The economic uncertainty of the Covid-19 pandemic has reiterated the importance of the modern lending market. While agile fintech firms adapted to the constraints of coronavirus lockdowns to meet customer expectations, traditional lenders channelled investment into technology to accelerate innovation already set in motion. To ensure the continuation of the economy, lenders were responsive by creating new business models, targeting new customer segments and future-proofing new strategies.

According to UK Finance, as of February 2021 the industry had provided £73bn in support to 1.6 million businesses through the UK government’s Bounce Back Loan Scheme (BBLS) and the Coronavirus Business Interruption Loan Scheme (CBILS). Considering the BBLS, the UK’s National Audit Office found that existing customers received a decision within 24 to 72 hours and new customers, between four and 12 weeks.

In the US, the Paycheck Protection Program (PPP) was established under the CARES Act, an initiative supported by the Department of the Treasury, providing small businesses with funds to cover eight weeks of payroll payments and expenses. $659 billion was authorised for the programme and encouraged financial institutions to ensure their systems are adaptable and could disburse loans quickly and effectively.

Finextra spoke to Richard Morgans, GM UK&I, Mambu; Alex Marsh, Head of Klarna UK; and Paul Elliott, head of mortgages, Atom bank about how these government initiatives have impacted the lending sector in 2021, how technology can dramatically transform traditional lending working practices and how lenders are building an ecosystem around live events.

Why is agility invaluable?

In conversation with Finextra, Morgans highlighted that “on both sides of the Atlantic, financial players played a crucial role distributing governments’ fiscal packages during the pandemic. They also filled an enormous credit gap, offering tolerance on payments and giving customers greater access to loan facilities.” As mentioned, agility amid the Covid-19 pandemic was crucial and being able to respond to needs quickly was required across the board - from digital onboarding to adjusting and modifying lending models in line with policies and aid.

However, as Morgans elucidated, there are growing concerns about the rise of non-performing loans (NPL) and possible capital depletion. “Those lenders that showed the highest levels of agility through the Covid-19 period will be best placed to address these new challenges, by being even more customer centric and continuing to digitise and build more resilient products and processes.”

On this, Elliott stated that there has been a significant increase in borrowing by small and medium-sized enterprises, “many of whom had not previously engaged with borrowing. The BBLS and CBILS schemes provided lenders a government-backed guarantee for the loan repayments to encourage more lending - where otherwise they would have retrenched as the COVID-19 crisis took hold.”

Elliott went on to explain that this “necessitated agility both within the banking stack and broader operating models to align application journeys with the prescribed scheme rules. At Atom, the initial British Business Bank accreditation to full CBILS product launch was achieved within 32 days and enabled us to release our balance sheet to support the UK economy.”

What must change about traditional lending practices?

Many banks struggled to cope with the volume of applications and were still relying on manual processes – and re-entering data into old systems – even if there was a digital interface at the point the customer applied for the loan. This must change; banks must focus on and improve the overall user experience to stay ahead of the competition. Although, as Morgans stated, digitising the customer-facing front-end is only one step in the process.

“Back-end processes must also be transformed to allow for fast origination and seamless onboarding. To achieve this, banks and financial institutions must first accept that they can’t always do it on their own. Collaboration is the key to innovation,” Morgans said. He went on to explain that collaborating with fintechs allows businesses to automate end-to-end user journeys without the need to rip-and-replace outdated systems, which eliminates disruption and excessive costs.

Determining credit worthiness

Technology can support the endeavour of automation by dramatically transforming traditional working practices, with innovation such as optical character recognition (OCR) and machine learning, which can be used to eliminate the manual work of reviewing legal documentation. APIs can also help banks access transactional data from current accounts, use it to analyse spending habits and categorise risk in a more detailed way than the traditional credit score.

As Morgans said: “Lenders have traditionally used a limited variety of data sources to determine a consumer's credit worthiness. While they work well with the financially active, they are not so good at capturing information on the underserved segments, and historically end up locking them out.”

Innovative lenders, and payments providers or wealth managers for that matter, are prioritising delivering hyper-personalised offerings today to determine behaviour and mitigate risk. By tapping into the potential of open APIs, real-time data can enable lenders to connect with third party providers and data sources. In addition to leveraging access to current accounts, industry players can access “rent, utility and phone payments, digital profiles, and even search histories to capture a more thorough overview.” Therefore, they are able to make a more accurate assessment of the customer risk.

Providing an example, Elliott explored how historically, “the ‘ownership’ of customer data has given traditional high street lenders a competitive advantage. Institutions could use this transactional data to observe income and cash flows. With the advent of open banking, the information asymmetry between borrowers and lenders is being challenged.

“At Atom, we are leveraging Open Banking in our lending journeys to automatically verify income, derive affordability and identify risk indicators such as high-cost lending or regular gambling. Not only does this materially reduce back-office processing but provides a superior customer experience when compared to the submission of paper-based documents.”

Elliott added: “Credit scores remain a useful metric but can consist of outdated information and lagging data. Access to account information - and for small businesses, management account data - can provide a lender with a broader overview to more realistic assessment of the applicant's financial health.”

Buy-now-pay-later

Swedish fintech Klarna has set the blueprint for buy-now-pay-later (BNPL) products and has popularised point of sale financing for smaller purchases. According to Kaleido, Klarna hit $53 billion USD in sales across 2020, an increase of 46% YOY. On determining credit worthiness, Marsh believes that “there is much in the current system that has not kept pace with the way many consumers want to use credit. The current system serves consumers of traditional products well but does not capture users of alternative products such as short-term, low value credit.”

Also leveraging the potential of open banking, Klarna are looking to “combine consumers’ current account data with CRA [Credit Reference Agency] data to build an in-depth and up-to-the-minute profile of an applicant’s whole financial situation. This hybrid solution can enable better, more responsible lending and borrowing. By incorporating open banking data, we have the opportunity to improve access to credit, enabling new products to be brought to market based on the customer insights gained.”

BNPL is an attractive alternative to the revolving credit provided by card issuers, as well as payday loan products. However, with organisations like Affirm launching a debit card, BNPL in some circles is seen as a challenge to banks’ traditional business. For Morgans, “BNPL is a hot topic and is seen by many as being simply short-term credit in disguise. However, consumer demand, especially in ecommerce, is undeniable.

“Should banks be worried? Maybe, but with the possibility of regulation and the saturation of the market, BNPL could become a commodity product. Instead, banks should be looking at what they can learn from BNPL players like Klarna on how to engage and inspire the consumer during the lending process.”

Providing the Klarna perspective, Marsh explained that with credit card companies making £5.7 billion from interest and fees charged to UK consumers, they are “starting to understand that there is something wrong with this model and that’s why they are preferring fintech companies and challenger banks such as Klarna for everything from managing their finances to getting credit.”

Mortgages

With people living longer – often owning their homes outright for decades – there is an opportunity to tap this market with mortgage products and offering new products for customers that fall outside of the traditional criteria. However, as Morgans stated, a challenge has emerged in ensuring the mortgage market remains a sustainable market. “By taking advantage of new technologies, maintaining a customer-centric approach, and using inbound marketing tactics, lenders will be able to attract more prospects and convert more of them into clients.”

Morgans added: “Interest only mortgages offer consumers more flexibility as to how they manage their finances. They have the autonomy to decide how they will save and pay back the mortgage balance. Options include inheritance, or a big pension withdrawal. Moreover, as the monthly repayments only go towards the interest on the mortgage, consumers are left with more disposable income to spend on home improvements which add value to the property.”

In a concluding statement, Morgans addressed how customers’ financial needs are constantly evolving. “They expect lenders to anticipate and meet their requirements (even before they know what they want), and to package services in a highly-contextual and hyper-personalised way.

“It’s no longer just about offering choice; tomorrow’s journeys will have to be embedded in the actual experience itself. For example, when buying a home, purchasers will simply browse, buy, and secure their mortgage through their real-estate agents web portal. No leaving the site and no duplicating effort, just a single seamless journey.”