In recent years, digital lending has become an increasingly global phenomenon. In the coming years, the global market for digital lending platforms may increase from $5,1 billion to $12,1 billion. The increased consumer demands and expectations have created new markets for alternative methods of borrowing money. Firms need to spend more time recognising the significance of customer experience as a critical differentiator. They are now relentlessly pursuing efficiencies, cost reductions, and expansion.
What is Digital Lending?
Digital Lending Meaning: Digital Lending is an innovative platform that enables financial institutions to boost productivity and income per loan to provide speedier service. It is a platform for borrowing money in a short amount of time. Digital Lending enables borrowers to apply for any consumer or commercial loan product from any internet-capable device, regardless of location.
Financial institutions can increase their efficiency and loan revenues through digital lending while delivering faster service at the point of sale (POS). It allows prospective borrowers to apply for loan products, such as BNPL, from any internet-enabled device in any location worldwide.
Digital lending is neither a novel nor uncommon practice, and financial institutions have a solid grasp of its fundamentals. However, as technologies evolve and customer needs change, the complexity of this idea increases. Customers anticipate banks to evaluate applications and render decisions swiftly. To keep up with the times, banking institutions must provide customers with digital financing procedures that go above and beyond the norm.
Digital Lending Vs Traditional approach of lending
The lending procedure in India utilised the conventional method. The application process for traditional loans was too lengthy, complicated, and time-consuming. As a result of the flaws in traditional lending, it was essential to establish a new type of lending that keeps the borrower’s ability to obtain a loan in mind. Digital Lending was introduced in India as a remedy for the flaws mentioned earlier.
Digital Lending is a platform that has advanced the lending and borrowing process by allowing anyone to borrow within a short time frame without needing papers. Digital financing has liberated borrowers and lenders from the traditional loan process, which requires a great deal of time gathering and organising documentation.
Benefits of Digital Lending
Previously, the traditional method of loan disbursement utilised by fintech companies was time-consuming for both borrowers and companies. Digitalisation has accelerated the loan process and added benefits for firms and borrowers.
Digital Lending encompasses the management of loans and their processes via the web or online platforms. In addition, the digitalisation of the loan process is included in the current development of payment methods.
The primary advantages of digital lending are:
1. Simplification of the application procedure
Consolidating and digitising customer information lending improves the borrower experience in multiple ways.
Customer dissatisfaction is diminished when processes are more transparent, and decisions are rendered more quickly.
It reduces the frequency of incomplete files, which might delay application review.
It promotes improved communication with the consumer regarding the information they must offer upfront.
An online application for a loan generates a centralised database containing all application information. Using a digital banking platform, a bank or credit union can automatically update the complete financial package when a consumer submits the necessary information.
2. Digitisation of lending information
Digitising the information flow and access delivers substantial benefits to the credit team.
It increases transparency and decreases bottlenecks in the following ways:
Information: Loan processors can collect third-party data via a number of digital lending systems, including credit agency reports, external bank and financial data, through an easy-to-use interface. This procedure reduces errors and removes needless manual activities, accelerating decision-making.
Access: Lenders get access to all borrower data from a central location. Digital lending software incorporates workflows that can be customised for more effective audit tracking.
3. Utilising lending data for analysis
Additionally, financial organisations can digitise the intelligence and analytics components of the loan process.
Lenders and analysts sometimes utilise differing estimations and assessments. These inconsistencies frequently lead to erroneous computations, which result in poor credit judgements and inaccurate reporting.
Combined with a digital banking platform, a digital lending system can assess, approve, and price each loan product precisely. Banks and credit unions will be better able to evaluate portfolio risk once the system collects lending data.
4. Providing mobile lending features and electronic document signing
Clients, especially Millennials, prefer mobile features since they perform most of their daily tasks on smartphones. It is no different when it comes to accessing lending materials.
When electronic lending procedures are available, they wish to avoid visiting physical branch locations to study and sign disclosures and other pertinent papers. This inconvenience is frequently considerable enough for some clients to consider switching to an online lender.
5. Providing loan options for customers with poor or no credit
Traditional lending processes primarily rely on credit scores from the perspective of financial firms. Credit scores provide lenders with a comprehensive view of a potential customer’s borrowing history.
However, many consumers seek first-time loans and need an established credit history. Traditional lenders may refuse to lend when a borrower lacks a history of on-time loan repayments.
Digital lenders, on the other hand, frequently forgo these stringent credit checks for short-term loans like BNPL. They rely on alternate credit score data or minimal financial information, which makes loans more accessible to first-time consumers.
This additional flexibility and approval latitude make digital lenders attractive to cash-strapped and unbanked clients. By removing obstacles related to credit history from the loan approval procedure, financial institutions can increase their customer base and offer more loans.
What to look for in Digital Lending platforms?
Digital lending platforms vary per provider, each with customer-specific and unique features. Nonetheless, a successful digital lending platform must have the following:
- User-friendly interface for completing and submitting applications from front to back.
- Data verification software that verifies borrower data via secure financial databases.
- Self-service pre-approval system that expeditiously renders application decisions.
- Software that collects manages, and transmits loan data to all relevant departments.
- A system that provides continuous monitoring for any red flags that could hamper the approval of an application.
Which are critical emerging models for Digital Lending?
Various business models have been implemented to satisfy customer and regulatory requirements. It has addressed the geographical, transaction cost, and transparency concerns.
The following business models pertain to digital lending:
1. Loan market places
This portal allows consumers to compare loans offered by various banks and non-banking institutions. Here, particular algorithms are employed to match borrowers and lenders.
2. Platforms for online and mobile lending
In this instance, end-to-end digital lending solutions are made available via mobile and web-based platforms. The lending process, from customer acquisition to loan distribution, is digital.
3. Peer to Peer lending
P2P lending, often known as peer-to-peer lending, is lending money to borrowers or businesses through internet services that match lenders and borrowers. It utilises data and profiles to match borrowers with lenders. Peer-to-peer businesses typically offer their services online and facilitate them at a lower cost than traditional financial institutions. Such examples include Faircent and i2ifunding.
4. Finance for the supply chain
Direct-lending NBFCs form partnerships with wholesalers and marketplaces to reach many merchants that source their goods there.
5. Credit limit
The line of credit is a revolving account from which the borrowers may withdraw and return payments. Example- MoneyTap. The average rate of interest is between 15 and 17 per cent. A line of credit has a minimum term of two months and a maximum of 36 months.
6. SME lending
Small and Medium-Sized Enterprise loans are loans for small businesses. It helps meet the needs encountered by small enterprises in the course of their operations. Launching a new product, moving to a new location, recruiting new employees, and marketing are all examples. Farmart and Flexiloans are examples of this type of digital lending business strategy.
7. Financing of invoices
Lenders provide a short-term working capital loan to Micro, Small, and Medium-sized Businesses based on unpaid customer bills. It is utilised to fulfil Micro, Small, and Medium-sized businesses’ short-term liquidity requirements, enabling them to expedite their accounts receivable.
8. Alternative credit scoring method
It involves a comprehensive credit scoring process that employs technology to examine a variety of criteria, such as a borrower’s payment history and purchasing habits, etc.
As we approach the realm of digital lending, the lenders that can meet the needs of different customer expectations and fluctuating market conditions will be the ones to prevail. In addition, digital lending is anticipated to become the standard in the future, creating more significant opportunities for clients and lenders.
1. What is Digital Lending?
Ans: Digital Lending is an innovative platform that enables financial institutions to boost productivity and income per loan to provide speedier service. It is a platform for borrowing money in a short amount of time. It enables borrowers to apply for any consumer or commercial loan product from any internet-capable device, regardless of location. Credit cards, business loans, and mortgages are examples of consumer or business loan products. The loan approval process is a click away through a digital lending platform.
2. What factors are contributing to the growth of Digital Lending?
Ans: The elements contributing to the expansion of digital lending are:
• Utilisation of upgraded technology
• High-security access and confidentiality
• Simple procedure
• Work without paper with the advent of electronic KYC
3. How are technology and digitisation altering the lending landscape in India?
Ans: Digital lending platforms make it so simple for users to access credit that they can do so from their mobile devices. Through technology improvements, digital lending enables customers to apply for loans online.
4. Explain the mechanism of Digital Lending’s operation.
Ans: Globally, the financial sector is seeing a rapid expansion of digital lending. Currently, the Indian population makes excellent use of internet channels.
Digital lending’s operational method is based on the:
a. Use of the web
b. Innovative and cutting-edge technologies
c. Digital Ecosystem
d. Customer-centric approach
e. Time-saving method
5. What is a P2P lender in Digital Lending?
Ans: In digital lending, a P2P lender is a digital platform that facilitates the provision of digital loans between several borrowers and lenders, hence assuming a central role in the continuous connection between the parties.