Online lending 3.0 – how technology is changing the game
Viktoria Ruubel, IPF Digital: Success lies in a company’s “digital brain”
Digital lending choices for both consumers and small businesses have grown rapidly over the past ten years. This growth has been fuelled by both the progress of technology and consumers’ willingness to embrace it.
Substantially improved internet connection speed and quality and the exponentially increased capabilities of the devices we use, particularly handheld devices, have allowed companies to reach consumers wherever they are with fully digitised financial applications.
At its outset, digital lending had many early and substantial challenges in its path which led many to question its viability. Would customers adopt and trust a digital-only channel? Would the underwriting model prove successful? How would regulators respond to the digitalisation of the key credit processes?
The initial era of online lending helped to address all these questions and proved that the digital-only routes to market could be successful. Digital lenders demonstrated they could attract a considerable number of customers and generate significant revenue, meaning that they could successfully compete with traditional financial institutions.
Digital lending was able to successfully establish itself as an industry which brings visible benefits to consumers and digital lenders alike. One of the main benefits of digitalisation is convenience: consumers and small companies can now apply for loans at the time and place that suits them. According to PwC, the majority of consumers across all age groups prefer to apply for credit online rather than in person or on the phone. At the same time, digital lenders benefit from the cost and scalability advantage over traditional lenders through digitalisation, and can access new customer segments in areas that were not before reachable by banks and their branches.
Online lending 2.0 – understanding the importance of data
As consumers transitioned online, so did their data, and data analysis was the focus of the second stage of development in the digital lending space. The ability to capture petabytes worth of data has allowed lenders to reach new consumers and small businesses that have previously been underserved by banks.
Many digital lending platforms still continue to use underwriting criteria that are more akin to those used by traditional credit institutions. This is not overly surprising, because although the technology and the way of market access might be changing, the regulations and credit rules still apply to everyone, legacy and digital alike.
But other digital companies have moved beyond the traditional model and have instead focused on understanding alternative data. They are looking to see how this not only can help to improve underwriting models, but also extend the reach of services to the under-banked and unbanked segments left behind by the traditional underwriting models applied by banks.
Using IPF Digital as an example, we use hundreds of different data points collected through different staging posts in the digital journey to provide credit decisions for consumers in under a minute, while at all times respecting our customers’ privacy.
Online Lending 3.0 – where do we go from here?
The online lending sector is now entering a phase of maturity. There is increasing competition, regulators are paying more much attention to the sector, and the technology continues to evolve. The winners in this more competitive market will be those that not only run faster, but run smarter.
Many make the assumption that a competitive advantage will be gained solely from the digitalisation of the processes and from improved customer experience. However, due to the speed of development in technology and the range of offerings in the market, to succeed as a business you need to continue innovating. At IPF Digital, we have learned that success lies in a company’s “digital brain”. By that, we are referring to a combination of high-quality data, processes, tools, and skills married with an institutional culture which encourages experimentation, learning, and the perpetual improvement of products and services.
Over the coming years we will see the agenda focus on three core areas – advances in data analysis, a more intelligent use of tech, and the explosion of strategic partnerships.
We have already talked about the use of data in the industry, and we will continue to see advances in this area which will bring further benefits to both consumers and businesses. Machine learning (ML) and artificial intelligence (AI) solutions are likely to mature and push further innovation. We will also see an improved ability to apply different data (both traditional and non-traditional) to different segments.
Secondly, companies will continue to enhance existing technology and use it more intelligently. Technology has always been at the centre of successful digital lending, and a lot of experimentation is taking place into how it can be improved. Those who cannot do this with speed and consistency will not be able to compete.
Finally, partly due to the increasingly complex tech and competitive market, online lenders are likely to be more successful if they experiment in collaborating with other firms, and from these partnerships will come new products and services. The most fruitful opportunities will come from combining the best competencies, technologies, and insights.
Despite the many changes that have taken place within the online lending industry over the past ten years, at its heart the purpose remains the same – to enhance the customer experience and adapt to how customers prefer to use technology. There is therefore no better way to improve the customer experience and to build a successful online lending business than to demonstrate an understanding of customers’ needs and to consistently develop new products and services to meet those needs.
Viktoria Ruubel, chief product officer, IPF Digital
