There’s no excuse for excluding people from financial services. Phone and internet coverage are reaching into the most remote areas of the world, and people who have been ignored by the financial system for generations are suddenly visible.
The market for lending is changing to meet the needs of a growing and ever more connected population across the globe. Today, lenders are tapping into increasingly digitized and accessible customer data, advanced analytics, machine learning, and lower-cost digital channels to design and remotely deliver digital products in seconds to a global clientele. Innovations in digital lending are enabling existing financial service providers and new fintech startups to offer better products to more underserved clients in faster, more cost-efficient, and engaging ways.
At the same time, customers’ expectations are rapidly evolving — shaped by their experiences with easy-to-use financial apps and social media. Digital lending is one way for financial service providers to keep up with the times. For a provider to stay relevant in this shifting landscape, it must be able to digitize its product portfolio and offer a customer experience that’s on par with or better than traditional methods.
There’s a lot of excitement about the potential of digital lending, but we’ve found the discussion often stops there. We’ve seen real issues in on-the-ground implementation of digital lending — for example, reaching underserved customers through digital channels, gathering sufficient data (and ensuring it’s predictive), building digital readiness, and effectively deploying partnerships. We want to encourage a frank conversation about these challenges and share some of our own battle scars.
Accion’s new paper explores the opportunities and challenges of digital lending for financial service providers at every level of digitization. In addition to discussing common concerns, we share insights into new trends shaping the industry, and distill emerging best practices into a framework that any financial institution can use to start to implement digital lending today.
When Accion discusses digital lending, we’re referring to the process of offering loans that are applied for, disbursed, and managed through digital channels. In each of these steps, lenders use digitized data to inform credit decisions and build intelligent customer engagement. Digital lending is also a valuable asset in the global effort to create a financially inclusive world and provide the three billion people left out of or poorly served by the formal financial sector with the tools they need to build better lives.
The paper is organized into five sections:
I. The introduction discusses the importance of digital lending, explores how new techniques are helping to reach underserved communities, and lays out some of the fundamental questions financial service providers have about digital lending.
II. “What does digital lending really mean?” elaborates on our understanding of digital lending — including what it is and what it isn’t. This section explores why digital lending is relevant for financial service providers targeting low-income and underserved communities. It also describes four central tenets of digital lending and delves deeper into the nuances of the definition.
III. “The digital lending process” breaks down each step in the lending process and uses industry examples to illustrate the digitized lending process.
IV. “How ‘digital’ is your institution?” introduces the Digital Maturity Matrix. This tool helps lenders assess their current digital lending capabilities and identify the next steps they should take to better integrate technology into their operations. The Digital Maturity Matrix can help financial service providers select which processes to prioritize based on their current and desired level of digitization.
V. “Where do I start?” offers financial service providers a path from insights to action. We’ve distilled the trends and best practices of lending in a digital age into a framework that provides practical steps and challenges to consider. Launching digital lending services is a complicated, challenging process, and institutions can be overwhelmed by a sense of paralysis, not knowing how or where to start. While the ‘right’ level of digitization may vary, financial service providers can use this framework to deepen their understanding of digital lending, identify their own digital lending objectives and current status, and take the first steps to implementing digital lending.
A financial service provider may decide to develop its own digital lending capability, explore digital lending partnerships with other organizations, or some combination of these options. No matter which path the company chooses, the recommendations outlined in this paper encourage the right mindset and processes that will position them for success. Digital lending will enable financial service providers to better respond to client needs, situate themselves strategically for the future, and work toward a financially inclusive world.
To learn more about the structural and cultural foundations financial service providers need to have in place to successfully implement digital lending, watch our webinar on Demystifying Digital Lending.