Every newspaper that you flip through, any online website you browse - you are bound to read something about digital lending, Online lending, P2P lending, alternative lending or the multiple variants of those terms. BCG has released a report on Digital lending in India and estimated the market to be $1 trillion over next five years*1. Given the low penetration of credit in India, no doubt lending is an attractive business opportunity in India.
We, here at LendFoundry, feel the lending sector is poised for exciting growth, evolution and transformation over the next few years. Digital way of lending is no longer a differentiator or an option for a lender, as a majority of consumers now prefer to apply for loans online, especially young borrowers*2.
So, if you are a new player in the lending space itching to start or an existing player looking to launch new products, this article is for you. We have laid out the basic framework to launch a sustainable, long-term competitive digital lending product.
Identify target segment: Lending companies are focusing on creating micro-segments and drive a personalization approach for each of these segments. Lenders can offer products for specific financing needs such as consumer durable financing, user car financing etc., or generic product for targeted segments such as unsecured personal loans for salaried people, self-employed, students, New to credit, senior citizens.
Drive Innovative products: Launch innovative products targeting the customer needs in the identified segments. Innovation can range from how lenders collect and use data that hasn’t been available earlier to proactive re-pricing or tweaking the way customers repay their loan. Internal back-office and support functions will also be digital. For instance, credit needs of millennials such as ‘Impulse purchase at POS’ or ‘emergency cash’ can be met through innovative operating models.
Drive Process: Armed with innovative products, it is important for lenders to drive customized workflows for each product. Workflows should be customized to focus on the demands of today’s consumer. For instance, each product segment may require a different set of documents. The increase in digitization and automation of certain processes will be key differentiators for lenders. This will imply that lenders will have to build the right mindset and culture in the organization.
Data-Driven Credit Model: As a lender, focus on data-driven risk scoring credit models for each product. You can pool data from various resources such as credit bureaus, bank transactions, social media etc., but the focus should be on minimizing the cost of rejections and optimizing the approved application. Data-driven decision making complements the pricing for each borrower by ensuring relevant insights are captured.
Finalize Customer Experience: Determine how you want to interact with your customers in overall cycle? Though most lenders focus on digitizing front-end application process, they fail to tap opportunities to apply user-centric design concepts in servicing and collections as well. Enabling self-servicing and providing omni-channel support transform the way lenders engage with customers across the customer journey.
Reinvent credit models: Lenders need to leverage data captured in the process and enhance the experience of the customer or reduce NPAs by changing their credit models. Lenders need to have a scalable and robust technical backbone to achieve changing needs and become agile. Emerging technologies such as Machine learning and Analytics can create an enormous opportunity for lenders to frequently innovate their offerings.
Digital lending is in at the cusp of exponential growth in India and another 2-3 years business models will attain maturity How lenders approach their customers by their digital offerings is vital to tap the opportunities in this space.