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The rapid growth of digital lending has been nothing short of revolutionary and has left banks who cling to traditional manual loan processing facing an ever-growing number of more agile competitors who enjoy a certain advantage.
The conventional lending process has always been a labor-intensive one for banks as well as customers, which is why a shift to digital lending is an attractive solution for many.
If banks are to maintain the competitive edge their other strengths give them, they must embrace the digital lending revolution.
Driven By Convenience
A recent report by McKinsey & Company pointed out that in the traditional lending process of most banks, the “time to decision” for small business loans is usually from three to five weeks, while the “time to cash” can take up to three months. Personal loans usually have shorter processing times but still, take days or even weeks.
For the fastest-growing segment of the market, millennials who have never lived in a world without instant communication or the ability to do business online, the comparative inconvenience of the traditional loan process is unacceptable. Very little of their business is done in person or on paper, and most see no reason why obtaining a loan from a bank should be any different.
The demand for flexibility and convenience has been the beating heart of the digital lending revolution. According to the same McKinsey report, banks that have already adopted digital lending solutions have been able to reduce their process times to as little as five minutes for a decision and 24 hours for customer cash disbursement.
And it is well that they have because the non-bank digital lending sector is proving to be formidable competition; the sector is expected to grow to $122 billion in the U.S. by next year.
Fueling the Digital Lending Revolution
Digital lending helps banks retain individual and business customers by making the process more convenient and faster. According to an extensive survey by the American Bankers Association in 2018, an overwhelming majority of banks agree that some level of digitalization is vital to keeping their loan customers from going elsewhere.
However, recognizing the necessity and responding to it are evidently two different things. The same survey found that only about half of larger banks and about 38 percent of smaller banks use digital loan origination programs. Of those, only about one-third have what could be described as full-service systems. More than half limit their digital lending capabilities to just offering online loan application functions. This presents a unique opportunity for banks to supply digital lending solutions and reap the benefits of the digital lending revolution.
Banks can use their traditional advantages of reputation and full-service capabilities to launch new digital products and processes and expand their customer base. Software as a service (SaaS) providers offer systems with tremendous flexibility and customization, allowing banks to expand into digital lending in a cost-effective way.
- White label options: Digital lending systems are available as white label solutions, which allow banks to use the strength of their own brands to attract new customers and maximize their existing ones.
- A personalized customer experience: The AI-driven data management capabilities of digital lending systems provide much broader and more integrated customer information. Data sharing with third parties is controlled by customers themselves through the use of open APIs, which means that the customer data available to the bank provides a highly accurate picture of a customer’s needs and intentions. This allows the bank to provide highly customized, personal product and service offerings to its customers, going beyond basic demographics to create solutions based on values, social connections, career choices, and other factors.
Full control of risk management and underwriting: Digital lending systems allow banks to fully customize credit rules for underwriting according to their own standards and regulatory requirements. This allows a great deal of flexibility in setting credit rules for customers – particularly small business customers – who may be good risks but fall outside conventional credit scoring frameworks. These customers might be otherwise overlooked or considered unprofitable due to the lengthy manual review required, but the automated system saves time. Risk management is maintained or even improved because the speed and machine learning capabilities of the digital lending system allow it to assess a far larger range of data points.
Creating New Synergistic Partnerships
Embracing the digital lending revolution does not necessarily mean that the bank must do everything on its own. One of the immediate advantages of digitalization is the creation of easy linkages to other potential fintech partners. A bank might, for example, partner with a smaller digital lender for underwriting, leveraging the firm’s technical capabilities to provide expanded services to its own clients.
Rather than competing for the same market, the partners both grow their businesses by applying their individual advantages.
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