Lending is a complex process. Unlike depositing which is productive both for the bank and the individual, lending is followed by a complex set of procedures, time, effort, and logistical investment. The process is a complete flip to climbing up a mountain, where the upward climb is slow and arduous, while downward is quicker and seamless. Lending involves procedures like KYC verification, document submission, loan application and user setup, account mandates, amount sections, monitoring of end-use, EMI collection and more. At its most simplest, lending revolves around convenience, both for the lender and receiver. How long the process takes and what are the transactions involve decide how stressful or smooth it will be. The long laborious process of lending was offline for several decades and only now has it gone completely online.
Lending by very its nature is riddled by complexities. Chances of fraud and misgovernance, transaction failures and data input errors, loan closure inconsistencies are high and the entire process is so cumbersome, that all stakeholders involved find it very painful and hesitate and dread the entire process.
In the last 7 years, customers have increasingly shifted all offline financial transactions online. While the adoption of deposits was quick and seamless, lending has taken a while because of the ecosystem’s complexities. The rise of fintech companies experimenting with new digital solutions and better governmental regulations has enabled the slow adoption of digital lending processes. Broadly speaking, lending can be broken down into 5 critical parts; Customer Onboarding, Underwriting, Disbursement, Repayment and Collection. Some parts of this cycle such as Repayment and Collections are hybrid or need offline and digital intervention, while others like Customer Onboarding, Underwriting and Disbursement have managed to go completely online. This dual model has been seen to have the fastest adoption and better scalability in the fintech space.
Paperwork was the make crux of ‘Onboarding’ in a pre-digital era. It was painful, entailed multiple documentation processes, verifications, signatories, and took forever to process. Customer and User Experience seamlessness and focus, have made this part of the process infinitely better. While taking personal loans has become quick and easy, SME’s still have it tough. Big ticket SMEs are finding the process of onboarding complex, but small-ticket loans have benefited from this change of loan application flow.
Underwriting is critical, and there was a very limited means of doing it especially for large loans. Today with access to individual credit scores, returns patterns, and access to a unified taxation model database, underwriters have alternate data to underwrite retail loans. This model relies heavily on the availability of current data to predict customer’s probability of default. Although underwriting is largely digital, the current covid situation has disturbed existing models, and therefore the process followed today is more of a hybrid.
DISBURSEMENTS, REPAYMENTS, COLLECTIONS
Instantaneous credits and debits have been streamlined, and are now assured with a technological intervention into the lending process. With everything being tracked, borrowers know the due date of payment while lenders know in case of missed payments and can quickly set up collection response strategies. The collection of dues still requires physical intervention. Lenders will identify patterns of delayed payment behavior, develop strategies around them and identify high-risk customers but will still need a team on the ground to visit customers who aren’t responding.
Collaboration between banks and fintech-NBFCs
An unsure collaboration, a nascent one but with immense potential, the collaboration between traditional banking systems and digital fin-tech companies is here to stay. As fintechs continue to build niche solutions to solve last-mile problems through SaaS and PFM platforms, banks will continue to need to pair with them to access data and handle volumes that wouldn’t be possible with legacy systems alone. Underwriting and collections are key tasks that fintechs need to get on top of if they are to plug gaps in the lending ecosystem. Borrowers will be the biggest beneficiaries of this, which will also depend on increased digitization of banks and processes specially in smaller towns and cities.
Digital lending is like a little child that needs to be set free, and has a very promising future provided some gaps are identified and closed. These include;
- An increased shift of customers from digital literacy to financial literacy, which will help them make more autonomous decisions
- Increased transparency by lenders so they include borrowers in the process. Borrowers will need to know where the loan is originating from, the outstanding amount, and the repayment date
- Greater options of fintech platforms with more choices for digital banks to collaborate with
- Stronger legal and compliance for customer Onboarding
Lending will perhaps take longer to get digitised and although slow, there are several prominent players in this space. SALT in Denver, Colarado lets borrowers leverage their cryptocurrency for loans while Fintech Tala uses big data to leverage fintech and financially serve under-banked countries of the world such as Philippines, Tanzania and India. Avant simplifies the entire loan application process and gets money into accounts in a day, while NY’s OnDeck offers personalized loans and credit to SMEs.
These fintech companies are not just solving or streamlining the complex lending process, but simplifying the process, creating jobs and boosting economies in far reaches of the world.
These articles are my personal insights and experiences running companies across finance, education and technology. Do reach out to me to share specific insights you may have and don’t forget to share this with your community.
Co-authoring this piece with Charmaine Kenita, on my learnings in FinTech, Real Estate, future challenges, and mapping the way forward