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:
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.
Figure 1: e-Lounge framework with integrated journey personas
Wipro’s e-Lounge framework incorporates deep financial services domain expertise to transform the way institutions embrace the future of digital lending. It combines data analytics and artificial intelligence-based predictive insights with a proprietary loan origination platform to augment a bank’s well-established credit analysis function across the entire value chain: origination, underwriting, fulfilment, and servicing.
The e-Lounge framework can deliver many benefits to all relevant stakeholders:
The e-Lounge framework can smooth the journey that lenders must make as they seek to augment their digital offerings. But the framework must also be accompanied by an integration mind-set that brings together all the personas in the lending journey into a single, secured framework. When all parties have access to the secure, online information they require (and are entitled to), the entire lending process gets more transparent, less cumbersome, and faster. It also enables future selling.
Below are the key functionalities of a robust e-Lounge framework:
Traditional banks are, obviously, aware of the threat that fintech lenders pose to their business, and they are taking steps. Some are embarking on transformation journeys from their legacy platforms to create a completely digital lending experience. Some are adopting AI-augmented underwriting with enhanced risk profiling and moving high-cost credit functions to centralized locations to find economies of scale.
Wipro believes that the future of lending will be digital and ecosystem-based – and that the e-Lounge framework offers a good path forward to being able to work alongside pure digital fintechs and remain competitive with their customers.
About the Author
Managing Consultant, Wipro Limited
Joy has more than 18 years of core experiences in retail banking, loan origination, credit services, and digital transformation. He is a core member of Wipro’s Domain Consulting and Solutions group focused on delivering innovative solutions in credit services and emerging core space.