Digital lending is rapidly gaining popularity worldwide, with Fintechs taking the lead in addressing the changing consumer behavior for accessing loans. India is no exception, as more than 1,000 FinTech companies operate in the country, all using digital models that carry the potential to disrupt the lending market. Even banks have partnered with FinTech companies and digitized the lending process. In a recent report on digital lending, the Boston Consulting Group identified four factors driving the growth of digital lending globally: internet-savvy millennials, big data & technological advancements, the upsurge of innovative operating models, and enabling regulatory environment.
The global digital lending market is projected to grow at a compound annual growth rate of 20.3% from 2020 to 2027, reaching $23.6 billion by the end of the forecast period.
In this blog post, we will explore the four key factors driving global growth in digital lending.
In today's technological world, consumers have become increasingly adept at using digital platforms for their everyday needs. From ordering food to buying groceries and booking vacations, consumers now rely on online channels for most of their transactions. This shift in consumer behavior has significantly reduced the need for physical interaction with sellers, as consumers increasingly rely on online reviews, videos, social media, and websites to make their purchasing decisions.
The rise of online channels has led to the emergence of fascinating patterns, particularly in the financial sector. For instance, financial transactions are often made outside working hours, with the world's largest money market fund, Yu'eBao, recording that 50% of its transactions are made after work hours. This trend highlights the convenience and accessibility of digital channels and emphasizes the need for businesses to adapt to changing consumer behaviors by offering reliable and efficient online platforms for their customers.
The widespread availability of smartphones has made mobile services accessible to two-thirds of the world's population, bringing economic activities to people's fingertips. With this surge in the number of mobile users, advancements in mobile internet technology have gone hand-in-hand, creating a wealth of data that is available for companies to use.
Connected devices such as smartwatches and cars have further increased the availability of online data, providing companies in the financial sector with valuable information to create substantial value. Visa is a prime example of a company that has harnessed big data to its full potential, reducing the average time to detect card fraud from one month to just 13 days.
Advancements in biometric technology, such as iris and fingerprint scanning, the internet of things, instant payments, face recognition, and blockchain, are also playing a critical role in digital lending. These technologies offer enhanced security measures and streamlined processes, making it easier for consumers to access financial services online.
Overall, the advancements in mobile internet technology and biometric technology are revolutionizing the way the financial sector operates, offering new opportunities for businesses to grow and thrive in the digital age.
The most powerful force behind digital growth is the emergence of innovative operating models. Fintech companies, financial aggregators, and other industry players have rapidly adopted these models, fueling the growth of digital lending worldwide. There are four primary archetypes of these operating models:
In this kind of model, the consumers are acquired by the FinTech companies and the lending to them is done by partnering with the banks. The best example of such a model is the Israeli FinTech company, BeeEye which translates the online available data of the customers into tailored financial indicators which are further passed onto the lending institutions to work upon and deliver improved market prediction models.
An independent platform is a FinTech company that raises debt and equity funds through institutions and lends directly to consumers without partnering with incumbent banks. Consumers can easily access these platforms through various online channels. Kabbage, a U.S.-based company, is an ideal example of this type of platform, which enables borrowers to obtain loans quickly and easily.
The peer-to-peer (P2P) lending industry originated in the United Kingdom in 2005 and expanded to the U.S. market in 2006. Since then, the P2P lending industry has experienced significant growth, and there are now many online P2P lending platforms available for borrowers to choose from. Peer-to-peer lending is gaining popularity in maximum countries and the global peer-to-peer (P2P) lending market size which was valued at US$ 83.79 billion in 2021 is expected to hit over US$ 705.81 billion by 2030, growing at a CAGR of 26.7% from 2022 to 2030.
As the name suggests, these models are built as a “value add” to the consumers of already existing large businesses. Or, we can simply count them as extra services to the existing consumers of the businesses. For example, China's online WeBank, in which Tencent is the largest shareholder, provides unsecured small loans to consumers via the WeChat and QQ apps since 2015. Depending on the consumer's score, they may also be eligible for other services and perks.
Digital lending is a rapidly growing sector worldwide, and financial regulators are taking steps to regulate it safely. In many developed economies, such as the U.K., Singapore, the U.S., Hong Kong, Dubai, and Australia, regulators have created sandboxes to support and accelerate innovation in the sector. The New York State Department of Financial Services has issued BitLicenses for businesses dealing with virtual currencies in the U.S., while the China Banking Regulatory Commission has issued draft rules for online lending in China. Similarly, the Indian Government has implemented the India Stack, an open architecture platform for authentication and data access.
Such measures taken by governments worldwide have enabled lenders to accelerate customer acquisition and boost the growth of digital lending. By regulating the sector, these governments are also promoting trust and stability, which are crucial for the sector's long-term success.
Digital lending is changing the lending landscape globally, with FinTechs leading the charge. Factors driving the growth of digital lending worldwide include internet-savvy millennials, big data & technological advancements, the upsurge of innovative operating models, and enabling regulatory environment. By embracing these factors and investing in the necessary infrastructure, businesses and lenders can take advantage of the opportunities presented by digital lending and transform the lending industry. As more lenders enter the market and competition intensifies, we can expect to see further innovations that will make digital lending even more accessible and convenient for borrowers.
LendFoundry’s expertise in leveraging cloud technology helps FinTechs to achieve organizational agility and scalability at speed. We have invested very significantly in Kubernetes, and other Cloud technologies to deliver a cloud-native, API-first, microservices-based digital lending technology platform for loan origination and servicing.
To learn more about our services and offerings and get the acceleration your FinTech business needs, please do connect with us.