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Digital Lending: How Technology Transforms Lending Market
The year 2020 brought along unthinkable challenges for mankind. The global pandemic crippled economies across countries. Individuals and small businesses were brought to their knees while the giants kept themselves from toppling over by conducting large scale downsizing.
As per a survey by the Pew Research Center, approximately 33% of Americans had to use their retirement funds and savings to pay their bills, while 25% of them struggled to cover expenses and 16% had no rent money.
This means a lot of people needed some short-term funding that could help them stay afloat and survive through the trying time the world was facing. It was at this point that digital lending turned into a savior for many individuals and small businesses who could access small amounts as loans for short periods. To top it all off, digital lending meant that the approval process was shorter and loan applicants could apply for loans using their smartphones. No long queues outside banks, no exposure, minimum health risk.
But this was not just a pandemic-specific feature provided by digital lending.
Digital lending, powered by fintech and digital lending software solutions, has been around for quite some time now. It is a quintessential mix of the lending practices of traditional banking, along with the power of AI and automation that technology brings with itself. Lending offered through digital platforms, that’s what digital lending is all about.
According to research conducted in 2018 by the Global Market Insights report, the global digital lending market was worth approximately $4 billion in 2018 and projected a 20%+ CAGR to 2025. During these couple of years, the fintech industry saw several digital lending unicorns, some of them being: OakNorth, WeLab, Better.com, etc. While other digital lenders, like, Aire and Kabbage invested in Artificial Intelligence to create easier and faster risk automation, that would help their loan origination efforts manifold.
The fact that the pandemic-impacted year of 2020 saw the entrance of over 100 digital lending start-ups is a testament to the fact that fintech has transformed the global lending market and both lenders and borrowers are benefitting from it, immensely.
How is fintech transforming the lending market?
Fintech has pumped in speed, accuracy, flexibility, scalability, and automation to the financial services industry. The same applies to the lending market. Earlier, traditional banks would handle most of the loan origination, underwriting, servicing, and disbursals manually. This would make loan servicing not only a lengthy process, but also one ridden with errors, dependent on the authority and access of a few key people, and finally high servicing rates.
Upon the infusion of fintech into the lending process, AI-based automation helped lenders churn multiple applications simultaneously, with higher accuracy, quicker turnaround time, better predictability and most importantly, faster loan servicing. An integrated, end-to-end automated loan management system that made lending incredibly smooth.
Also, fintech does not work on the traditional banking model of safeguarding money from individuals and lending them to loan applicants. In the case of digital lenders, individuals can turn into lenders directly by signing up into digital lending websites that work as a broker between the lender and the borrower.
Thus, by reducing multiple friction points, digital lending software technology provide lenders with a host of options to choose from, to start a booming digital lending business. Be it crowdfunding, peer-to-peer (P2P) lending, community lending, small lenders, etc.
Technology trends responsible for transforming the lending market
- Cloud computing
Digital lenders need digital lending software solutions that are scalable, flexible, secure, and most importantly, comply with the evolving regulatory reporting requirements of the digital world. Cloud computing enabled digital lending solutions to allow lenders to embrace these dynamics and stay ahead of the competition and in the learning curve, as well. Most disruptive technologies, such as AI, ML, deep learning, big data, data analytics are housed on the cloud, which allows for easy access to authorized personnel from anywhere in the world.
- Artificial Intelligence
Artificial Intelligence and Machine Learning form the bedrock of alternative credit scoring that makes digital lending the giant it is today. Unlike traditional credit score techniques, such as third-party data, along with subjective factors such as reputation and market forecasts, AI and ML dig in much deeper into gathering a more objective and realistic view of an applicant’s creditworthiness. Artificial neural network-powered digital lending software technology helps lenders unearth social/online behavior, identify patterns, using it all to predict more accurate consumer creditworthiness or attached risk factors. Based on a conclusive study, lenders then come up with an informed lending plan, schedule, and interest rate that work for both for them and the borrowers.
- Digital payments
With the rise of contactless payments in 2020, that can be attributed largely to the pandemic, people are getting more used to using digital payment models for their financial needs. With over 3.8 bn people using smartphones and with 4.32 bn active mobile users globally, it’s only natural to see the world shift to digital payments and lending. Financial transactions are not just online anymore, they are mobile. This spells great news for digital lenders across the world, who are already in the market and the ones who are considering entering the digital lending market soon.
- Digital authentication
Security threats and risk often accompany financial transactions. The same applies to digital lending. How do you know you are lending to the right individual? How do you know that your data, your credit history, your customer data and their profiles are completely safe? As such, the financial services industry is always quick to embrace and implement the latest technologies that help them put security to the forefront. Biometrics is one such example. With technologies such as fingerprint scanning, face and voice recognition, eye scanning, etc. digital lenders, too, have been able to prevent data security threats and breaches.
With faster turnaround time, better speed, higher accuracy, and incredible customer support and service, along with a host of choices of plans, payment terms, and loan options, digital lending is evolving into a lending giant. Tech advancements of various types, right from ML and AI, biometrics, cybersecurity, cloud computing, and compliance tools have made it possible for digital lenders to step over the large barrier that traditional banks led to. Given the abovementioned growth rate of CAGR 20%, the digital lending industry is well set to reach the $17 bn mark by 2025. It’s time that lenders worldwide identify this opportunity and add digital lending software to their processes to automate loan management, boost their revenues to expand their business.