Will 2021 Revolutionize Digital Lending?

Digital lending is the process of offering loans that are disbursed and managed through digital channels. Lenders use digitized data to inform credit decisions and build intelligent customer engagement. This article throws light on the various ways 2021 will revolutionize digital lending.

The technological boom in the last few years has revolutionized industries globally, including the financial sector. Digital lending is viewed as an easy way out of a lengthy and cumbersome bank process, which further aids in the monitoring and in-depth analysis of financial transactions. The pandemic saw an acceleration in digital transformation as businesses amplified their technology investments on cloud-based products and services, and digital sales gained steam as traditional retail stores went online at full stretch for the first time. With all the developments in hindsight, digital lending has now taken center stage for the past few months. 

Digitization of the lending process brings powerful benefits at the bank’s doorsteps. With digitization, banks can make better decisions, provide a better customer experience, and enable significant cost savings. Looking at the future of the financial sector, banks are now slowly but steadily embracing technology to better organize their digital lending process. One such technology that best serves the lending process is artificial intelligence (AI) that can assist in document automation, electronic signature, and many more tasks.

Digital Lending Market: Growth Rate by Geography (2020 – 2025)
Source: Mordor IntelligenceOpens a new window

According to a market studyOpens a new window by Mordor Intelligence, the digital lending market was valued at $311.06 billion in 2020 and is expected to reach $587.27 billion by 2026. The lending market is expectedOpens a new window to register a CAGR of approximately 11.9% during the forecast period 2020 – 2025. These figures show that the lending landscape has changed drastically over the years due to rapid digitization.

The Pillars of Digital Lending

1. Fintechs — The fulcrum of transformation

Fintech startups have been key drivers for digital loans. They have captured the current lending market by capitalizing on consumers’ need to secure instant funds through a seamless experience. They completely automate the underwriting of loans by leveraging data heavily. 

Some well-known examples of such fintechs include Alibaba, Kabbage, Ondeck, and Lending Club. In 2017,  digital loansOpens a new window worth over $160 billion were extended by fintechs, and in 2020, this number was around $220 billion. China has dominated this space with over 75% share of fintech digital loans globally. Today, Chinese fintech giants are valued more than several legacy banking groups. They are rapidly moving up the ladder of the valuation leaderboard.

2. Banks — Partnering with fintechs 

The digital lending market is no longer a niche defined by fintech startups and internet companies — it has become a sector that has attracted the attention of traditional lenders with large balance sheets. 

For example, Goldman Sachs launched Marcus, a digital consumer-lending platform that seeks to compete with fintechs with a fixed-rate, no fee personal loan. In October 2016, Marcus started offering personal loans of up to $30,000 and continuesOpens a new window to do so. Today, Marcus offers lending and digital saving lending services to 350,000 consumers — the loans made so far have returns-on-assets that are four times higher than those of the overall group. 

Encouraged by this stupendous growth in the U.S., Goldman Sachs’ Marcus began its international expansion starting from the U.K., where it launchedOpens a new window with an easy-access savings account in September 2018. In addition to this, incumbent banks have had growing partnerships with fintechs for the past few years. National Australia Bank (NAB) partneredOpens a new window with Xero, a cloud-based accounting software solution, to augment data for underwriting. Similarly, in India, ICICI Bank and Paytm partneredOpens a new window to offer short-term instant digital credit.

Also Read: Europe to Witness a Significant Spike in Digital Payments in 2021

The Transformation of Digital lending in 2021

With the authorization of two COVID-19 vaccines, there’s a reason to believe that 2021 will offer a fresh start many were hoping for. Currently, there is ongoing inertia in the field of digitized banking, implying digital lending is not going away anytime soon. Lending institutions that were just dipping their toe into the digital space should expect to fully immerse themselves in 2021. 

The decisions financial institutions make in the first quarter of 2021 about adopting new technology and expanding reach to small businesses may well be the most crucial ones for years to follow. So what are financial institutions looking forward to? Anything that can help the institution run smoothly in a purely digital space and address the growing needs of small businesses. Here’s what 2021 holds in store for the digital lending market.

1. Integrated hi-tech solutions

Small business lending in 2021 can be elaborated in three words: access, simplicity, and efficiency. There are myriad advanced tech solutions in place today that can help lending institutions go completely digital. This implies accelerating, streamlining, and personalizing a process that can be completed just through a smartphone — it can also be termed as ‘smartphone banking’. 

To begin with, digital application solutions that help lenders generate more loans in less time will continue to rise in popularity, and so will secure, automated two-way communication tools that allow applicants to upload all documents directly to their application portal. 

Once the loan is approved, a fully integrated digital funds transfer will be par for the banking course as opposed to cutting a 20th-century paper check. Digital transfers may also provide the option of making daily electronic payments directly to small businesses over the life of a loan, which in turn can mitigate the risk to lending institutions. With these digital solutions, financial institutions will be able to cast a wider web and build their customer base while simultaneously supporting small business customers.   

2. Enhanced support to small businesses

Small businesses will play a key role in economic recovery throughout 2021. According to Small Business Administration (SBA)Opens a new window , small businesses or those typically with fewer than 500 employees contributedOpens a new window  almost two-thirds of net employment gains in the U.S. from 2000 to 2018. 

Many small businesses will be awaiting a much-needed capital infusion, increased protection, programming, and development for these enterprises will be a priority for most government authorities in 2021. Thus, we may witness a boost in small business funding at both the state and federal levels, from the second round of Paycheck Protection ProgramOpens a new window  (PPP) funds, with a focus on women and minority-owned businesses, to the state-level small business grant programsOpens a new window  that President-elect BidenOpens a new window  intends to establish. 

As more funds are earmarked for small businesses, more entrepreneurs will reach out to lending institutions. Though the number may vary by location, lenders may see a major uptick in loan applications; institutions need to be ready to process those loans as the need arises. 

Also Read: Will Digital Currencies Become Mainstream in 2021?

3. Financial health

As the world grappled with the pandemic, small businesses survived the jolt by increasing online options and offering curbside pickups. Small businesses have smartly navigated the new terrain and acclimatized well to the highly dynamic customer needs. Community banks have followed suit in all respects. Thus, digitizing lending and finding virtual workarounds as a viable option to in-person interactions has been the peak pivot of 2020.  

However, despite the adaption, small businesses, even those that creatively adapted and/or received funding, are still strugglingOpens a new window to withstand the aftereffects of the pandemic. Thus in 2021, small businesses may need more funding and a fresh direction to keep their companies viable and relevant with a reduced workforce. For example, they may need guidance to understand how much to invest in employee and customer safety. And that’s where the role of lending institutions may come into play. 

The financial health umbrellaOpens a new window of small businesses covers everything from maintaining sufficient cash reserves and managing debt to calculating risks. Therefore, in the long run, lending institutions may benefit from working with a digital platform that offers financial health tools, from surveys to financial literacy. Such tools offer two-fold benefits: 

1. 1. Lenders can tap into trends and pinpoint opportunities to boost their potential customers’ financial wellness by understanding the financial health of a business. 
   2. When customers are looking for a loan, or any product or service, with the aid of such tools, they’ll be more accustomed to the financial institution’s framework. 

Fintech lenders are currently playing a critical role in patching the economy. The effects of disruption caused by digital lending across the spectrum of customer engagement, origination, credit assessment, underwriting, risk monitoring, compliance, governance, and collection are still unfolding. Digital lending is expected to open up a new avenue in the financial sector. 

Key predictions for digital lending include:

• • Advancements in underwriting or credit models using data from non-traditional data sources.
  • Fintech models with robust cost-efficiency gains are expected to drive future product innovation.
  • Enhanced scrutiny and compliance regulations in non-traditional lending models.
  • New customer segments and business models may crop up with the expected data and analytics-driven expansion. 
  • Mobile penetration and convenience of segmentation, trading, and positioning straight-through processing (STP) online models may encourage consumers to adopt more fintech models. 

With new emerging technologies and the fast-paced nature of consumer lending, it is critical that digital lending gives its members more than the traditional paperless process.  

Also Read: How Does Interconnected Banking Accelerate Digital Transformation?

In conclusion

COVID-19 has been an inflection point for the surge in contactless and paperless lending. It has promoted and fast-tracked digital transformation in the lending industry. A modern and robust economy needs to have a strong foundation of financial inclusion. This implies providing easy access to financial services and products from reliable providers to all individuals and businesses operating under the social spectrum at affordable cost, in a timely manner, and as per the tailored needs.

Do you think 2021 will change the overall landscape of digital lending? Comment below or let us know on LinkedInOpens a new window , TwitterOpens a new window , or FacebookOpens a new window . We’d love to hear from you!