The answer to the question above is: "...as close to zero as practical!"  Full disclosure: we are massive advocates of automation.  If you have read our earlier posts in this series, you will know that we believe that automation is the route to profitable, sustainable digital lending businesses.  The role of skilled people is to monitor exceptions and take action where fine judgement and delicate handling is required.  This blog looks further at automation and what can be achieved with clever technology.

Interestingly, we found some analysis recently that we had prepared back in 2016, looking at the major Peer to Peer Lenders.  At that time, across the board, losses were significant, IT spend was going through the roof and headcount was increasing rapidly.  Those were the days when Peer to Peer Lending was the darling of the FinTechs and institutional investors queued up to get their slice of the action.  No problem then to ride the wave of alternative finance!

Fun to look back, but the world has changed and we now have a major task ahead of us.  We must build towards a positive future, re-igniting the passion for providing a win-win-win scenario for lenders/investors, borrowers and platforms.  As highlighted recently in The Woolard Review: A review of change and innovation in the unsecured credit market - a sustainable market needs more alternatives to high-cost credit.  As the economy rebuilds over the next few years, we intend to support the industry to deliver Peer to Peer Lending and Online Direct Lending, profitably and sustainably.  The key to that is minimising operational costs, and the key to that is automation!

Getting the balance right

There are Digital Lenders who seem to have got it right.  One example is a Caribbean firm focused on consumer lending, offering general instalment amortising loans of three to five years, salary deducted loans and Point-of-Sale loans (Buy Now Pay Later, but with interest bearing loans having had proper credit referencing and affordability checks, as per current FCA recommendations).

In their four years since launch they have processed over 2400 borrower loans, in value terms USD $23 million.  Because this is P2P Lending, there are about 200 lenders' loans per borrower loan, so in transaction terms they have processed and are processing a total of more than 450,000 individual loans.  Lenders have averaged 8.3% return after defaults.

You will probably be surprised to learn that their operation has been run by just four people, covering customer service, back office administration and management.  They have recently started bank balance sheet lending in another country, alongside their investment partner, and recruited three people to process the business for this market, which is potentially ten times larger than their previous location.

How have they achieved this?  Great management, clearly, but also highly automated software driving the whole loan lifecycle, automated payments and management.

To achieve maximum efficiency, what elements can be automated in the whole loan lifecycle?

The People/Automation debate has been ongoing within the industry but great strides have been taken towards automation recently, particularly because the pandemic has forced so many online over the last year.  These are just some of the areas of automation that increase the efficiency of digital lending and borrowing:

• Onboarding, ID verification
• AML/KYC compliance checks
• Loan origination
• Loan matching lender funding
• Payment processing (deposits, withdrawals, disbursements, repayments, etc) and banking
• Open Banking data access and payments
• Whole of loan lifecycle servicing
• Re-configuration of active loans, extensions, reductions, holidays, part and early redemption
• Collection and re-distribution of principal and interest repayments
• Client money/asset reconciliation
• System reconciliations to lending funds and client money segregated bank accounts
• Late payments, arrears, DCA interface, debt collection, default processing
• Customer & user profile management, eg person, company, FI, HNWI, sponsor, broker
• Credit referencing, underwriting automation, credit decisioning
• Loan pricing, redemption and maturity processing
• Customer communications eg email
• Borrower and lender dashboards
• Tax and withholding tax data and certificates
• Fees management
• Administrator notifications and approvals
• Document management
• Secondary market sales/purchases
• Valuation and re-pricing
• Cashflow and liquidity forecast
• Launching new loan and lending products
• Reports and statistics
• Audit trails for processing and compliance

This list is not exhaustive, and all systems have to be capable of adding new things, quickly and easily, as required.  The pandemic has shown us how dynamic lenders have to be, managing new regulations at the drop of a hat, like giving payment holidays, creating new loan types, modifying loan terms and managing vulnerable borrowers.

One approach that has been popular for aspiring online lenders and FinTechs is to create a front end or mobile app and then to "buy-in" third party products to process key parts of the operations technology eg onboarding, ID verification, AML/KYC, payment processing and credit decisioning.  This approach seriously undermines the possibility of profitability as each one takes another bite at the margin created, reducing or eliminating possibilities of profitability.

Looking back, pre-pandemic, to the new Peer to Peer Lending regulations that were introduced by the UK Financial Conduct Authority in December 2019, sadly many lenders closed their doors to retail investors rather than tackle the changes required to their systems.  We realise that it might look easier to generate more fees out of businesses and institutions but, revisiting the early days of P2PL, this was its appeal, a level playing field for the retail investor and institutions alike.

Sledgehammer to Crack a Nut

Still, it seems that automation isn't the priority of all.  I'm sure that many software vendors with comprehensively automated systems like us, have heard the phrase "sledgehammer to crack a nut" from lenders searching for their new system.  Many believe they only need a "small system" to do the job, thinking they would only use 30% of the functionality on offer. As we all know now, deploying small non-automated "recording" systems just leads to large staffing/office requirements, high overhead costs and an unsustainable future.  Lending IS a complicated business with so many variables across the full loan lifecycle.  Clever automation saves time, money and compliance headaches and, importantly, leads the way to profitability.

For those who bought small systems previously, when did they realise the need for more process automation or functionality - 6 months later?  Perhaps even a few weeks into its use!  It is often cheaper to think long term value, rather than short term cashflow.

Top tip for new digital lending firms: Search for a system with an inbuilt sledgehammer for when you expand quickly, as many online lenders have, both in new lending products and geographic reach.  Then you can let the system do the heavy lifting in loan processing and you can keep your operational overheads to a minimum.  That way, you will have the sledgehammer to hand when you quickly discover you have that bigger nut to crack!  Automation IS the route to profitable growth in digital lending.