customer acquisition and onboarding;

• customizable decision/risk profiles;

• automated decisioning;

• electronic funds disbursal;

• account monitoring with personalized loan extension offers;

• document capture;

• audit and compliance reporting.

LaaS solutions are a relatively convenient and easy way to incorporate machine learning and artificial intelligence into Bank's technology toolkit to ensure profitable underwriting and pricing, prospective customer targeting and retention, and fraud prevention. 

Initial consultations and ongoing expertise are also offered by vendors together with servicing skills in various specific areas like customization of underwriting risk parameters or customer acquisition marketing to help financial institutions with business process realignment and cultural changes connected with the new digital lending practices. 

Assessing the alternatives

One of the most critical challenges for financial institutions in consideration of LaaS is to choose the right overall approach fully fitting with their capabilities. The options for that include:

• an end-to-end platform;

• several niche services;

• on-behalf-of operations;

• fully outsourced ones;

• white label offerings; 

• affiliate agreements.

For a variety of conditions, the evaluation period may vary from less than one month to a calendar quarter or two depending on the organization’s internal decision-making processes. Key evaluation criteria include: 

• risk management;

• corporate due diligence; 

• IT infrastructure and data security;

• company governance and stability; 

• auditing and reporting. 

The implementation phase itself can take as little as a few weeks.

Evolution of LaaS market

The LaaS market displays continuous growth in Europe and North America. But financial institutions in the Asia Pacific are far more effective in adopting LaaS solutions because companies there can move faster due to less stringent customer data regulations.

Some experts say that LaaS will become a driver for banks to refocus on the cost of capital advantages, customer relationships, and governance/compliance expertise. Lending-as-a-service backed by top-notch technology-centric platforms can streamline processes, add features, and target increasingly niche borrower segments with individually tailored lending products and experiences.