Credit in a new technological era! 🚀

Since the millennium, the finance and banking sector has faced a radical change in terms of its traditional activities. Fintechs are the disruptors behind this fundamental shift; new entrants to the market who have debunked the received wisdom around traditional banks holding the keys to banking. In fact, Bill Gates set the tone in 1994, claiming, “banking is necessary, banks are not”. The credit industry is no exception to this idea, and players are emerging in response to the increasingly demanding and urgent needs that established traditional organizations too often ignore.

Consumers and SMEs are increasingly turning to neobanks and fintechs. In Europe, 64% of consumers have used fintechs for some of their banking needs, compared to 16% in 2015 (Global FinTech Adoption Index, 2019 par EY).

In addition to market disruptors challenging the status quo, consumer behavior has also clearly changed. This is closely related to COVID-19 and is leading to new ways of lending. With changes to regulations, increased demand, and market problems, the lending sector is more complex than ever. Lenders want to speed up their responses to loan applications and provide their optimum customer service while also minimizing risks. To deliver this, they are seeking to design products that are agile because of digitalization. In simple terms, new solutions are needed for a wide range of lenders, so the move towards digital remains a priority.

For traditional lenders, creating new products and modifying existing offers can take months. However, neobanks and fintech have the know-how to rapidly implement measures like payment holidays and deferred interest payments causing them all to consider how they can continue to be agile and stay competitive.

Modern lenders and financial institutions have responded to this change with a new modular approach: the ability to integrate tech partners and products so that lenders can improve their agility and responsiveness.

Four types of lending are currently popular—mortgages, small business loans, microcredit, and Buy-Now-Pay-Later (BNPL). We are going to consider the role that technology, financial technology, in particular, has played in these different areas and look at the future of loans.

#1 - Mortgage loans 🏡

How the mortgage market will develop over the next year or two is hotly debated. It is important to note that COVID-19 has badly impacted the purchasing power of individuals. Personal finances have been put through the mill and many people are not able to pay back their loans. Not only does this affect their credit, but it reduces the capacity to buy, which pushes down the market price and leaves owners in a tricky position as to what they should do next.

Which raises the million-dollar question for lenders—what losses can they sustain and will they be ready for the tsunami of missed payments? Even more important, they need to consider whether they have the right systems in place to quickly identify vulnerable customers. To ensure that their business remains viable, they must decide if and when they increase the flexibility of their products—from increased leniency to reduced rates of interest. 

Right now, a new generation of players, fintechs like Pretto, is disrupting the mortgage credit market through their use of banking data and new technologies to facilitate access to mortgage loans with simple, digital customer experiences and offering bespoke terms.

#2 - Small business loans 👨‍💻

SMEs are the cornerstone of many economies around the world. They represent around 90% of businesses and more than 50% of jobs globally. They contribute up to 40% of the gross domestic product (GDP) in emerging economies (World Bank). 

Because of the lower return on investment and the higher cost of services in the SME market, traditional banks have tended to ignore it in the past.  Furthermore, because of cash problems and unstable credit ratings, these banks are not able to respond to the needs of these potential SME clients, so they remain underserved and left to their own devices.

While SMEs have had problems accessing finance through traditional financial institutions, alternative financing is stepping into the breach. Thanks to technology, the neobanks, fintechs (e.g. Mansa and October), and big tech players are gaining ground in the market with innovative service models and client-centric offerings that offer increased self-service, quicker decisions, flexible payment terms, secured and unsecured loans, and attractive rates of interest.

#3 - Microcredit 🙋‍♂️

Although the traditional concept of short-term and payday loans used to be viewed dimly; the arrival of microcredit in some countries saw it establish itself as a means to counter social and financial exclusion, promote independent work, and support micro-businesses.

Under current policy, most applicants without a bank have a problem: they are refused credit because they don’t have a credit history. A vicious circle that prevents them from establishing the same. In the context of consolidation, fintechs (like Finfrog) and the neobanks have launched flexible products and services to better serve this type of customer, particularly in terms of finding creative ways to create the necessary credit history.

#4 - Point-of-Sale Finance 📱

Around for a decade or so, the Buy Now Pay Later (BNPL) concept is now growing in popularity as online businesses gain over purchases made in-store. It gives buyers the chance to pay for their purchases over time, usually in three short-term, interest-free payments. Long-term credit is available to spread over several months, which does accrue interest.

At the height of the pandemic, brick-and-mortar brands boosted sales by facilitating online purchases thanks to BNPL (Klarna, Afterpay and Alma), which makes credit history more transparent for consumers. Despite being a developing area of finance, it holds many advantages for the consumer and the distributor. A study by The Ascent in July 2020, revealed that almost a quarter of consumers use BNPL to create a credit history, with the need for larger loans like mortgages in mind. And nearly half (39.37%) use it as a way of splitting payments over time without paying credit card interest. 

A paradigm shift 

Over several years, there has been a fundamental shift in how loans are managed. To stay relevant, traditional banks must, more than ever, demonstrate their agility and adapt efficiently and effectively. 

Key areas like digitization and automation herald the arrival of wholly digital loan products, they will minimize profit losses for banks and lenders. Using the cloud and a modular approach to integrate specialized partners in specific sectors, rather than a one-stop shop, gives lenders greater agility and control.

Unfortunately, current infrastructures are not sufficient. They can not keep up with the pace of constant change in the market and are lacking in the resources needed for the maintenance and constant updates of these systems. Resources that can no longer be allocated to innovation or product development. In simple terms, you will not survive if you don’t innovate.

Lenders are looking for a technology that works transparently with existing systems while benefiting from the competitive advantage afforded by a digital approach. This changing landscape needs a revolutionary, modular approach based on the digital. 

A Core Banking Platform as a response to the technological challenges

A Core Banking Platform is a cloud-native API banking platform that can handle the set-up, subscription and management of consumer credit, specific purpose loans, refinancing, and leasings for banking, financial and brokerage organizations. Using a microservice architecture and the ability to create personalized workflows, the entire credit journey communicates via APIs (or endpoints), from the first data input to the accounting entry, with a growing list of partners to support every credit product and service. 

This model makes for more intelligent, agile, and robust operational deployment by creating an innovative and disruptive environment that facilitates the use of new business models. It offers access to funds by liberating itself from the bureaucracy and complications of traditional banks. Thanks to these entirely digital processes, Core Banking Platform providers are able to reduce overheads, offer better rates and speed up access to credit.

The platform also automates the credit process and removes barriers to credit. Its principal aim is to streamline payment systems and manage customer credit. These days, the most common credit experience involves a fragmented physical journey with little external data collected, a complex account creation process, and a long time to cash. This lengthy customer journey results in many inequalities in access to credit and is often a tiresome customer experience. Core Banking Platform organizations are aware of these failings. So they are focusing on offering capabilities to create 100% lending workflows with their partners, a seamless journey via strong authentication drawn from digital identity, an immediate ‘time to yes’ and appropriate procedures to suppress fraud. 

The Core Banking Platform integrates the best market solutions, including KYC (e.g. Onfido and Ariadnext), document collection, aggregation of banking data (Tink and Budget Insight) and even electronic signatures with YouSign to make the user experience more fluid by minimizing required actions in a move towards the ultimate ‘one-click’. The platform uses Open APIs to intuitively integrate with partner servicing tools and with the sales journeys of their purchasing and e-commerce partners. Naturally data-oriented, it collects both internal and external structured and unstructured data, while also offering more conventional data collection methods like OCR. Finally, this model takes some of the latest advances in AI and scoring solutions (Algoan) to respond to the expectations of immediacy, personalization, and a smooth customer experience.

Conclusion

If lenders just maintain the status quo, they run the risk of becoming hamstrung by technology and undermining even the best innovation strategy. Many organizations find themselves paralyzed by complexity and so are not able to take advantage of these new tools. As a result, they quickly lose competitive advantage and, eventually, their customers.

To prosper at this time of change, lenders can take an agile approach, by adopting a cloud-native platform like Skaleet to keep pace with the changes in the market and the developments customers expect. 

By adopting Skaleet’s lending workflow and orchestration platform, lenders can reduce risks, make more rapid decisions, and offer an exceptional customer experience, all with a lower TCO. They also have access to an extended ecosystem of available components with third-party API and internally designed tools and services. 

Although the market dynamics are constantly changing, time lenders have the chance to have a considerable positive impact on the lives of their customers. Today they can choose to embrace this world based on rapid changes, partnerships, and modern technology and enjoy being one of the first organizations to do so.