An A-Z Guide to Digital Lending
Digital lending is transforming the financial service sector. Innovations in this niche have allowed financial service providers (FSPs)—be it a digital-native fintech company or an incumbent bank—to provide effortless loan products that today's market requires. Customers' preferences today are dictated by the experience they have with mobile apps, fintech, and social media. Digital lending is a way for FSPs to satisfy those expectations.
This article explores common definitions and concerns related to digital lending, and offers insights into the digital lending framework that FSPs can use to enter into this market.
Table of Content
- What is digital lending?
- 3 components of digital lending
- Types of digital lenders
- Any lending products can be digitized
- The digital lending process
- Pre-build Digital Lending Platform: an alternative way to get started with Digital Lending
What is Digital Lending?
Digital lending refers to the form of lending that is applied for, disbursed, and monitored by digital channels such as mobile apps or desktop apps. In digital lending, the FSPs leverage digital data to inform credit decisions and deliver customer-centric experiences.
In terms of output, digital lending is all about enhanced operational efficiency and faster turnaround time. Regarding the technicality behind the process, digital lending is the automation of one or some parts, or the entirety of the lending process—from acquisition and servicing to post-disbursement.
Below is an example of a digital lending customer journey.
3 components of Digital Lending
Many sorts of lending products are only digital on the surface. They come under a well-designed app. But unfortunately, lots of manual work are still happening in the backend.
A loan product only fits the definition of digital lending when it possesses the following three components. Together they form an iterative process, where the previous enables the next.
The use of digital channels
In digital lending, digital channels are used for servicing. Web apps and mobile apps are the most popular forms. But conventional digital means such as email and SMS are just equally important. An effective mix of these channels allows customers to apply for loans, get disbursements, and search for the information they need everywhere and whenever they are—at home or work, or on the go.
By being the collector of customer data (with their consent), these digital channels enable the next component, which is the use of digital data.
The use of digital data
Thanks to digital platforms, FSPs now can reduce in-person and time-consuming assessments. Instead, they use digital data to assess customers' credit and behavior.
Relevant data sources including bank statements, credit scores, or credit bureau data are collected to predict if a given customer is willing and able to repay. Sometimes, this prediction can be automated with Machine Learning.
Moreover, lenders exploit the data to provide personalized experiences in the form of targeted communications, promotions, or product offerings.
The focus on customer experience
From the customers' perspective, digital lending is about them able to receive the fund super quickly. To make this digital lending experience possible, FSPs leverage the modern banking tech to provide self-service loan applications, near-instant loan approval, and faster disbursal. Moreover, digital channels and data are utilized with care to offer personalized experiences while not compromising security.
Better customer experience is the product of the above components. As customers are satisfied with how they are serviced, they are more willing to provide their data and information. This is where we come back to the first component.
Types of digital lenders
Digital lending is not the arena for only fintech companies or traditional financial providers. Taking advantage of the changing market structure, regulatory environment, and customer experiences, many types of players have found their way into this niche.
There are many venues to becoming digital lenders. But the most popular ones are either by offering a comprehensive package of digital lending products, by digitizing only some lending products, or by partnering with other companies.
- Online lenders: FSPs that position digital lending as their core product, which is provided mainly via either mobile apps or web apps.
- P2P Lenders: digital platforms that act as an intermediary facilitating the provision of loans and the relationships between lenders and borrowers.
- e-Commerce and Social Platforms: lending is not the core product of these platforms; they leverage the strong brand, rich customer data, and powerful platforms to offer certain types of credit products to their customer base.
- Marketplace platforms: The key roles of these platforms are to originate loans and match one borrower with other lenders, and charge the origination fees.
- Supply Chain Lender: they offer non-cash loans for certain kinds of asset financing, invoice financing, or pay-as-you-go asset purchase within a supply chain or distribution network.
- Mobile Money Lender: this is where the lenders partner with mobile network operators (MNOs) to provide loan products to the network providers’ customers, where mobile phone data is used to calculate credit scores.
- Tech-enabled Lender: traditional financial service providers, such as banks and financial institutions, that have digitized parts or the entirety of the lending process. The digitization is done either by an in-house team or a partnership with an external service provider.
But the list is for reference only. Digital lenders are experimenting with new ideas, enhancing their existing products, and evolving with new models. It's hard to find one FSP that fits exactly into a category. As a result, they are making the digital lending landscape more diversified and complex.
Any Lending Product can be digitized
Regulations allow—even encourage—any types of lending product to be provided digitally. This applies to loans of any size, whether it’s personal loans or SME loans, or even mortgages, as long as the lenders have measures to evaluate the borrowers’ willingness and ability to repay.
Loans can be divided into two categories. They are personal loans (where credit is evaluated on limited data, which leads to increased risk) and SME loans (where the credit must be thoroughly evaluated on the client's financial health).
When diversifying loan products, financial service providers will intentionally or not find themselves diversifying the ways they design products, assess credits, manage risk, source data, and serve customers. These diversifications are made clear as below.
For personal loans
FSPs usually have to evaluate customers’ willingness to repay, which requires behavioral assessment of the customers. Additional data to collect include mobile phone data and bureau data.
When a given customer refuses to pay off their debts, their future access to loans must be restricted or prevented; and information of these debtors should be sent to the bureau for blacklisting.
Digitizing personal loan products has implications for both lenders and customers. For lenders, they must support and engage customers throughout the repayment periods to maintain high interests and encourage repayments.
Non-paying loans of 60 days or more should be written off, in which case FSPs should consider taking legal action. For customers, the loan products are offered digitally via mobile apps, web apps, or SMS, where borrowers are required to provide their personal data to support credit assessment.
For SME loans
FSP needs to evaluate the borrowers’ capacity to repay based on financial proofs. The types of data to collect include customers’ monthly income or revenue, cashflows, and expenses (digital invoices and tax returns).
In consequence of non-payments, the borrowers will shoulder the immediate financial loss of collateral and access to inventory. To restrict or prevent their future access to loans, blacklisting should be applied.
Providing this kind of large loan will have impacts on both the lenders and the customers. For lenders, they have to thoroughly assess customers’ affordability to repay. Non-payment should be punished by costly legal action to recover funds. For customers, they can apply, be disbursed, and repay on digital channels, but assessment should include physical checks. FSPs should limit access to funds for those lacking digital records.
|Common differences between digital personal loan and digital SME Loan|
|Product||Credit Scoring||Main data sources||Punishment for non-payment|
|Personal Loan||Evaluate the willingness to repay—based on behavioral assessment||- Personal data
- Bureau data
|- Preventing access to future loans
- Blacklisted by the bureau
|SME Loan||Evaluate the capacity to repay—based on financial proofs||Income
|Financial loss of collateral, access to inventory
Blacklisted by the bureau
|Implications on lenders and customers|
|Product||Implications on Lenders||Implications on Borrowers|
- Support and engage customers throughout the repayment periods to maintain high interests and encourage repayments
- Non-paying loans of 60 days or more should be written off, in which case FSPs should consider taking legal action
- Loan products are offered digitally via mobile apps, web apps, or SMS
- Borrowers are required to provide their personal data to support credit assessment.
- Thoroughly assess customers’ affordability to repay
- Non-payment should be punished by costly legal action to recover funds.
- Able to apply, be disbursed, and repay on digital channels
- Assessment should include physical checks. FSPs should limit access to funds for those lacking digital records.
The Digital Lending Process
The lending process is a course of activities performed by FSPs to provide loans. It includes acquiring and onboarding customers, assessing their credit, disbursing loans, collecting repayments, and following up on due loans. A lending process is digital when parts or all of those activities are delivered via digital channels. Throughout the digital lending process, data is collected and algorithms are built for credit operations, collections, and customer engagement.
To acquire new customers, digital lenders should have a mix of digital marketing tools and onboarding channels. They can also add physical touchpoints to enhance the digital ones.
SMSs, search engine optimization, online banners, and online ads campaign are the most effective digital marketing tools to consider. For digital onboarding channels, FSPs can consider web apps and mobile apps. Remote onboarding can be supported by human call agents and smart chatbots. In digital onboarding, customers’ identification is an integral activity. With access to verified records of the government or other credit bureau, FSPs can use electronic Know-your-Customer (eKYC) technology to verify customers’ information online, without them having to come to physical branches.
These tools and channels for digital acquisition can help banks reduce significantly the amount of manpower and paperwork. They also bring in a huge volume of customer data, which can be used for credit decisions and personalized engagement. All in all, they are a more cost-effective venue to promote products and provide key information to potential customers.
However, physical forms of marketing (such as POSs) and banking channels (such as branches) are still necessary to resolve issues during this first stage of digital lending. This is particularly true for underbanked or unbanked customers or those with low familiarity with digital tools.
An essential aspect of digital lending is the ability to access and utilize customer data to automate the underwriting process. Both traditional and alternative data sources can be used and enhanced by algorithms and analytics to assess customers and automatically make credit decisions. Digital lenders commonly combine the data they collected and independent bureau data with call data records, digital payments, and social media to understand customers. Hence they can make decisions in seconds rather than weeks, which improves turnaround time and customer experience.
Digital lenders score customers by feeding data into algorithms designed to predict the capacity and willingness to repay. And algorithms should have the ability to iteratively learn to improve their analysis over time.
Disbursement and Repayment
Loans are disbursed and repayments are collected digitally on digital channels that customers have registered, such as bank accounts (the most common), e-commerce accounts, or mobile wallets. Since these channels provide a clearer and more traceable audit trail, they help to prevent fraud. They also allow for rapid or even instant disbursement. Repayments will come through these channels, but FSPs can use auto-debiting, where customers can either approve or disapprove the repayments.
Likewise, digital data and advanced algorithms are the basis of the collection process. Delinquency scores can be applied to track customer behaviors and support customizing recovery strategies. FSPs should blacklist delinquent customers and prevent their future access to loans, and make this clear to potential borrowers to encourage them to repay.
Another way to motivate customers to pay off debts is by educating them on the financial consequences of negative credit scores. One way is to provide educational content such as articles or videos explaining credit and repayment, which can be consumed on phones, tablets, or desktops
Throughout the digital lending processes, digital channels and customer data are used to design intuitive and personalized experiences. Customer engagement in digital lending is a two-way process, where lenders can interact with the borrowers and vice versa. On the one hand, lenders send personalized communications, notifications, and offers based on customer behaviors. On the other, borrowers can manage their accounts, have questions, or report issues on the digital channels. This is where having a central system for data management, such as a customer data platform, is so important.
Building a long-lasting relationship with customers requires FSPs to apply responsible practices. This includes giving easy-to-understand explanations of the terms & conditions during onboarding, underlining the consequence of not making repayments on time, and providing access to channels to resolve issues.
Pre-build Digital Lending Platform: an alternative way to get started with Digital Lending
There are typically three ways for traditional FSPs, such as banks and credit institutions, to join the digital lending niche. They are
(1) building a digital lending platform from scratch,
(2) partnering with fintech, or
(3) buying a pre-built digital lending platform.
Of these 3 strategies, purchasing a pre-built digital lending platform is the fastest and most economical way.
In our experience, building such a large system from scratch would take anywhere from 12 to 18 months. Meanwhile, a commercial digital lending platform can be implemented within a couple of weeks. As most vendors support customization, FSPs can rest assured that the pre-built platform will work and have the look they want.
If FSPs choose to buy over build, here are 5 commercial digital lending platforms to consider:
- Temenos Infinity Loan Origination
- Finastra Digital Lending Solutions
- FIS Commercial Lending
- Mambu SME Lending
You can learn more about each of them in this article.
FSPs across the world now can leverage available digital lending platforms, increasing customer data, and new technologies to provide digital lending products at much lower cost but with customer-centric experience and improving efficiency. If designed and built correctly, digital lending will enable FSPs to innovate and compete in this ever-changing landscape.
Recently, KMS Solutions has partnered with axefinance to introduce Axe Credit Portal digital lending platform to Vietnam. Read about the release here, or discover the platform today to know how it can help incumbent banks in Vietnam digitize their lending process.