Are You Going Digital? Lending 101

The lending landscape, as a whole, continues to grow every year. It is estimated that by the year 2021 approximately $62.84 billion in new personal, small and medium enterprise, and student loans will be originated. According to a recent S&P Global Market Intelligence report, this number will represent a 16.5 percent compound annual growth rate over a five year time-frame through the end of 2021. With this anticipated growth, competition will continue to increase amongst lenders.

Year after year, FinTech lenders are continually seizing more market share with regards to smaller sized loans. In 2010, FinTech lenders represented less than 1 percent of all personal loan balances. In 2012, that number grew to just 4 percent, but by 2016 that number had grown to 30 percent. Since 2017, FinTech lenders now have a larger share of personal loan balances than banks and credit unions. Through the first half of 2017, FinTech lenders represented 32 percent of all personal loan balances, while banks loaned 29 percent and credit unions 24 percent.

While FinTechs have made a huge impact on the personal lending business model, they have not been as successful in the business and commercial lending sector. According to the FDIC, community banks still provide more than half of all small business loans. However, these FinTechs provided more loans under $100 thousand to small businesses in 2006 than in 2016. These statistics show that competition is rising within the lending arena with the emergence of FinTech lenders. Digital lending strategies are helping these alternative lenders penetrate a market that was traditionally controlled by banks, and to a lesser extent, credit unions. So how can these financial institution’s (FI’s) integrate digital lending strategies into their respective business models to stay competitive with FinTech lenders, and what are some of the benefits of implementing digital solutions?

The majority of community banks have already integrated some form of digital banking into their service offerings that may include online banking, mobile banking, mobile deposit capture, P2P payments (Pop Money), etc. However, these community banks are still falling behind in the digital lending arena. Larger FI’s (the Bank of America’s of the world) have already started to implement digital lending services into their business models with increased competition from, and partnership with, FinTech lenders.

Partnering with FinTech lenders can be beneficial to both parties involved. It benefits the FI’s by accessing borrowers they would not have come in contact with via digital channels. NerdWallet reported that by the end of 2015 nearly 80 percent of small business owners checked online first to seek financing for their companies. By using these digital platforms provided by FinTech lenders, borrowers can originate loans via online and mobile channels, and enhance the borrowers overall experience by providing a swift approval and funding process. Also, ever since the financial crisis during the mid-2000s, FI’s have practiced stricter lending standards. These FinTech lenders can help access those small enterprise loans (under $100 thousand) that FI’s have viewed as “costly” and “too risky.” FinTech lenders benefit by gaining access to a loyal customer base and capital.

Another way for FI’s to integrate digital lending is by fragmenting a digital solution that makes sense for their respective business model. This can be accomplished by obtaining a small business loan origination platform, consumer loan origination platform, and similar platforms, through a third-party FinTech company. FI’s can buy or lease these technology platforms. This trend allows FI’s to focus their efforts on specific areas, and remain focused on ROI. FI’s need to be mindful that this fragmented approach comes a lot of due diligence and staff training versus partnering with FinTech lenders.

FI’s can greatly benefit from implementing digital lending solutions. Earlier, we looked at a few strategies on how FI’s can integrate digital lending into their respective business models in order to stay competitive with FinTech lenders. One might ask what are the benefits from this growing trend? The biggest benefits from these strategies are enhancing the borrower experience in a timely manner, managing loan origination, efficiently with no paper, and reducing staff time by driving new business through digital marketing and online/mobile channels.

With digital lending comes an expedited process in which borrowers can apply for a loan at the touch of a mobile device, and get approval in minutes, including the lenders approved amount, rate and term. This process is streamlined for the borrower because they do not have to visit a branch to fill out extensive paperwork and wait for approval. These digital lending platforms, or FinTech lenders can also use online data retrieval and access data points to approve borrowers. These digital processes can also cut risk through compliance efficiency, manage loan applications virtually, and streamline what is traditionally a manual process. Staff time and expense tied to originating loans can be significantly reduced, and ultimately, with digital lending comes digital advertising and marketing, which allows FI’s to reach new potential borrowers.

While FI’s continue to internally debate how to implement digital lending solutions, choose strategies, and analyze if such strategies produce ROI, they are simultaneously losing market share and missing out on profits. According to a recent analysis by Bain & Company and SAP Value Management Center shows banks are currently, on average, only handling 7 percent of product offerings digitally from end to end. Digital lending is the wave of the future for FI’s, and although it is still considered an early trend, we can expect more technological strides within the landscape, digital lending is here to stay.