5 Key Emerging Technology Trends in Lending

The world of lending has evolved. This is primarily driven by increasing customer expectations and the growing need for data sharing, customized services, mobile banking, e-KYC, e-sign, and online credit checks. With these changing industry dynamics, speed, personalization, and digital acceleration have become key imperatives for new-age business lenders.

Let’s look at the top five emerging trends that every lender must watch out for:

AI-driven Lending

According to KPMG, “Successful bank of 2030 will master data-driven customer experience across channels, underpinned by artificial intelligence and robotic automation".

With cutting-edge technologies like artificial intelligence (AI) and machine learning (ML), banks can identify probable defaulters and dropouts and focus only on the right set of customers and align their efforts towards upselling and cross-selling opportunities.

Benefits of AI in Lending

• Minimized Cost: A well-integrated AI/ML, automation, OCR, and NLP enhances the efficiency in the entire spectrum of lending processes, including customer onboarding, KYC, legal approvals, and credit checks, thereby minimizing overhead costs
• Reduced Lending Time:The loan processing time is reduced from weeks to hours. Typically, the initial documentation is the most time-consuming activity, which is minimized by leveraging the ideal automation tools across the lending cycle
• Automated Loans: Fintechs and banks are leveraging AI to determine creditworthiness and make smarter decisions to approve credit. This happens at the fraction of the cost, is fast, and involves low risk, thereby empowering banking leaders to offer a great customer experience

 Open banking

Open banking is when financial information for consumer banking transactions or other financial data is securely shared with third-party financial service providers using APIs. The data is shared after customers’ consent. API architecture is a key aspect that banks must mature to enable this.

Benefits of Open Banking

• Increased Number of Tailored Products: Based on the agreement to share spending details and other financial information, customers get access to more tailored products
• Complete Data Control: Customers have full control over how their financial data is being used and who has the accessibility. This approach instils a sense of confidence amongst customers that their financial information is being handled while ensuring the highest security standards throughout the journey
• Faster Access to Credit and Financing: The diversity of credit services allows for access to a larger source of financing, to which consumers can apply. Open API interfaces result in providing much faster credits to consumers

Co-lending

The co-lending model, where banks and NBFCs come together to engage in priority sector lending, provides a wider customer reach and enables financial inclusion, by providing tailor-made and affordable financial solutions at the grass-root level.

Benefits of Co-lending

• Improved Access to Funds: Co-lending leverages digital channels to make funds easily available to unserved/underserved customers
• Lower Cost of Loans: It helps push credit through the economy and reduces interest rates to customers, translating to low customer acquisition costs, increasing market share, and more loan disbursals for the financial institution
• Increased Depositors: It allows banks to reach out to a larger customer base while acquiring and retaining them even during financial downturns
• Promote Portfolio Growth: Sharing risks in co-lending allows banks to finance high-potential companies. Such companies don’t really qualify for a loan directly from the bank. Once a customer receives the loan, he can slowly build a good credit history, qualifying for financing directly from a single bank, thus promoting portfolio growth
• Quick Turnaround Time: Integrating mechanization and instruments helps NBFCs in making quick credit decisions, allowing them to handle more advanced applications and dispense more advances, thereby guaranteeing quick turnaround time

Microservices

Scaling a traditional paper-based lending process, modernizing legacy lending systems, and taking lending to digital channels is a cost-intensive exercise for financial institutions. Cloud-native microservices allow banks to invest incrementally, augmenting their current system gradually at a fraction of the cost making transformation financially viable for them.

Benefits of Microservices

• Agility and Extensibility: Incremental services and products can be added quickly and seamlessly without the need to impact the existing functionality or system downtime. Customers also appreciate the regular launch of new products and features for their use
• Reduced Development Infrastructure and Maintenance Costs: Microservices leveraging the cloud technology help lenders achieve their growth objectives at a marginal cost as they pay only for what they build and consume, without the need for upfront sunk costs
• Functional Isolation and Focus: Analysts and developers get to focus on a particular feature, testing, and releasing to production. In case the feature does not perform as expected, it doesn’t hurt the overall process and the impact is likely to hit a specific module

Neo banking

Neobanks are fully digital banks that work entirely online with no physical presence and branches.  These banks cater to tech-savvy customers, who avail services through mobile phones and other digital gadgets. These banks drive innovation and leverage AI to offer personalized services to clients while limiting working expenses

 Benefits of Neo-banks

• Reduced Costs: Fewer regulations and the absence of credit risk allow neobanks to keep their costs in check
• Faster Banking: Neo-banks allow customers to set up accounts and process requests quickly and skip the usual time-consuming steps to offer loans

In a Nutshell!!

According to a report by MARKETSANDMARKETS, the global digital lending market size is expected to reach USD 20.5 billion by 2026, at a compound annual growth rate (CAGR) of 13.8% during the forecast period.

The five trends that we discussed are set to change the face of the lending industry. The time is now to ride the digital wave and capitalize on this market opportunity to stay ahead and competitive.

Authored By: Kaushal Verma, Associate Vice President− Banking Centre of Excellence, Newgen Software