Digital lending is on a roll: Why now is the time to capitalize on this fintech trend
In the midst of the 2020 crisis, digital lending quickly became one of the most in-demand services. The proof? According to Pew Research Center, the pandemic forced 33 percent of American adults to use money from savings or retirement to pay bills, 25 percent had trouble covering expenses, and 16 percent struggled to pay rent.
What's more, one in ten lost their job and are now searching for alternative ways to earn money, and startups and small companies have also experienced difficulty raising funds to stay afloat. As a result, digital lending has become a financial life vest for the countless individuals and institutions currently drowning in uncertainty.
Luckily, recent tech advancements have boosted adoption of digital banking as customers are increasingly short on time and want to apply for loans on the go using just their smartphones. There are even more advantages: Digital lending businesses are willing to extend small amounts for short-term periods and offer a quick approval process, with no physical appearance required.
But what exactly does "digital lending" mean?
Digital lending combines traditional credit practices from banks, non-bank financial institutions, and innovative financing mechanisms on a single platform. Doing so delivers more productive results for banks and fintech leaders; on average, the adoption of a flexible and scalable digital lending platform may increase loan volumes by 15 to 20 percent and decrease operational costs by 20 percent.
The state of the digital lending market in 2021
According to a Global Market Insights report, the digital lending market was estimated to be four billion in 2018, with anticipated growth at a CAGR of over 20% to 2025. Additionally, many lending-based unicorns — WeLab, Blend, OakNorth, Better.com — received infusions while other startups in the space — Aire, Kabbage, Kasisto — invested in AI to provide faster, easier risk assessment. Also in 2020, the market welcomed more than 100 new digital lending companies.
But beyond necessity, what are some real-life reasons these platforms are ramping in popularity with both consumers and businesses? Let's dive into the major benefits.
Benefits of digital lending: A win-win solution
Time is money
While it can take anywhere from several days to several months to apply for credit through a bank, digital lending apps can give you feedback in a few hours. It improves not only loan origination speed, but makes the process cost-effective: Bank owners don't need to hire a lot of personnel to check application forms or make decisions.
Higher chances of loan approval
Traditional lenders rely on credit scores to disburse loans. But what if an individual is applying for a loan for the very first time and therefore has no credit repayment history to show? Alternative credit scoring data makes digital lenders the preferred choice of first-time borrowers, as they enjoy easier access to loans.
Power of analytics
Digital lending has a far more efficient lending process and portfolio profitability as it uses ML analytics that remain hard at work long after human employees clock out. Bonus: Basing decision-making on metrics ensures all borrowers are weighed against the same terms and conditions without any bias.
Mobile features and e-signing
Millennials run their lives off their phones, so why should their banking be different? Users appreciate that mobile lending solutions provide a higher level of security due to SSL certificates, e-signing, and other security measures.
When the application process is automated, the decision process is also much faster — which can make a tremendous difference for a customer's business.
4 technology trends transforming digital lending
Cloud computing offers flexibility, scalability, security, and compliance to digital lending as it provides easy access to data for regulatory reporting, risk mitigation, analytics, deep learning, and risk management anomalies. As a result, the process of customer onboarding is enjoyable and does not entail any risks.
Among the leading 2020 digital payment trends are contactless payments, mobile wallets, and mPOS technology — all of which served to replace physical channels this year. For the long term, there has been a realization that it's possible to do business without relying on physical distribution points.
AI and ML
Traditionally, banks used numerous internal credit scores reflecting quantitative data points and some subjective factors (market forecasts, reputation, and so on) in order to choose an appropriate lending strategy. Today, non-linear statistical models deployed in artificial neural networks help lenders identify complex relationships, and patterns predict consumer credit worthiness and risk factors.
Financial services have always put security at the forefront, but today's biometric technologies are truly changing the game. Face scanning, fingerprint scanning, iris scanning, and voice recognition enable authentication, allow for "zero human touch" transactions, and prevent data breaches and leakage.
Vention expertise: An inside look at digital lending development
To illustrate how digital lending platforms come into being, we'll now check out a few of the related projects our engineers have tackled.
Our first digital lending client was engaged in small business lending, helping banks make the right decision on granting loans. Our engineers helped automate the whole process by collecting the necessary data, processing it, running it through a set of specific conditions for each bank, and providing all this information to its personnel. For their part, the startup founders only had to fill out a simple loan application form.
Our team also contributed to the small business support program that the US government organized to provide aid during the pandemic. We first developed software that allows business owners to virtually apply for loans and validate their need for them; later, we built infrastructure to help startup owners secure money from the government to pay off loans.
Vention engineers also developed a mobile application for a microlending startup: Individuals can apply for approval and secure a loan right from their phone. The business value was great as the client was able to completely digitize the repayment process.
Coming out of 2020, the need for inclusive financial infrastructure in 2021 has never been more obvious. Banks, digital-born startups, and NBFCs will have to create and sustain customer-centric digital experiences at scale to survive and thrive not just now, but moving forward.
If you've been considering digital lending as a way to fuel growth, this may well be the right time to take that leap — after all, the bigger the challenge, the greater the reward.