In virtually every industry, disruption has been the order of the day – and this is clearly the case in the lending arena. Alternative lenders like Blend, Sofi, and Better are putting real pressure on many traditional financial services providers by offering a better value proposition in terms of ease of applying, faster underwriting, and quicker fulfilment – and they are delivering a better customer experience through digital enablement. This competitive threat is fuelled by the growing demand for obtaining hassle-free loans through digital platforms offered by these alternate lenders. According to a recent report from Grand View Research, the market for solutions connected to digital lending is expected to grow rapidly at a CAGR of 24% CAGR between now and 2028. This forecast suggests the market will be amount of $26 billion by 2028.
The most successful alternative lenders – companies like OnDeck, LendingClub, and Prosper Marketplace – have embraced the digital marketplace approach. They run targeted advertising campaigns to find and attract customers through multiple channels, including the web, mobile, and social media plugins coupled with leads generated from partner aggregators sites such as Zillow or AutoFi. For instance, last year Sofi, as part of its social finance campaigns, spentclose to $100 million on digital ads to capture target customers early in their credit journey, before those customers approached more traditional lenders. (Wipro published a point of view on how the partner aggregators are playing a key role in driving growth for these Fintech lenders marketplace aggregators are reshaping the lending landscape.)
The future reality is already crystal-clear: Lending will be increasingly dominated by digital ecosystems that aggregate multiple providers. Purchasing credit will be more like buying a consumer product at Amazon – customers will chose from among many lenders – than choosing from a few local lending institutions. As with all shifts towards a more digital business model, customer experience will be a substantial source of differentiation, and possibly the most important source of differentiation.
Digital natives like millennials have already embraced the fintech approach, but many others are following suit. One by-product of the COVID-19 pandemic is that many other consumer segments have gotten comfortable with the idea of shopping for credit online through a computer, tablet, or phone. At the same time, the economic disruption caused by the pandemic has affected the ability of consumers to repay existing loans – and has hurt lenders’ ability to offer competitive loan products and introduce risk controls to help them avoid bad debts.
Digital Borrowing: What’s Important to the Consumer?
Consumers face a very clear trade-off when considering fintech lenders versus credit products from more traditional banks: They can get a better and faster customer experience from the preponderantly digital newcomers, but more reasonable fees and interest rates from traditional banks.
According to a 2018 J.D. Powers customer satisfaction survey about auto lending, traditional lenders score well with consumers in terms of pricing and trust, while alternative, fintech lenders score highly on digital outreach, multiple channels, and speed of response – all which are clearly important to today’s borrowers. One key finding: turnaround time for a digital experience should be no longer than one day.
But a 100% digital experience is not necessarily a panacea. Only a small percentage of borrowers rely exclusively on digital self-service channels because of the lack of consistent experiences across websites and automated e-branches. Personal attention can be valuable, particularly in terms of closing a deal. Potential borrowers won’t leave a conversation with a loan officer midway and walk out of a branch, but many will abandon a digital transaction or an automated virtual interaction that compromises the customer experience. The highest satisfaction among those that J.D. Powers surveyed resulted from in-person or phone communications with the lender.
Traditional Lending: Pain Points
Traditional banks have so far lagged behind their fintech counterparts to provide the optimum mix of digital experience with human touch. This has helped fintech lenders capture a significant share of the lending market in recent years.
Let’s think about a typical lending experience and the kind of challenges or pain points that a consumer might experience as compared to a fintech lender:
- Traditional banks are slower: A fintech provider can generally make the funds available within a day; traditional lenders take 7-10 days for an unsecured loan and 3-4 weeks for a mortgage loan on average.
- Traditional banks are less transparent: A common reason for withdrawing (or not acting on) a loan application is the lack of transparency in the loan process.
- The traditional process is cumbersome: For mortgages and auto loans, the customer journey requires online and offline steps, compromising the overall user experience.
- Traditional lending processes are complex: Obtaining a loan can involve many entities – the lender, obviously, but also owners or dealers, agents and brokers, and attorneys and title companies. This complexity is compounded when borrowers have to deal with operations staff who may not be well-versed in customer service.
- Traditional processes tend to be bureaucratic: Traditional banks typically rely on intensive documentation, which translates into tedium for customers. Customers also can worry about a lack of accessibility to loan documents.
To address these concerns and challenges, banks should define and deliver a much more seamless, much more personalized self-service experience, coupled with financial guidance and transparency, delivered digitally but with ample human service and support. And delivering this experience demands a more collaborative, ecosystem-driven model in which traditional institutions work with online aggregators to scale up their digital offerings.
Consumers want a one-stop secured marketplace platform that spans the entire lending journey. Lenders can create this kind of functional integration – and the powerful, differentiating digital experiences that it can deliver – using a single, secure framework. Wipro conceptualizes this as an e-Lounge framework (see Figure 1); it’s designed to enable a seamless process that unites multiple stakeholders, counterparties, and vendors.