Pandemic Hastens Move to Digital in Banking, Lending & Payments
Emerging trends focus on API, decision making in credit and underwriting, and security
2020 was quite a tumultuous year for economies worldwide and particularly so for small businesses, banks, and lending platforms that cater to them. While the pandemic accelerated the adoption of digital banking as consumers switched to digital payments and other online services, banks were to make almost years’ worth of business and technological changes in mere months. As the demand for digital solutions as well as work from secure home systems began to explode, the digital lending landscape faced far-reaching impacts as well.
With all the initial hiccups in 2021, businesses now seek to move ahead with that sustained energy of improvisation and innovation that the rampaging pandemic forced them to harness. As business banking is looking at the transformation via digital practises, this year's trends will mostly look at how banks and lending platforms are going to revamp their strategy and pave a new path of digital-first.
The Impact of Covid-19 on Business Lenders and Borrowers
The unprecedented scale of the pandemic impacted small businesses almost immediately, be it personal or business service companies, retailers, or restaurant owners, etc. Business leaders were confronted with high rates of impaired loans, the necessity of creating digital capabilities that ranged anywhere from end-to-end digital account opening and lending capacities to novel features and loan products - while regulatory bodies increased pressure, many organisations raced against time to achieve targets at an unimaginable pace.
Even when working at breakneck speed on digital adoption, a recent report by Infosys, stated that financial institutions ranked themselves much lower in digital transformation maturity in 2020 as compared to 2019. The prime reason behind this, as surmised by them, was the fact that customer expectations were increasing at a faster pace than their collective capabilities to deliver. This also ended up impacting their innovation as well as data/analytics maturity.
Top Trends that will Shape the Banking Sector in a 'Path-Breaking Year'
Despite the affected data/analytics maturity, banks in India did manage to bring innovation into play; they brought the era of technology and digitization. The recent fintech revolution in India heralded a new age of banking for 190 million unbanked adults and 63 million enterprises who had been on the fringes of financial services.
Fintechs today are running several pieces of vital machinery for the Indian economy. They have been the most important part of developing a common language for big banks and small enterprises so they can access financial services. In addition, they are important for facilitating quick sachet loan disbursals at low-interest rates.
This being just a glimpse of the new age of banking, here’s a list of the top trends that define the ‘new normal’ for the financial sector in the year ahead.
As people are getting easy access to smartphones and internet data, banks can easily reach out to their customers digitally. This brings a big opportunity for financial institutions to build intuitive customer journeys for interacting with them.
Banks and financial institutions can now do the KYC (Know Your Customer), underwriting, and verification process digitally; thanks to Application Programming Interface-based data ecosystem. Also, a lot of work has been done in the field of lending product design such as click payments, checkout financing, buy now-pay later credit solutions. This trend would continue and the sector will witness a rise in the number and size of digital transactions.
Enhanced Credit Decisioning Capacities
When the first wave of the pandemic hit India, Banks responded quite quickly and in an empathetic manner, by providing assistance as well as credit to customers in the form of loan moratoriums, however, it is something that cannot be carried on indefinitely, especially with the resurgence witnessed in the form of the second wave. A rise in the unemployment rates in 2020, had a parallel impact in the form of impaired loans and Non-Performing Assets. Tapping into enhanced data analytics, banks will be able to leverage technology and assess the impact that various stress factors like supply chain disruption, unemployment, increased debt can have on their loan performance, all the while uncovering newer opportunities.
Realtime Credit Decisioning & Underwriting
Loan funding will be online, smooth, and instantaneous thanks to real-time credit decisions. This technology enables lenders to digitise their credit policies and provide consumers a simple online application along with the ease of instantaneous account funding.
With sophisticated technology and data analytics, real-time credit decision alters the traditional and physical loan application and approval process. A dynamic shift might be witnessed in the requirement of real-time decision-making, digital KYC, and digital underwriting. Cross-sell, up-sell, early warning portfolio actions, and collection portfolio actions are all examples of post-acquisition customer interaction points where real-time decisions will have an increased impact.
Tapping into the API Ecosystem for Lending
The rapid pace at which technology has been shifting has forced both banks and lenders alike to accelerate the pace of digital transformation, to cater to the new demands of consumers as well as improving their productivity while being focused on scale. 2021 is going to mark the year in which both institutions are going to look at an outside-in approach, that can help enterprises in harnessing resources and relationships that are existing, able to drive efficiency and innovations.
As per Gartner, “The Application Programming Interface economy is an enabler for turning a business organisation into a platform. Platforms multiply value creation because they enable business ecosystems inside and outside of the enterprise to consummate matches among users and facilitate the creation and/or exchange of goods, services and social currency so that all participants can capture value”.
Implementation of More Secured Practices
With the rising needs of working from home nearly all operations have gone remote, leading to the exchange of critical and sensitive information, especially financial data on the cloud. As the world is becoming more and more dependent on technology and cloud computing, there is a growing concern for cybercrimes.
Given this, cybersecurity and access management are going to play a major role shortly. They will be required to protect data, reduce or eliminate loss, and meet the regulatory compliance requirements. To further safeguard the distributed workforce of the future, organizations will implement more security practices like data encryption to further safeguard the distributed workforce of the future.
Increased use of Social Media
FinTech companies have always been using their algorithms and artificial intelligence to develop their credit rating mechanism. They have been tracing the digital footprints of their customers on every platform, including social media.
Tracing digital footprints on social media will be the new trend that the financial industry will see. This will give an accurate and precise picture of the behaviour, characteristics, integrity, background, hobbies, likes, aspirations, etc. of a borrower. This information will be a great source to determine the borrower's intentions and ability to repay the loans.
Continuous Growth in Mass-Market Loans
The financial sector has been witnessing a trend where Indian clients are using multiple digital lending platforms to repay small-ticket, short-term loans. Considering lenders' perspective, this group of clients may be serviced as they are digitally linked. Since much of the data is available via Application Programming Interface in real-time at a nominal per unit cost, the cost of acquiring and underwriting these clients has decreased. According to the transaction data, lenders who offer buy now, pay later and short-term sachet loans have found a solid product-market fit, which is anticipated to continue increasing through 2021.
The demand for affordable housing is also likely to rise in the future years. This is because homeownership is one of the government's top priorities, and it coincides with an increase in job opportunities. Therefore, the government will bring initiatives and regulatory bodies to encourage the bottom of the economic pyramid segment to dream of owning a house.
Another segment that will see a rise in the coming years is Rural Finance triggered through government initiatives and digital solutions being offered by the fintech NBFCs. This can be owed to the increased mobile application, technological advancements, and simplified user interfaces.
Benefits of Digital Lending:
In 2021, the focus of banks and lending institutions is going to be on maintaining their financial health along with recovery. For this to happen, they must embrace and adopt more digital solutions, especially those that can help in bringing down the ‘time to decision’, which implies bringing down the loan disbursal decision time to less than 24 hours. Digitization at the end of the day can help in improving customer experience significantly, which leads to more revenue and a lower cost to serve.
Digital lending hence ends up benefiting everyone. While for businesses it can offer more lenders and options, quicken loan approvals and disbursals - for banking benefits include:
An increase in efficiency
Reduction in credit risk
Time and money savings by the elimination of potentially costly mistakes via the usage of automated processes
An increase in efficiency wherein the origination approval and payment of alone can be done in minutes
Access to crucial data collection we are the usage of lending automation software.
Future Outlook of Digital Lending in 2021
The way forward in 2021 it's going to be focused on the accelerated growth of digital business banking and lending. According to McKinsey, banks are not prioritising small and midsized business (SMB) lending, as the opportunities for improving customer experience are quite considerable. Into this is the fact that even traditional banks and fin-techs have been offering attractive digital propositions when it comes to SMB lending, with shorter approval and disbursal times - which is a key metric for customer consideration of lenders.
2021 is gearing up to be a year that is going to feature dramatic digital transformation for business banking. To stay ahead of the curve and ensure success, banks need to prepare themselves for the new world, by embracing the upscaling of legacy skillsets and bringing about a change in legacy culture, all the while leveraging lending as a catalyst.
The author is Global CTO, Biz2X
DISCLAIMER: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.