How Digital Credit Reshapes Corporate and Retail Banking

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Mateusz Krawczyński

Updated Apr 11, 2024 • 10 min read
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Digital lending is a key opportunity for competitive differentiation. Here's how to do digital credit processing the right way.

The market will very likely grow with a CAGR of 14.3% over the next decade and destined to hit about US$46.4 billion by the time the year 2032 rolls around.

In this field, you’ll see brands tossed around like Nucleus Software, the leading provider of banking solutions to the financial services industry, as well as Fidelity National Information Services, Inc. (FIS), and ICE Mortgage Technology.

At this point, North America controls the single largest chunk of the Digital Lending Sector, weighing in at 41% of the total, but there is room (and need) for more players, international or homegrown. If you’re in the financial sector, digitalization is the road to your future.

Digital lending landscape

In recent decades, the global financial landscape has undergone profound changes. While traditional banks and financial institutions continue to serve as the primary funding sources for businesses and individuals in the majority of countries, the importance of capital markets cannot be overstated. Moreover, the emergence of new digital lending platforms represents a powerful evolution in the financial sector.

Banks and Credit Unions are up against NBFCs (Non-Bank Financial Companies) which are seldom invested in brick-and-mortar. Instead, these digital credit providers are already mostly electronic, offering more financial inclusion. Banks need to move fast if they’re going to keep up with the more agile NBFCs.

The expectation from people using digital technology, particularly smartphones, is for fast answers to inquiries. With the broad adoption of AI, ML, and blockchain, digital platforms can quickly assess loan applications, credit history, payback likelihood, and provide an answer in minutes instead of five weeks using traditional (and often manual) methods.

While banks remain blithely uninformed about modern digital lending practices, preferring their own standard methodologies for approving loans, customers are going elsewhere. Banks may be too entrenched in their historical practices to be able to cope with change, even if it means higher throughput, greater profits, better customer experiences, and fewer uncollectibles on the books.

How to do digital credit processing the right way

This area has a lot of room for innovation but the most successful transformations had many things in common. These included:

An analysis of the current status

How long does it currently take from the time someone applies until they get cash-in-hand? Follow all the steps on that journey—such as how many people handle the application. How long does it take to move from one person to the next in the chain? How many people write reports, enter data over and over again, make mechanical mistakes that require re-handling and corrections, and how long does it sit in a pile before another person interacts with it?

Automating right

What do you automate? You can start with the very familiar SME lending which banks have dominated for years, and retail mortgage lending. Your priorities ought to be eliminating pain points for staff and applicants, assessing possible gains, and reducing overall complexity. Typically the focus is on those seeking refinancing of existing financial arrangements.

Following leading bank examples

Banks that effectively navigated this transition could serve as inspiration or an example of how to streamline your workload and decision-making process. Take, for instance, one of Netguru’s clients, a bank that leveraged its global expertise by assembling international specialists to offer insights into optimizing loan discovery opportunities, refining the lending process, and establishing efficient underwriting practices. Through this collaborative effort, they meticulously crafted a comprehensive blueprint for digitizing their lending operations.

Focus on business outcomes

One bank targeted a two-day time limit for responses to credit applications. Compared to current processes that now take several weeks, that may seem ambitious, but they achieved about an 80% success rate. Once you know your destination, you can plot a path to it much more easily.

Known objectives create agility

Your agile team sets the criteria for the Minimum Viable Product (MVP) along with the timetable. It defines the needed IT architecture and initiates cross-functional collaboration among business, risk, technology, and operations teams to address those components of change.

Benefits of implementing digital credit processes

Higher profitability

Digital acceleration has a positive impact on the profitability of commercial banks. In 2023, a Chinese study covering the years 2012 to 2021 found that digitalization provided expanded revenue channels and was responsible for increasing profitability across 16 commercial banks that were studied.

Additional extrapolations strongly suggest that digital acceleration would result in a valuation of the sector hitting US$1.3 trillion by 2030. That would be nearly a five-fold increase over its 2023 valuation of US$270 billion.

What supports this growth?

Blockchain technology revolutionizes the lending process, offering enhanced security, transparency, and efficiency. It facilitates swift verification of borrower information, mitigating fraud risks and ensuring that only qualified borrowers receive digital loans. Through blockchain-based smart contracts, fund disbursement and collection are managed seamlessly, bypassing intermediaries and resulting in cost-effective and expedited operations. This instills greater confidence in investors, fueling overall growth.

The sheer efficiency of automation makes it possible for those in remote locations to apply for credit more easily than if they walked into an institution in a city. Geography is no longer a limiting factor when this “anywhere, anytime” application process without humans involved becomes the new normal.

This permits commercial banks to use digital tools to analyze existing dynamic markets in real time, letting them design bespoke products for individual customers. Market boundaries vanish when serving remote locations is the same as serving population centers.

By expanding their range of services, businesses can now cater more effectively to each customer, maximizing sales potential. Personalized marketing can occur seamlessly with the help of big data and artificial intelligence, tailoring offers to individual needs and – ultimately – boosting customer retention rates. In essence, this translates to automated upselling strategies.

Faster processing times

Everything will be faster. New application responses will be measured in minutes rather than weeks; money can be in hand in days rather than months. Decisions will be at least 80% faster and there will be up to 50% less time spent on decision-making.

Improved accuracy

Digital credit inquiries utilizing automated algorithms to verify and analyze borrower information will reduce the risk of errors and fraud. AI & ML will contribute to more accurate risk analysis, rendering better decisions.

Enhanced transparency and higher security

The mystery surrounding loan application rejections vanishes with digital evaluations. Improved transparency in the decision-making process lets individuals understand which areas need upgrading. They can now recognize the factors that influenced the assessment of their creditworthiness.

The danger of being online is concerning to risk-averse lenders. Other risks include data breaches, which are a daily occurrence. However, digital lending is safer.

Digital trails make misappropriation and theft much more difficult. It’s easier to track criminals, detect issues, comply with the law, and resolve questions. Paper trails may be useful, but digital trails, especially in blockchain, are permanent and irrefutable—and they’re faster, too.

Increased efficiency for digital credit providers

Naturally, digital processes are more efficient, too. Handovers in manual processes are big time-wasters. Eliminating steps in a borrower’s journey improves customer service and saves the business money. At first, you may focus on those consumers with the highest ROI. But, once the service is in full-swing, you can lend with equal ease to micro-, mini-, small-, and medium-sized businesses, expanding your reach and lending opportunities.

Conversely, you might find that narrowing your focus down to just a few products could vastly decrease business complexity, saving money and enhancing profits. Do you want to explore every market, or be intensely interested in a specific niche that is underserved?

Guido Sacchi, Chief Information Officer at Global Payments, noted that consumers shifted to “less personal and more digital” in their expectations. “Covid was a big catalyst for the adoption of digital payments and digital forms of commerce,” he said.

Borrowers are ready for dramatic change—they want it. They want faster, more reliable approvals and guarantees that funds will be available immediately, upon approval.

This is your opportunity to differentiate yourself from the competition. Consumers want a fast and bespoke experience because they know it is possible from examples they’ve seen. Offer that to them before your competitors do and you’ll have a dedicated customer with real stickiness for your company.

Digital credit products will dominate the banking scene

Nigel Moden, EY EMEIA Financial Services Banking and Capital Markets Leader, says:

“Digital lending is a key opportunity for competitive differentiation. This is not just about speed of decisioning and fulfillment (the important basics) but also about delivering personalized customer journeys on a scale never seen before.”

Altogether, digitalization of the lending sector is going to be the one of the most influential factors for the next decade. Those that accomplish the change early will reap the biggest benefit; laggards will pay a heavy price.

The pandemic proved that people are ready for custom digital banking solutions. Getting lending right, now, is what will make the public loyal to your company. Provide a fast, frictionless experience and they’ll beat a path to your door.

Interest rates are rising; brick-and-mortar banks are closing; SMEs are looking for digital partners, and bespoke is the ‘new desire’. Now is the perfect time to be going digital.

Whatever direction you choose, it needs to start now.

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Mateusz Krawczyński

Delivery Director | Finance at Netguru
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