BNPL or bust: Is online lending damaging financial wellness?
The BNPL space has skyrocketed over the past 18 months, mainly in harmony with the increase in online spending. But now that numerous online stores offer the service at the point of sale, and companies like Apple and PayPal have jumped on the bandwagon, are we in danger of creating another credit debt boom? We spoke to Amit Dua of SunTec Business Solutions to find out more.
Q: What are the main drivers behind the online lending revolution in fintech?
There are several factors driving the proliferation of fintech lending. First, consumer behavior has dramatically changed in the past few years. People are not only socializing virtually, but they’re spending online too - and borrowing. Digital lending has quickly accelerated with the vast technological developments of the last 15 years such as artificial intelligence, big data, the introduction of 4G and the advent and advancement of the smartphone.
We’re now a mobile- first world where customers can bank on the go. Access to personal loans, mortgages and automatable financing is available at the touch of the button - anytime and anywhere. When this occurs within a regulatory environment highly favorable to fostering lending online, it’s clear that the digital lending fintech revolution is here to stay. It’s a transformation that will continue to snowball especially in this ‘value-add’ environment that we live and work within. We must also consider the impact changing operating models of the world’s leading fintech providers has had. The innovation and simplification of their functionality drove the entire financial services industry to digitize quicker than perhaps they wanted to or had planned.
Q: Has the ease of online lending changed the borrowing culture?
Completely. Digitizing the offer of credit for consumers and businesses alike provides a significant growth area for both traditional and challenger banks and fintech providers. Because online lending has become increasingly accessible, convenient and available, fintechs are gaining more momentum. The regulatory environment continues to be ripe and open to disruption - and fintechs have been able to capitalize on this and offer a wide range of payment-as-a-service provisions to meet traditionally unmet customer pain points. With the opportunity now to start and complete a loan application from end-to-end on your mobile device [even as you stand at the point of purchase], why do you need to step foot into your bank branch to arrange a credit facility or loan agreement? Borrowing money from some financial providers is now as easy as booking a holiday online.
Q: How is this wave affecting the incumbent banks?
The digital lending tsunami has proved that traditional banks must simplify and streamline the consumer borrowing process - and quickly. There’s no longer a one-size-fits-all approach when it comes to lending. Many banks haven’t changed their basic lending processes in decades so they are often too long, too complex and can’t be fully completed online. As a result, banks have inadvertently presented themselves as an expensive, exclusive and slow option for lending. Unmet needs lead to disengagement, which means loss of revenue for banks.
Banks need to create options that meet the ever-changing needs of consumers especially the millennials and Gen-Z. They must improve their agility, responsiveness and decisiveness to not only react to customer requirements but predict them. Many customers may never bank in person again meaning banks need a comprehensive solution to provide credit and arrange lending in a low risk, low cost and personalized method to solve the unique needs of their customers.
Q: What can banks do to address the issue?
Simply, they must step up their game. The technology proliferation and digital transformation acceleration that the pandemic created presents an unmatched opportunity for banks - one they must seize.
It’s no longer about waiting for the customer to approach the bank and seek credit options for their specific circumstances. Banks must now switch to a completely customer-driven model in which they develop credit and lending options for a wide range of customers with very specific, unique needs before the customer themselves realize what they need. Today’s customer is savvy and proactively scours for deals online themselves. They actually dislike someone contacting them.
Fintechs got their foot in the door first by enabling end-to-end loan completion agreements on a mobile device. But banks, with their well-established legacy in customer trust and loyalty, can turn this tide. The pandemic changed the way consumers interact, transact and engage with financial firms. Digital is now the standard, not a ‘nice-to-have’. However, there’s a heightened variance in the market. Some banks are highly digital and provide sophisticated services and products tailored to a digital environment and a truly ‘online’ customer while others require real improvement. All banks must go digital and must reconsider their entire organization systems, processes, data and people - including how they ensure online lending meets their digital native customers’ needs.
Q: Is increased and potentially less regulated online lending good for the business economy or problematic?
On one hand, increased regulation can be a good opportunity for the economy because, as with all kinds of services and provisions, it is essential to a prosperous, thriving business environment. In terms of online lending specifically, regulation is a vital tool to protect both consumers and lending providers. But there is a fine line between necessary and appropriate regulation and the type of laws that stifle innovation and are detrimental to growth.
Digital lending can provide a cost-effective and convenient solution that offers a win-win for both the consumer and the financial institution. An unregulated lending ecosystem is a recipe for disaster. We need regulation that matches the lending environment as the right level of regulation serves the best interests of the industry for all stakeholders.
Q: What new online lending technologies are disrupting the market?
While blockchain has been associated with the likes of Bitcoin and other cryptocurrencies, it’s relatively new to the digital lending sector. But the potential changes it can bring are fundamental. Not only does it offer best-in-class security - which is imperative for online money transfers and other lending processes such as gathering auditable data, underwriting and securing smart contracts - it enables, the bank and the customer to record their transactions in an easy and verifiable way. By building a lending platform on blockchain technology, contracts and transactions become indisputable. A World Economic Forum report stated that by 2025, 10% of the world’s GDP will be stored on blockchain. It’s definitely a technology that’s here to stay and will only grow in importance.
Digital signing technology has also accelerated and although not new, it’s innovated extremely quickly in the last 12 months due to Covid-19. Know Your Customer digitally (e-KYC) has developed rapidly, reducing the time it takes from starting a loan application to receiving approval and the funds in your bank. By digitalizing the entire verification process many online lenders have been able to better meet the needs of more customers in a much quicker, seamless way. Gone are the days where a representative from your bank needed to meet you in person to complete the KYC documentation. Everything can now be completed digitally.
Although not a new technology, the cloud also offers a huge opportunity for banks in the lending space. Cloud tech enables bank to innovate faster and in a cost effective way. It also enables them to work fast, and that’s what today’s digital customer wants; speed, accessibility and ease when it comes to lending.
The opportunity for banks is to leverage the cloud’s flexibility, scalability, high performance and security to handle large volumes of transactional data and functionality to translate it into value for their customers. This will instill confidence in their ability to keep up with agile, highly responsive, and adaptable fintech players. In this case, it can help to enable loan application decisions to reduce from weeks to days, save money, drive higher quality decision-making based on the amount of data cloud tech can facilitate, and, ultimately, drive revenue.
Machine learning automation and big data also enables lenders to not only make quicker decisions but better-informed ones too. Automation can save a lot of internal resources and overheads for the provider while ensuring a hyper-personalized customer experience for the applicant. Speed, responsiveness, and agility are just some of these boxes machine learning automation and big data ticks.
Q: Is the boom in online lending purely customer-driven and will it become ‘the norm’ in the foreseeable future?
It’s not only driven by the customer. A ripe regulatory environment for example where laws stimulate a strong digital landscape for consumer borrowing has also bolstered the digital lending boom.
There are also the benefits digital lending offers to financial institutions - whether that’s a traditional bank or a new fintech player. As well as the cost savings digital lending can create for institutions it can also generate revenue growth that results from stronger pricing power and being able to meet the needs of a bigger percentage of customers.
About: Amit Dua is President and Global Head - Client Facing Group at SunTec Business Solutions. Based in London, he leads Sales, Business Development, Client Engagement, Alliances, and Industry Solutions functions for SunTec globally