The last 18 months have been tumultuous for the world at large, as individuals and businesses struggled to make sense of the new normal and adapt to it. People had to adopt new ways of shopping, studying, transacting, entertaining and doing business. Businesses stepped on the gas to accelerate the process of digital transformation. The effects were fairly pronounced on the banking industry as they had to cope with a spike in credit costs and a high NPA ratio, job losses, pay cuts and a debilitating liquidity crunch.
The unexpected situation led to a change in consumer behaviour including the consumption of financial products such as loans. Due to the pandemic, consumers preferred to shop for loans on the internet rather than visit lenders. India has emerged as the second largest online market with over 560 million internet users. The data revolution has contributed to the rise in digital lending through web platforms and mobile apps.
Banks and NBFCs have set-up their own digital platforms with specific private players. In addition, there are fintech companies and loan aggregators who have used smart technology to create online platforms that can provide users with a contactless, seamless lending experience that is faster, cheaper and more convenient to the end-user.
In short, digital technology has disrupted the traditional lending business. Today’s aware consumer seeks a superior customer experience that has led to the emergence of smarter business models, quicker turnaround times and lower costs. This has been made possible by the adoption of modern technology like the cloud, Artificial Intelligence and Machine Learning.
The user simply has to select the loan product and upload his basic identification documents on the digital lending platform. The software uses the inbuilt APIs to complete the background verification, confirm the credit score & bank details and approve the loan application. This is done in a matter of minutes through complex algorithms without any human bias. Once the loan is approved, it is a matter of time before the bank details are verified via penny drop and the amount is credited to the account.
The emergence of digital lending has struck a body blow to the informal, unorganized lending sector that was ruling the roost in the small towns and villages prior to the smartphone revolution. With the increase in internet penetration, digital lending is finally reaching the underserved segment of the population.
What are the reasons for the surge in digital lending? Changed Consumer Behaviour with a Preference for Digital Offerings:
The increase in smartphone usage combined with the rise in internet penetration has led to digital channels influencing the purchase of over 40-60 percent of loan products. Over 55 percent depend on online tools/recommendation of credit options.
Younger Demography: The age of new borrowers is falling everyday with over 49 percent of consumers falling under the 30-year bracket which explains the influence of the digital avenues.
Acceleration Towards Digital Intensified by COVID-19: The need for social distancing created by the pandemic forced people to seek online avenues for all their requirements. The concept of online transactions for all financial products really took-off after March 2020 when people started actively exploring digital channels as an alternative to visiting the banks/NBFCs.
Switch to Digital - A Matter of Survival for Lenders: Simply put, lenders have been forced to adapt to the digital lending platforms as a matter of survival. Anyone who doesn’t will perish creating a dinosaur moment in the world of lending.
What are the benefits of Digital Lending? Reduces Borrowing from Informal Sources: Digital lending has democratised access to funds by extending its reach to anyone who has a smartphone and internet access. This has reduced the dependence on usurious money lenders leading to a faster, cleaner and cheaper line of credit.
Drastic Cut in the Time Taken to get a Loan: From being a matter of weeks or days, getting a loan has become a matter of hours today, thanks to digital lending. Simplified processes and elimination of paperwork ensure that application for loan is quick and convenient. This is one of the main reasons why digital channels have become the preferred option for borrowers.
Automation of processes using APIs makes digital lending a quick and contactless process that provides an enhanced user experience
Good Channel for Micro Enterprises & Low Income Consumers:
Borrowing money for business or personal use has never been easier. The eligibility criteria for loans have been simplified and made transparent. The system algorithms take care of the loan eligibility parameters while eliminating the human bias, making it easier for all sections of the population to access loan products.
Protection of Lender Interests by the Use of AI: Digital platforms have inbuilt intelligence to run customer background checks and verify the documents submitted, obtain the credit score and other functions. This allows them to make unbiased decisions that are quicker, cheaper and safer, thus reducing the risk of defaults.
Creation of Tailored Offerings: Digital platforms offer lenders the flexibility to create tailored offerings for customers with flexible repayment options. This gives borrowers a wide array of options to choose from and pick a loan product that meets their specific needs.
For instance, a personal loan fintech portal offers customized personal loans for different purposes like a wedding loan, home renovation loan, medical loan, a rental deposit loan and so on. The customer can choose from a variety of repayment options like an interest only EMI with bullet payments for principal, a step up option and more. This allows borrowers the freedom to pick the loan according to their need and choose a repayment plan that suits their convenience.
Creating a Digital Backbone: Automation of processes using APIs makes digital lending a quick and contactless process that provides an enhanced user experience. Today the borrower simply needs to fill in a form on the online portal and upload the basic documents like the PAN Card, Aadhaar card, three month salary slips and the bank statement for six months. The loan application gets evaluated, approved and credited to the back account without any hassle if the documents are in order.
Boosting Digital Financial Inclusion: Financial inclusion is boosted by the use of an ecosystem approach that collaborates with telecoms, local merchants and other service providers to create the last mile connectivity.
Managing the Cybersecurity Risks: Digital lending platforms manage the data security risks by using firewalls and smart networks to ensure data integrity. The aim is to ensure the integrity of the data that is available on the platform and prevent it from fraudulent or unauthorised use.
Digital lending has become the preferred method of lending and borrowing, especially after the COVID pandemic. Both lenders and borrowers see value in this channel as it provides a seamless and contactless experience that manages the lender’s risk on one hand and enhances the customer experience on the other leading to a win-win solution for all stakeholders. As India marches towards an era of increased financial inclusion, digital lending will continue to have a larger role to play in the near future.
