Digital Lending and the New Financial Ecosystem

In a financial world that’s increasingly open and subject to ever-emerging competition, there’s a compelling case to be made for the importance of “ecosystem” participation and collaboration. This blog explores how digital lending empowers banks to improve the customer experience and enter new and more diverse markets through partnership. Success in the new age of competition requires modernization, vision and collaboration.

Banking is a highly competitive industry, with firms battling for market share, wallet share, and geographic reach (or niche markets, as the case may be). Traditionally, banks manufactured and distributed branded products exclusively through their own networks. And historically, despite the number of financial institutions from which to choose, retail bank customers often relied on a single bank for most of their financial needs – primarily because shopping around tended to be a hassle.

Open banking and digital technologies are changing all of that.

An Open Financial Ecosystem

Around the world, open banking initiatives give customers the right to share their data with authorized third parties who can, for example, execute payments on a customer’s behalf. Open banking seeks to spur competition, boost innovation and increase customer convenience. However, it’s also changing people’s banking habits. Bank customers are now better informed and more sovereign than ever, and increasingly buying financial products from multiple banks or other financial services providers. It’s never been easier.

Banks can’t assume their customers will remain loyal; they must make the paradigm shift from a “bank first” to a “customer first” mindset – backed with technology to meet today’s digital demands. In this new environment, customer engagement is paramount – many customers no longer search for a specific financial product (such as a loan) but rather look for engaging digital experiences with integrated finance that meets their needs and wants.

The Customer Journey

In the case of lending, banks can’t rely on new loan applications arriving automatically from their account holders. Furthermore, lending is not just a matter of processing loan applications and providing funds to a designated bank account. This is the age of the “customer journey”: Lending products must be offered in context, where and when customers need and want them.

Most customer journeys begin online or via a mobile device. Although customers may require finance, the search for a loan is usually part of a bigger transaction, such as when seeking to purchase a house or a car. Most bankers would concede that customers prefer shopping for products rather than finance, so it makes sense to locate lending products within that context. Banks that fail to acknowledge this will run the risk of missing out on lending opportunities or even losing customers.

New Opportunities with Digital Lending

Digital lending opens new opportunities for banks to:

• Become part of a growing ecosystem. Digital technologies empower lenders to participate in a vibrant financial ecosystem that’s driving new collaborations and business models. For example, lenders can partner with payments providers or insurance companies as part of an aggregated service that increases customer convenience and improves choice.  
• Increase revenues, reduce costs. Digital lending can boost a bank’s bottom line by increasing win rates, creating new revenue streams, and reducing costs. By reducing the “time to yes” from weeks to minutes, lenders can boost efficiency and do more with less. Some lenders report cost savings of around 40% from digital lending.* With increased automation, staff can be redeployed from reviewing loan applications to work that adds more value.
• Make better decisions. By introducing standard processes and accurate data, a bank can make better quality lending decisions more quickly and consistently. Digital lenders can harness the power of big (and small) data and advanced algorithms to monitor and refine lending decisions and criteria.

The Loan Journey

Digital lending is redefining the economics of the credit market. With a lower cost base and improved reach banks can do more with less. But digital lending requires careful planning and is more of a journey than a destination.

A loan journey begins when a loan application is made, digitally or in person. Traditionally, a bank could take days or weeks to arrive at a decision – a timeframe that’s become unacceptable. Today’s customers expect a decision in minutes and cash in days. Behind the scenes there’s a lot to do in a short amount of time: Know Your Customer (KYC), eligibility, credit underwriting, loan agreement, loan disbursement, customer communications, and more. And the loan journey doesn’t stop at disbursement – digital lending is an end-to-end process, with loans that need to be collected, serviced, potentially restructured or renewed, and closed when paid in full. To ensure a successful journey, digital lending with process automation is key.

With so many moving parts to manage, a bank’s digital lending proposition offers a good snapshot of its overall digitalization strategy. Lending is at the heart of most successful banking relationships and banks that get it right have everything to play for. But there have been many false starts and costly experiments, as banks grapple with fragmented data and disjointed lending operations.

Technical partners can help by providing modern end-to-end low code platforms and solutions that can be easily tailored and integrated into compelling customer journeys. Banks also need to consider partnerships to enter new markets and fully participate in the modern banking ecosystem.

* McKinsey & Company, The lending revolution: How digital credit is changing banks from the inside