‘Disrupt or Die’ - the new mantra in digital lending

By Abhiram Modak

We are in the midst of Digital revolution, with the Financial Services sector on its frontlines. Banks and lenders are starting to function more like tech companies. As we usher in new technology, we’re seeing the phasing out of some familiar signifiers of traditional banking such as branches and ATMs.

Banks, and the service sector in general, have long been ahead of the curve for survival reasons. The industry has always been largely ‘software-assisted’ in its functioning for the last thirty years or so.

But, this also means that many banks are entering the era of digital transformation with the baggage of legacy systems. Staying competitive entails great shifts. This includes shifts in mindset and requiring risk-averse leaders to overcome their scepticism of new technologies. Survival hinges on these changes. New banks may have it easier without those constraints, but the inherent demands of digital lending platforms are now placing pressure on all lenders without exception.

An ever-growing list of Demands
Faced with constant change, banks and non-banking lenders are struggling to stay competitive. In this climate, here are some demands of the Digital Lending business:

• Loan Approval in under a minute, Loan Disbursement in under 5 - A 5-minute wait is as much as can be expected of customers now for a Consumer Durable Loan. If it’s not done by then, they’re onto the next lender or next Dealer if he is online.
• Products created on the fly - Loans are no longer appealing in their traditional packaging. Customers want a better user experience. Branding loans differently, such as a ‘vacation loan’, changes how people relate to the product. While it’s still a personal loan, it’s made more relevant to a specific situation and need. Multiple customized front-end products can map onto a single back-end product this way. The bank can then hope for a better uptake of that loan.
• Integration with multiple credit rating agencies - This is a strong need, including real time selection based on cost of credit score and other parameters. To procure a credit rating independently, it would cost customers. That’s why banks are building internal scoring systems.
• A robust de-dupe mechanism - A known customer walks into a bank with a new line of business. What happens next could be a lot of unnecessary procedure, because banks work in silos. Instead, with strong internal wiring in place, the customer could have a completely different experience.
• Extreme flexibility in Interest rate structure - This entails customizable payment plans, flex interest rate, and offers on existing loans. Keeping customers engaged and creating a “sticky” relationship with them is of utmost importance.
• Extreme Offers and Discount Structures on Assets - This is in line with banks becoming almost like eCommerce portals, where bank loans are tied to online purchase.
• Lines of Credit, Dealer Finance, Risk Pools - Banks need to provide finance to intermediaries such as dealers and distributers - something we’ve seen work for one of our long-term customers.
• On the fly process & workflow changes - In short, facilitating flexibility.
• Multiple ways of customer acquisition and robust communication infrastructure - This plays into interactions on social platforms where people see ads, buy products, and take a loan in the process, i.e., where loan origination occurs on social channels.

Now, new solutions need to have “Lego” like architecture. Fail-fast mechanisms have replaced what used to be a six month to one year wait to find out if something worked. The Lego structure has the API Management piece at the centre i.e., the layer talking to various systems. This offers agility and cutting down on costs. As disrupters bring in new tech, lenders in the market should move to this architecture to remain relevant.

Lenders need to be very creative with their business models. The IT components should be built and/or selected based on business models, and not vice versa. If some components don’t work, they should be replaced quickly. Further, if the business model doesn’t work it should be amended quickly along with the IT components.

‘Disrupt or Die’ is the new mantra.

The author is Chief Principal Consultant - BFSI Vertical at Persistent Systems