Digital lending can be a potent force for financial inclusion. Traditionally, lending to underserved consumers has been time-consuming and costly for financial service providers (FSPs). Today, innovations in digital lending are enabling providers to offer better products to more underserved clients in faster, more cost-efficient, and engaging ways.

Amy Stewart

Kathleen Yaworsky

Paul Lamont

Michael Schlein

Victoria White

Priya Punatar

Credit

Delivery Channels

Digital Financial Services

Financial Service Providers

Human Centered Design

MSME/SME Finance

Advisory Services

Digital Credit

Governance

Appropriate Product Design and Delivery

Consumer Protection

Credit Provision

Partnerships

Trends

Enabling Environment

Financial Technology

Human Touch

Article

Webinar

Report

Demystifying digital lending

Digital lending can be a powerful force for financial inclusion. Innovations in digital lending are enabling financial service providers to offer better products to more underserved clients in faster, more cost-efficient, and engaging ways. This Accion Insights paper addresses common concerns, shares insights into new trends shaping digital lending, and distills emerging best practices into a framework that FSPs can use to implement digital lending today. Collectively, these steps are intended to help FSPs plan strategically to navigate the new and rapidly changing landscape of digital lending.

<img class="size-full wp-image-10267 alignleft" src="https://content.accion.org/wp-content/uploads/2018/09/Citi-Foundation.png" alt="" width="225" height="225" />

Accion’s Global Advisory Solutions team developed this report with the support of the Citi Foundation.

Demystifying Digital Lending

The market for lending is changing across the globe. A new category of digital lenders has emerged that uses digitized customer data, lower-cost digital channels, and advances in machine learning and analytics to offer better products to more clients in faster, more cost-efficient and engaging ways. The market opportunity is significant: the total transaction value is expected to show an annual growth rate of <a href="https://www.statista.com/outlook/399/100/alternative-lending/worldwide">18.2 percent between 2018 and 2022</a>. And the <a href="https://www.smefinanceforum.org/data-sites/msme-finance-gap">IFC</a> estimates the financing gap for small businesses in developing countries at more than US$5 trillion.

Around the world — and especially in emerging markets — these lenders are developing innovative business models that leverage technology to reach customers whom banks have largely ignored in the past. In Mexico, small businesses can now access funding within hours from <a href="https://konfio.mx/">Konfio</a>, a fintech that use alternative data to better understand applicant behavior. In Ghana, the solar company <a href="https://www.pegafrica.com/">PEG</a> is enabling low-income customers in remote rural areas to use mobile money to affordably pay for solar units, gaining access to light, radios, and even television sets in their homes.

What does this mean for traditional financial institutions? These institutions historically have used a “high touch” approach to serving the low-income segment, relying on an extensive network of loan officers who canvass regions and build personal relationships with their customers. While effective, this manual approach is expensive and has been a key roadblock to providing personalized financial products at scale.

Improvements in infrastructure and access to technologies have provided all lenders — including traditional institutions — with a new and compelling alternative. Digital technologies allow for more customized products and experiences at a fraction of the cost of physical delivery. One key component of this opportunity in emerging markets is the improvement of mobile network coverage and the proliferation of low-cost smartphones. <a href="https://www.gsma.com/mobileeconomy/">GSMA</a> predicts the number of unique mobile subscribers will reach 5.9 billion by 2025, with growth driven by new customers in India, sub-Saharan Africa, and Latin America. Another factor is government action; policymakers around the world are setting digital and financial inclusion agendas that offer increased regulatory and infrastructure support for digital lending.

In addition, customers in emerging markets are becoming more tech-savvy. More than half own a smartphone, and many use digital services on a daily basis — in Kenya, almost two-thirds of the adult population makes or receives payments using mobile phones. And global exposure to multinational brands like Facebook and Amazon has heightened customer expectations around product design and service. Financial institutions that don’t offer a similar customer experience risk losing customers to new digital competitors.

Digital lending offers great promise, but it is not a magic bullet. If not well-designed and delivered, digital products can negatively impact both providers and customers. On the customer side, poorly-executed digital lending can lead to over-indebtedness, aggressive digital collections practices, and, in extreme instances, even financial exclusion. For example, in 2017 Microsave <a href="http://www.microsave.net/resource/where_credit_is_due_customer_experience_of_digital_credit_in_kenya">reported</a> that 2.7 million people in Kenya were blacklisted for non-repayment of digital credit in the three years prior, with 400,000 blacklisted for loans of less than $2. These negative impacts are often the result of overly aggressive sales tactics or not ensuring the customer understands (or needs) the product. To avoid these effects, digital lenders must offer financial products with transparency and customer protection at the core of their design.

While fintechs will continue to drive much of the innovation in digital lending, it is essential to recognize that they are only part of the picture. It is the traditional financial institutions that have built strong regional brands, hold banking licenses, offer a wide variety of financial products, and importantly have access to capital that can enable scale. And microfinance institutions have been successful at reaching the unbanked, particularly because they use physical touch points to engage, educate and support their customers.

Arguably the biggest opportunity for scalable digital lending innovation sits at the convergence of fintechs and traditional financial service providers. There are promising signs that through partnerships, fintechs and traditional lenders are harnessing their respective strengths to design customer-centric products that can sustainably drive financial inclusion. If resourced and managed well, these partnerships have the potential to drive significant scale of digital lending in emerging markets — resulting in increased access and inclusion.

Digital lenders can help unlock full financial inclusion

“We should go digital” is often proposed by financial service providers with the assumption that it will make life easier for everyone involved. But digital transformation is a challenging process, requiring both a strong structural and cultural foundation to be successful. To make the process as smooth as possible, lenders must take the crucial first steps of assessing and building their digital readiness, as we wrote in our recent publication <a class="markup--anchor markup--p-anchor" href="http://www.accion.org/demystifying-digital-lending/" target="_blank" rel="noopener noreferrer">Demystifying Digital Lending</a>.

<h2 class="graf graf--h4">Build your digital readiness — and avoid a ‘digital mullet’</h2>
One of the most common mistakes financial service providers make when going digital is giving themselves a “digital mullet” — they look digital in the front, with fancy mobile applications or automated credit distributions, but they have a lot of labor-intensive work happening on the back-end, which fails to deliver on the expected benefit of greater operational efficiency.
Building digital readiness means putting in place the core processes and systems that will ultimately support end-to-end digitization of lending products and the customer experience as a whole. For example, to help streamline operations, reduce costs, and increase scale, financial service providers (FSPs) can deploy digital channels and tools, such as <a class="markup--anchor markup--p-anchor" href="https://www.centerforfinancialinclusion.org/new-case-study-provides-evidence-on-the-impact-of-digital-field-applications" target="_blank" rel="noopener noreferrer">digital field applications </a>(DFAs) or cloud-based core banking systems — but deploying such tools is just a small part of the broad range of activities required to build digital readiness.
A baseline of digital readiness can help mitigate common digital lending <a class="markup--anchor markup--p-anchor" href="https://medium.com/accion/5-key-principles-for-financial-service-providers-looking-to-go-digital-d9fb58b07816" target="_blank" rel="noopener noreferrer">implementation challenges</a>, including data quality and availability, building strong partnerships, and change management.

<h2 class="graf graf--h4">In digital lending, the whole is greater than the sum of its parts</h2>
To become a digital lender, a traditional financial service provider must undergo a comprehensive digital transformation to create an integrated digital product proposition that improves the customer experience. This draws a useful line in the sand — digital lending isn’t just doing the same thing better, but rather creating something new. It implies an end-to-end process of developing and delivering a data-driven financial product that is applied for, disbursed, and managed through digital channels, and ultimately improves the customer experience.
As we note in the report, FSPs should understand the distinction between digital readiness (the ability to offer existing products in a digital format, typically enabled by a number of digital tools) and a digital product proposition (the launch of an end-to-end digital product). Many FSPs plan to launch digital products <a class="markup--anchor markup--p-anchor" href="https://medium.com/accion/5-key-principles-for-financial-service-providers-looking-to-go-digital-d9fb58b07816" target="_blank" rel="noopener noreferrer">without realizing the time required to build their digital readiness first</a> — this often involves multi-year planning to develop systems and skills to enable the delivery of digital products before actual digital products are launched.
At its core, much of digital readiness is about building the institutional capacity to <a class="markup--anchor markup--p-anchor" href="https://medium.com/accion/implementing-big-data-10-tips-from-financial-service-providers-11b30dbee1a" target="_blank" rel="noopener noreferrer">use data effectively</a>, which is a prerequisite for launching a successful digital lending product. The diagram below, from our publication <a class="markup--anchor markup--p-anchor" href="http://www.accion.org/unlocking-the-promise-of-big-data-to-promote-financial-inclusion/" target="_blank" rel="noopener noreferrer">Unlocking the Promise of (Big) Data to Promote Financial Inclusion</a>, depicts a simple diagnostic framework for understanding an institution’s data capacity.
<img class="alignnone size-large wp-image-8443" src="http://blogs.accion.org/wp-content/uploads/2018/07/Screen-Shot-2018-07-26-at-9.11.58-AM-1024x790.png" alt="Data continuum diagnostic framework for companies at different levels of data maturity and digitization." width="1024" height="790" />
As the diagram above illustrates, digital readiness can be broken down into three broad categories — people, systems, and strategy:

<ul class="postList">
 	<li class="graf graf--li">People — ensuring the business is ready for scale from an organizational culture and internal capacity perspective. This includes reviewing the skills, capacity, and commitment of the institution at all levels, and assessing whether existing team structures and individual incentives are suitable for delivering a digital proposition.</li>
 	<li class="graf graf--li">Systems — ensuring the core infrastructure is in place to scale the business, such that information flows smoothly and is used effectively across the organization. This includes an institution’s core banking system, electronic document management system (EDMS), data warehouse, middleware, and reporting dashboards. The systems required to offer digital lending are comparable to a CRM (customer relationship management) system in which the institution can disaggregate customer-level information from the lending process and ultimately build a comprehensive, 360-degree digital view of individual customers over time.</li>
 	<li class="graf graf--li">Strategy — ensuring the business is ready for scale from a strategic and operational perspective. This includes data and channels strategy, customer segmentation and understanding, and process reengineering. An essential step in building digital readiness is taking stock of current processes and identifying opportunities to streamline and leverage data.</li>
</ul>
To quote J.R.R. Tolkien — “the road goes ever on and on…” — but by keeping this framework in mind, combined with a Bezos-like <a class="markup--anchor markup--p-anchor" href="https://www.cnbc.com/2016/05/13/5-key-business-lessons-from-amazons-jeff-bezos.html" target="_blank" rel="noopener noreferrer">obsession</a> with customer needs, financial service providers can position themselves for a successful digital transformation.
This post is part of our series on digital lending.
Accion has developed many tools and resources to support FSPs in these first critical steps to build digital readiness, including a <a class="markup--anchor markup--p-anchor" href="https://www.accion.org/content/new-case-study-impact-digital-field-applications" target="_blank" rel="noopener noreferrer">case study</a> on the use of DFAs, <a class="markup--anchor markup--p-anchor" href="http://www.accion.org/content/tool-and-resources" target="_blank" rel="noopener noreferrer">tools</a> on credit scoring and operational risk management, and a <a class="markup--anchor markup--p-anchor" href="https://medium.com/accion/implementing-big-data-10-tips-from-financial-service-providers-11b30dbee1a" target="_blank" rel="noopener noreferrer">guide</a> on developing the operational capability and infrastructure required for the strategic use of data.

The biggest mistakes lenders make when going digital

I am continually impressed by the innovation of digital financial services in emerging markets. This innovation is often assumed to be solely the work of fintechs, but we are increasingly seeing that regulated financial service providers (FSPs) are playing a pivotal role in driving financial inclusion through their own digital initiatives. This development is typically driven by their regulatory licensing, access to low-cost funding, and strong brand and distribution networks they have developed in their respective regions.
To help such institutions think about their digital strategy and plan a roadmap for digitization, my colleague <a class="markup--anchor markup--p-anchor" href="http://www.accion.org/digital-maturity-financial-service-providers/" target="_blank" rel="nofollow noopener noreferrer">Amy Stewart recently discussed the Digital Maturity Matrix</a> (<a class="markup--anchor markup--p-anchor" href="https://www.surveymonkey.com/r/Y8N7F83" target="_blank" rel="nofollow noopener noreferrer">take the quiz</a> to see your institution’s digital maturity). Our latest paper <a class="markup--anchor markup--p-anchor" href="http://www.accion.org/demystifying-digital-lending/" target="_blank" rel="nofollow noopener noreferrer">Demystifying Digital Lending</a> examines digital lending in detail and how financial institutions can implement their digital offering.
As FSPs look to digitize, the natural first question to ask when applying the Digital Maturity Matrix is How should we develop our digital maturity, and to what extent? The matrix speaks of three different levels of digital maturity — Early Stage, Base Level, and Digital Plus — and it is important that institutions aim to develop to a digital maturity that drives sustainable growth and is appropriate given their specific context.
It is our view that FSPs should not necessarily aim to develop their digital maturity to Digital Plus, the highest level on the matrix. Most can benefit significantly and compete in the changing lending landscape by reaching Base Level maturity and perhaps selecting elements of Digital Plus maturity.
But even reaching Base Level maturity requires FSPs to fundamentally change their products and the way they are offered to customers. This is no easy task, and it’s understandable that many FSPs may get overwhelmed with where to start. And so, I would like to introduce five fundamental principles that can help FSPs when applying the Digital Maturity Matrix as they develop their digital capability:

<h4 id="ccf3" class="graf graf--p graf-after--p">1. Digital happens throughout the organization — including the C-Suite</h4>
This one sounds obvious, but for digital transformation to be genuinely effective, digital initiatives must be able to integrate across all functional teams to deliver a fluid customer experience. A good example would be that if an applicant for a digital product needs to use a lender’s physical branch network to register Know Your Customer (KYC) details, this means that branch staff must be familiar with this new digital product to assist the customer as per the planned customer journey. In the pilot phase of launching a digital product, we have seen FSPs successfully silo the launch within a small team. While this can be effective to quickly prove commercial feasibility, ultimately scale cannot be achieved without full buy-in and collaboration across all functions.
To achieve this digital scale, full support from the CEO and C-suite are paramount. Ensuring that the C-suite has the requisite digital skills can significantly influence the execution of digital initiatives. The way the digital team is structured (for example — across functional teams, as a separate digital team, or even as a separate “fintech subsidiary”) also affects the capacity of the institution to digitize effectively.

<h4 id="d452" class="graf graf--p graf-after--p">2. Developing digital readiness is a prerequisite to digital lending</h4>
Before FSPs can offer digital products, they must ensure that their systems and processes can support a digital transformation. This includes building scalable and interoperable systems that can organize and visualize data, having intuitive and clearly defined and mapped business processes before they are digitized, and developing a deep understanding of existing and potential customer segments to allow lenders to design products to meet specific needs.
Without these in place, we often see FSPs with ambitious digital plans forced to delay product launches and revert back to the basics first.

<h4 id="5c6b" class="graf graf--p graf-after--p">3. Digital products can be varying levels of digital</h4>
Once FSPs have developed their Digital Readiness they can start digitizing their existing product range or developing new digital products with more personalized propositions. But these options can have very different demands for a lender:

<ul class="postList">
 	<li id="4cb4" class="graf graf--li graf-after--p">Digital Propositions speak to the use of digital tools to digitize an existing product range. This would include, for example, using USSD or a mobile app to enable digital application. This improves the customer experience in piecemeal additions, without offering a fundamentally different product.</li>
 	<li id="07b1" class="graf graf--li graf-after--li">Digital Products introduce fundamentally new business models enabled by digital tools, and allow lenders to offer new products to serve the specific needs of customers.</li>
</ul>
The reason why this is so important is that many FSPs think of the most digital version of a product and aim to go there first. However, there is often a more gradual path to offering a fully digital product which frequently involves digitizing parts of existing products first. This route also allows for quick wins which management teams are often in need of to show progress to the board before investing heavily in newer digital technologies.
In this sense, planning different types of products with varying levels of digital capability over time can be an easier and less complex way of building an FSP’s digital product offering. We encourage FSPs to develop multi-year digital roadmaps beyond 12-month budgetary cycles, to allow for momentum in planning key digital milestones.

<h4 id="a4b6" class="graf graf--p graf-after--p">4. Human touch will remain relevant in several markets when implementing digital lending</h4>
As discussed in a <a class="markup--anchor markup--p-anchor" href="http://www.accion.org/human-touch-place-age-digital-financial-services/" target="_blank" rel="nofollow noopener noreferrer">recent Accion blog</a>, human touch will remain crucial for many FSPs given their legacy of high-touch customer acquisition as well factors such as customer preferences and sophistication, larger loan sizes, and to facilitate cash transactions in markets where this is preferred. This means that FSPs should not think that digital no longer requires investment in physical distribution; it will more likely require an explicit design of the customer journey to balance tech and touch points. Furthermore, the need to enable remote support to customers will naturally mean that decentralized touch points such as call centers and mobile-based platforms will require significant investment to support efficient scale. Institutions will need to start planning for these touch points in terms of skills and systems.
5. Partnerships are a key enabler of digital product launches
For FSPs, driving digital maturity can be a time-consuming and expensive process, and in some instances, they will not have the skills or systems to fully execute on a desired product offering. Partnerships with fintechs that have the technology and skills to execute a specific product or functionality can significantly reduce time-to-market and decrease the risk of failure for a digital product launch. A recent <a class="markup--anchor markup--p-anchor" href="http://www.centerforfinancialinclusion.org/storage/CFI_IIF_FI_Fintech_Partnerships_Report_2017.07.pdf" target="_blank" rel="nofollow noopener noreferrer">paper by the Center for Financial Inclusion</a> concluded that partnerships can be an effective strategy for FSPs to gain access to new market segments, create new offerings for existing customers, enable data collection and management, and deepen customer engagement and usage.
There is no guaranteed formula for digital transformation, but the above principles are a helpful start to promoting meaningful planning and collaboration within lending institutions (and externally, where required) as they look to transform their business models.
And to those FSPs out there already starting their journey — good luck, the future looks bright!
Looking for more guidance on how your institution can enable digital lending? <a class="markup--anchor markup--p-anchor" href="http://www.accion.org/webinar-demystifying-digital-lending/" target="_blank" rel="nofollow noopener noreferrer">Watch our recent webinar.</a>

5 key principles for financial service providers looking to go digital

[embed]https://www.youtube.com/watch?v=vSCLwJHOwZU[/embed]

Digital lending can be a powerful force for financial inclusion. Innovations in digital lending are enabling financial service providers (FSPs) to offer better products to more underserved clients in faster, more cost-efficient, and engaging ways. Governments are increasingly incentivizing the growth of digital lending models as a way to promote greater financial inclusion and extend high-quality financial services to underserved communities and businesses.

<a href="http://www.accion.org/demystifying-digital-lending/">Download the full report here</a>.

Webinar: Demystifying digital lending

Scroll down for our Digital Maturity Quiz
Over the past few years, I’ve read countless blogs and articles stressing the need for financial service providers — including those that lend to underserved customers in emerging markets — to ‘go digital.’ This process is often presented as a miracle cure, that will help institutions to be more efficient, achieve scale, offer a better customer experience, and remain relevant in a rapidly evolving and innovative marketplace. However, these pieces often skip or gloss over what ‘digital’ actually means and what digital lending looks like on the ground. Readers are left with a vague sense of urgency but lingering questions: what makes a lender ‘digital’? Can all providers be digital lenders? How ‘digital’ is my institution today — and where do we want (or need) to go?
We set out to tackle these questions head-on in our recent publication, aptly named: <a class="markup--anchor markup--p-anchor" href="http://www.accion.org/demystifying-digital-lending/">Demystifying Digital Lending</a>. In this paper, we <a class="markup--anchor markup--p-anchor" href="http://www.accion.org/digital-financial-services-advance-financial-inclusion/">define the scope of digital lending (it’s more than just nano-loans offered by fintechs</a>!) and showcase the <a class="markup--anchor markup--p-anchor" href="http://www.accion.org/rapidly-changing-landscape-digital-lending/">evolving and growing landscape of different digital lenders</a>. We argue that financial service providers can (and should!) look to strategically digitize their product offering, while also <a href="http://www.accion.org/human-touch-place-age-digital-financial-services/">leveraging their distribution network to provide much-needed customer education and support.</a>
Most importantly, the paper introduces a framework to help lenders better understand how digital their lending products are today, and what steps they can take to improve their digital maturity. The Digital Maturity Matrix outlines specific activities and functionality financial service providers should have in place at each stage of the lending process (from acquisition to customer engagement) for three different levels of digital maturity — early, base, and digital plus.
Each level implies a different strategic objective for digital lending:

<ul class="postList">
 	<li class="graf graf--li">Lenders at early digital maturity are working to increase customer’s access to and usage of financial services by providing existing products and services over digital channels. They focus on introducing digital acquisition, disbursement, and repayment. These digital services offer convenience for current customers and facilitate access to new customers. They also allow customers to digitally manage core components of their account — for example, checking their outstanding repayment — while still providing in-person support through loan officers or agents.</li>
 	<li class="graf graf--li">Lenders at ‘base’ digital maturity move beyond access to customization of financial services. Increased use of digitized customer information informs the development of new, more personalized digital products, offered to both new and existing customers. At this level, the sophisticated analysis of data is key to design these personalized products for customers.</li>
 	<li class="graf graf--li">Digital plus lenders not only offer customized products, but they also create a customized experience based on an intimate understanding of specific customer needs and preferences. Interactions are fully digital, with physical touchpoints only where required for regulation or cultural preference. What sets digital plus lenders apart from the competition is their understanding that digitization goes far beyond simply implementing new technology — they focus on aligning the company’s strategy, workforce, culture, and technology to meet the digital expectations of customers and employees.</li>
</ul>
The digital maturity-level for each financial service provider is based on existing products and processes, current capacity and strategic objectives. Some, who are just getting started with digitizing their product offering, will likely be pre-early stage.
So how digital is your institution? We’ve created a short 9 question quiz to give financial service providers an initial sense of where they may fall on the maturity matrix. Please keep in mind that results are intended to provide high-level guidance — not all lenders will fit neatly into one level of maturity. A full categorization will require a more thorough, customized assessment.

<h4 class="graf graf--p">Click here to take the <a class="markup--anchor markup--p-anchor" href="https://www.surveymonkey.com/r/Y8N7F83">Digital Maturity Quiz and find out where you fall on the digital maturity matrix</a>.</h4>
You’ve taken the quiz and identified where you likely are on the Digital Maturity Matrix today. Great, what’s next? Look out for the next post in our digital lending series to learn how the digital maturity matrix can be applied and some practical lessons for financial service providers digitizing their product offerings.
If you are interested in learning more about how to diagnose digital maturity and build digital roadmaps at your institution, <a href="https://www.youtube.com/watch?v=vSCLwJHOwZU">watch our webinar on Demystifying Digital Lending</a>. Paul Lamont, the Director of Digital-Africa with Accion’s Global Advisory Solutions and lead author, discussed the gap between the vision of fully-integrated digital lending and the realities that traditional lenders must effectively navigate to complete an institutional transformation.
You can access the full Digital Maturity Matrix in our most recent publication, <a class="markup--anchor markup--p-anchor" href="http://www.accion.org/demystifying-digital-lending/">Demystifying Digital Lending</a>. Accion’s Global Advisory Solutions leverages innovations to increase the quality and lower the cost of financial services, and thus help to build sustainable and scalable institutions focused on serving the financial needs of underserved individuals and small businesses. <a class="markup--anchor markup--p-anchor" href="mailto:glassupport@accion.org">Contact us</a> for more information on implementing digital lending at your institution.

How digital is your institution?

Technology has fundamentally changed how we send and receive money, purchase insurance, or even think about currency. It will continue to transform nearly every conceivable financial activity.
But technology’s biggest impact on financial services may be on lending.
Traditionally, lending to underserved consumers has been time-consuming and costly for financial service providers (FSPs). Today, innovations in digital lending are enabling providers to offer better products to more underserved clients in faster, more cost-efficient, and engaging ways.
Knowing this is one thing, but implementing it is another. There is often a gap between an FSP’s vision of digital lending and the reality it must navigate to complete a digital transformation. In addition, digital lending brings with it new risks and challenges that can have unintended consequences for both institutions and clients.
Accion’s latest report, <a class="markup--anchor markup--p-anchor" href="http://www.accion.org/demystifying-digital-lending/" target="_blank" rel="noopener noreferrer">Demystifying Digital Lending: How Digital Transformation Can Help Financial Service Providers Reach New Customers, Drive Engagement, and Promote Financial Inclusion</a>, draws upon discussions with more than 100 digital lenders to explore this evolving space, and help FSPs assess their current digital lending capabilities and identify next steps toward adopting a successful digital lending methodology and mindset.
The paper answers five key questions relevant to any FSP that works — or is considering working — in the digital lending space:

<ol class="postList">
 	<li class="graf graf--li">What’s the big deal with digital lending? In today’s increasingly digital world, lenders can leverage improving connectivity, increasingly available customer data, and new technologies to effectively and sustainably extend high-quality financial products and services to more underserved communities and businesses.</li>
 	<li class="graf graf--li">What is digital lending? There are a variety of responses to this question, some focused on the products themselves, others focused on process. But there are three key components for digital lending: the use of digital channels, the use of digitized data, and a focus on customer experience and engagement.</li>
 	<li class="graf graf--li">What is the process? The <a class="markup--anchor markup--li-anchor" href="http://www.accion.org/demystifying-digital-lending/" target="_blank" rel="noopener noreferrer">report </a>breaks down each step of the lending process — from customer acquisition, to approval and analytics, to disbursement and repayment, to collections — and explores how FSPs can best leverage digital channels and digitized data and algorithms.</li>
 	<li class="graf graf--li">How digital is my institution? The Digital Maturity Matrix offers a practical framework for FSPs to assess their digital capabilities and identify next steps for digital transformation.</li>
 	<li class="graf graf--li">Where do I start? With this context and framework in hand, lenders in any market or at any level of maturity can take steps to advance along a continuum toward increased digitization. The report identifies those steps, as well as potential risks and challenges FSPs should consider to avoid negative effects on both institutions and clients.</li>
</ol>
We’ll continue looking for the best ways to help our partners responsibly leverage digital technologies to provide families and entrepreneurs with the financial products and services that they need to build better lives.

Demystifying digital lending to reach the underserved

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.
<div class="postArticle-content js-postField js-notesSource js-trackedPost"><section class="section section--body section--first section--last">
<div class="section-content">
<div class="section-inner sectionLayout--insetColumn">
The <a class="markup--anchor markup--p-anchor" href="https://medium.com/accion/the-rapidly-changing-landscape-of-digital-lending-c4a6620f6f43" target="_blank" rel="noopener noreferrer">market for lending is changing</a> 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.
<a class="markup--anchor markup--p-anchor" href="http://www.accion.org/demystifying-digital-lending/" target="_blank" rel="nofollow noopener noreferrer">Accion’s new paper </a>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 <a class="markup--anchor markup--p-anchor" href="http://www.accion.org/human-touch-place-age-digital-financial-services/" target="_blank" rel="nofollow noopener noreferrer">‘right’ level of digitization</a> 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 <a class="markup--anchor markup--p-anchor" href="http://www.accion.org/webinar-demystifying-digital-lending/" target="_blank" rel="nofollow noopener noreferrer">Demystifying Digital Lending.</a>

</div>
</div>
</section></div>

Now what? The path forward for financial services in a digital world

Last year, Amazon grabbed headlines by giving <a class="markup--anchor markup--p-anchor" href="https://www.reuters.com/article/us-amazon-com-loans/amazon-lent-1-billion-to-merchants-to-boost-sales-on-its-marketplace-idUSKBN18Z0DY">$1 billion in small-business loans</a> to over 20,000 merchants in the United States, Japan, and the U.K. Their near real-time data on sellers’ businesses and access to customer reviews allow Amazon to evaluate customers and manage the risk of lending to small merchants. WeChat also made waves when it entered the game in 2015. As China’s largest social network, it’s been able to <a class="markup--anchor markup--p-anchor" href="https://www.kapronasia.com/china-banking-research-category/item/889-wechat-loan-blows-retail-banking-with-rmb100-billion-loans-in-two-years.html">deploy more than US$14.7 billion in funds</a> in just two short years. Like Amazon, WeChat benefits from access to data and the ability to offer convenience and efficiency for the customer — it only takes 0.3 seconds to approve a loan application.
These tech giants have joined a host of other players in a continually evolving digital lending ecosystem. Other prominent digital lenders include <a class="markup--anchor markup--p-anchor" href="https://konfio.mx/">Konfío</a> in Mexico and Kenya-based <a class="markup--anchor markup--p-anchor" href="http://kopokopo.co.ke/">Kopo Kopo</a>. Each platform in this space leverages technology to offer loans that are faster, more cost-efficient, and more straightforward for the customer.
Digital lending is proving to be a potent force for reaching people who haven’t been able to access financial services in the past. Innovative products can overcome the challenges of geography, reduce transaction costs, and increase transparency. But distinct market structures, regulatory environments, and customer needs have led to a wide variety of digital lending models that are each tackling financial inclusion in different ways.
When we evaluated the current state of play, we identified seven primary digital lending models:

<ul class="postList">
 	<li class="graf graf--li">Online lenders. These lenders offer full end-to-end digital lending products online or via mobile applications. In this model, customer acquisition, loan distribution, and customer engagement are entirely digital. This process is specially designed with no need for face-to-face contact or even for customers to phone a call center. Fintech companies like <a class="markup--anchor markup--li-anchor" href="https://www.lidya.co/">Lidya</a>, <a class="markup--anchor markup--li-anchor" href="https://branch.co/">Branch</a>, and <a class="markup--anchor markup--li-anchor" href="https://tala.co/">Tala</a> are online lenders that help entrepreneurs access funding in emerging markets, including <a class="markup--anchor markup--li-anchor" href="http://www.accion.org/new-venturekast-episode-lidya-building-future-small-businesses-nigeria/">Nigeria</a>, Kenya, and the Philippines.</li>
 	<li class="graf graf--li">P2P platforms. P2P platforms are purely digital platforms that match a borrower with an institutional or individual lender and facilitate the digital transaction. The platform typically plays an ongoing central role in the relationship between these parties. In this model, P2P lenders like <a class="markup--anchor markup--li-anchor" href="http://english.creditease.cn/about/Overview.html">CreditEase</a> and <a class="markup--anchor markup--li-anchor" href="https://www.kwikcashonline.com/">KwikCash</a> often design the product, score the borrower, and may support repayment and collection processes.</li>
 	<li class="graf graf--li">E-commerce and social platforms. These platforms include the likes of Amazon and WeChat. These are digital platforms where credit is not their core business, but they leverage their digital distribution, strong brand, and rich customer data to offer credit products to their customer base.</li>
 	<li class="graf graf--li">Marketplace platforms. Marketplaces, like <a class="markup--anchor markup--li-anchor" href="https://www.loanframe.com/">Loan Frame</a> in India, are digital platforms that use proprietary algorithms to match a borrower with the right lender. Lenders typically use these types of platforms to acquire new customers, and they pay an origination fee to the platform. Once funds are dispersed, the customer relationship is direct with the lender.</li>
 	<li class="graf graf--li">Supply chain lender. Firms such as <a class="markup--anchor markup--li-anchor" href="http://www.tiendapago.com/en/">Tienda Pago</a> and <a class="markup--anchor markup--li-anchor" href="http://www.m-kopa.com/">M-Kopa Solar</a> provide digital short-term working capital loans for microenterprises to purchase inventory from their distributors or for pay-as-you-go financing of an asset purchase. The distribution network enforces repayment through penalties if necessary. For example, suppliers might withhold deliveries of goods or turn off utilities in the case of late payment.</li>
 	<li class="graf graf--li">Mobile money lenders. Firms such as <a class="markup--anchor markup--li-anchor" href="http://www.accion.org/kopo-kopo-mobile-money-kenya/">Kopo Kopo</a> partner with mobile network operators to offer mobile money loans to their customer base, leveraging mobile phone data for credit scoring. In this model, physical agent networks where customers can go to complete cash-in/ cash-out transactions supplement the digital interface of the mobile phone.</li>
 	<li class="graf graf--li">Tech-enabled lenders. These are traditional lenders who have embraced technology to digitize part of their otherwise manual lending process. This digitization could include adding digital acquisition channels or digital repayment options. Tech-enabled lenders like <a class="markup--anchor markup--li-anchor" href="http://www.ayefin.com/">Aye Finance</a> in India and <a class="markup--anchor markup--li-anchor" href="http://www.accionmfb.com/Home.aspx">Accion Microfinance Bank</a> in Nigeria, supplement their physical distribution networks with technology — providing a <a class="markup--anchor markup--li-anchor" href="http://www.accion.org/human-touch-place-age-digital-financial-services/">‘tech and touch’</a> approach.</li>
</ul>
Adding to the complexity of the digital lending ecosystem is its dynamic nature, which makes strict categorization difficult. Key players continue to test, refine, and evolve their business models and value propositions based on customer needs and market experience.
For example, <a class="markup--anchor markup--p-anchor" href="https://www.creditas.com.br/">Creditas</a>, a digital lender in Brazil, started solely as a marketplace platform but has subsequently moved into credit scoring, customer engagement, and financing solutions for customers, to become an online lender. <a class="markup--anchor markup--p-anchor" href="https://www.jumo.world/">JUMO</a>, an online lender in Kenya, started as an end-to-end mobile money lender but is moving away from funding its own portfolio and becoming a marketplace platform.
Innovation and market expectations will continue to alter and refine the digital lending landscape. However, the similarities shared by today’s successful models are likely to remain prominent: they digitally source customer data, rely on hundreds, and even thousands, of data points to score customers, offer instant and remote approval, create data-driven mechanisms to drive repayment, and engage customers digitally. Advanced digital lenders have leapfrogged over traditional lenders to provide customers with a faster, more transparent, and convenient service. Traditional banks will have to give customers similar benefits if they hope to compete.
To learn more about the ways that digital lending is advancing financial inclusion and how financial service providers can evolve in today’s digital landscape, read Accion’s Global Advisory Solutions team’s publication on <a href="http://www.accion.org/demystifying-digital-lending/">Demystifying Digital Lending</a>.

The rapidly changing landscape of digital lending

[caption id="attachment_11256" align="alignleft" width="215"]<img class="size-medium wp-image-11256" src="https://content.accion.org/wp-content/uploads/2018/02/IMG_6709_crop-1-215x300.jpg" alt="Paul Lamont" width="215" height="300" /> Visiting a market in Accra, while in town to meet with Accion's partner institutions.[/caption]
While on a recent trip to Accra to work with an incumbent lender to digitize their product offering, I was not surprised to hear the CEO ask whether he should go “fully digital” and discard the idea of investing in branches. Based on the hype out there, it’s understandable — businesses such as <a href="https://www.ft.com/content/05e65d04-3c7a-11e6-9f2c-36b487ebd80a">Tala</a> in Kenya and <a href="https://www.vanguardngr.com/2017/06/wema-banks-alat-paving-way-100-digital-banking-nigeria/">Wema Bank’s ALAT</a> have designed business models that are <a href="http://www.loans.info.ke/2016/09/how-to-contact-tala-kenya-formerly.html">void of physical contact</a> without the need to ever walk into a branch.
But do I believe that traditional financial services providers should aspire to transform to the fully digital model? Not at all.

While digitization is inevitable for “traditional lenders” to remain competitive in the ever-changing landscape, exclusively digital business models do not allow microfinance institutions to leverage some of their strongest assets. These strengths include their existing branch network, the ability to understand and engage directly with their customers, and a brand that is trusted and regionally relevant due to a legacy of high touch engagement.

For these traditional lenders in emerging markets, going “digital” is often merely perceived as a channel play, serving existing products through digital channels (as opposed to designing new products that are premised off fully digital business models). Digitization can enable expansion into rural locations where serving new customers with brick and mortar distribution wouldn’t be feasible.  But it’s not always that simple — customers in these rural areas may still need physical interaction due to lack of digital access (infrastructural constraints) or to gain comfort with digital products (cultural constraints).

A good example here would be to compare lending models between emerging market online lender <a href="https://global.handelsblatt.com/finance/lender-of-last-resort-816054">Kreditech</a>, which employs an entirely digital lending model, and <a href="http://uk.businessinsider.com/heres-how-one-alt-lender-is-using-alternative-underwriting-data-2017-10">Oakam</a>, which uses a more balanced tech and touch strategy. Kreditech targets underbanked customers — those who may have a bank account but limited access to credit or customized products that meet their specific needs. Their online, non-physical business model means that they are typically unable to target unbanked customers at the bottom of the pyramid, where lack of online access may restrict the delivery of digital products. In comparison, Oakam targets migrants in the UK who have no credit history and are often wholly unbanked. Their customer engagement is digitally-focused (even financially excluded customers in the UK have smartphones!), but they have also set up a number of physical branches to engage with customers and educate them on their financial journey. This physical touch point is also used as an opportunity to learn more about customers, which provides data beyond what a credit report might show for customers who’ve never had a chance to establish a financial history for themselves.

Oakam’s physical branch network has proven pivotal in its ability to serve financially excluded, often financially illiterate, customers. This example illustrates the value of a physical touch point to acquire customers and build trust where financial literacy or trust is low.

In Accion’s experience, there are four factors that lenders should consider when balancing their tech and touch strategy to serve their target market:
<ol>
 	<li> Customers’ ability to use the product: The adoption of digital credit may be limited by gating constraints such as affordability of data, poor connectivity, and <a href="http://reports.weforum.org/delivering-digital-infrastructure/emerging-markets-big-challenges-big-opportunities/?doing_wp_cron=1508931092.0609951019287109375000">low smartphone penetration</a>. These are classic examples where the delivery of digital financial services requires a more physical medium of delivery. Furthermore, physical engagement may be required to educate customers and build trust before they are willing to open an account or take out a loan, digital or not.</li>
 	<li> Customers’ “digital savviness”: <a href="https://cfi-blog.org/2017/07/06/what-does-effective-human-touch-look-like-in-kenyas-digital-age/">Recent research by CFI</a> revealed that financially unserved customers, when engaging with providers of financial services, strongly prefer face-to-face interactions for establishing mutual legitimacy or resolving problems. I’ve seen this first-hand when launching digital financial services in several African countries. Many people who have never used a formal financial product want the comfort of a face-to-face discussion — not only to understand the product but also to trust the provider of the product (I have personally been accused before of being a <a href="http://www.newsweek.com/origins-nigerias-notorious-419-scams-456701">419 scam</a>!).</li>
 	<li> The size of the loan: Different digital lending products require different touch strategies. Short term nano-loans, which are often used for consumption purposes and typically have higher default rates, require scale for the lender to drive profitability; to achieve this scale, the lender can’t afford to have a high touch model. But larger loans, such as SME loans, which concentrate the risk for the lender, may require additional physical checks, even in highly digitized processes. <a href="http://www.reuters.com/article/brazil-tech-creditas/brazils-creditas-taps-asset-backed-debt-market-to-fund-auto-loans-idUSL2N1GS1KE">Creditas</a>, a mortgage and car loan origination platform in Brazil, employs a fully digital customer journey but still uses partners to assess assets, as lenders will pursue full legal recourse in the event of default. In comparison, digital nano-loan lenders such as Jumo or CBA (MShwari, MoKash) will simply <a href="https://cfi-blog.org/2016/09/22/digital-credit-in-africa-are-nano-loans-safe-for-consumers/">write off defaulted loans</a>.</li>
 	<li> The lender’s current distribution: An existing, efficiently-run branch network would provide a competitive advantage in any of the above cases. In these instances, immediate disinvestment may be detrimental to the business’s growth or relationships with customers. However, lenders faced with building their branch infrastructure from a low base will naturally look to the efficiencies of digital engagement.</li>
</ol>
The key to going digital is for customer engagement always to remain human and for lenders to design an intuitive customer journey that maintains established relationships and trust, yet balances digital and physical engagement. Over time this will involve a less physical involvement. However, a strategically placed physical presence will continue to play an important role in helping financial services providers serve emerging markets.