The Digital Lending Process [Best Practices]

Digital Lending is a big story for financial institutions today where artificial intelligence is making a huge difference in increasing market revenue, customer satisfaction, and faster lending cycle.

The traditional lending process leaves a lot to be desired in terms of borrower experience. Digital technology is transforming the consumer loan industry by providing borrowers with greater simplicity, efficiency, and transparency. The Financial Institutions that can use digital technology to process applications, deliver faster decisions and provide funding quickly on the device(s) of choice will win going forward. The convenience of being able to apply with minimal manual inputs, provide and sign documents electronically, at any time, from any device is enticing to potential customers. To enable this efficiency will require complete digitization of the back-office process, however, not just digitizing paper documents.

The lending process refers to the sequence of activities an FSP (Financial Service Provider) performs to provide credit from acquiring and onboarding a customer, evaluating the customer and disbursing the loan, receiving repayments and following up on past-due loans. Throughout the lending process, the FSP builds customer engagement and loyalty through high-touch interactions that adapt to client needs and preferences.

The FSP’s lending involves the digital channels for acquisition, disbursement, repayment, and engagement and by leveraging digitized data and advanced algorithms for credit decisions, collections, and customer engagement.

Adding, this blog is a continuation of “4 Key Pillars for Financial Services to Boost Digital Lending.”

Customer Acquisition

In the lending business, nobody has figured out a sustainable hook, everybody is saying ‘come and take loans’ which is the easy proposition.

In order to go pro digital, FSP’s should start acquiring customers using a mix of digital marketing tools and digital onboarding channels, enhanced by strategically designed physical touchpoints and referrals. Digital marketing tools include SMS blasts, search engine optimization, online banners, Secure Quick Response (SQR) codes, and social media advertising campaigns, etc.

Approval and Analytics

Lenders are using pretty much the same underwriting process since the 1970s, which would have been a big deal except its standard credit models kind of well, “SUBSTANDARD.” We see too many bad loans being made and too many good borrowers are getting turned down. That means more people defaulting on their loan then they should and the only way lenders can able to keep up is by raising interest rates.

But with the access to digital data lending institutions have changed the game around. Digital lenders use digital data from different business functions and build the Data Bank to make quicker, automated, and more accurate underwriting decisions using both conventional and alternative data sources and advanced algorithms and analytics to quickly and remotely ‘score’ potential clients and make credit decisions.

Disbursement and Repayment

Digital lenders disburse loans and collect repayments remotely through digital channels, such as bank accounts, e-commerce accounts, or mobile wallets integrated with a partner (or) third party integration. These cashless channels improve operational efficiency and reduce fraud by providing a clear audit trail. They also allow for rapid, sometimes instant, disbursement providing customers with access to their funds in a matter of seconds.

Even though third party integration is important for hassle-free lending, still FSPs’ fears of ‘losing their client’.  The fear of losing a client can be mitigated by offering a compelling digital lending value proposition that the partner alone cannot replicate.

Collections

FSP’s aspiring to emerge as a digital lender should start leveraging data and algorithms to support their collections process. FSP’s or lender, on the whole, should deploy delinquency scorecards that track customer behavior and propose customized recovery strategies.

Digital lenders should start creating short educational videos that explain key messages on repayment, which field staff can show to customers on their phones or tablets to avoid delinquencies.

Customer Engagement

Each stage of the digital lending process involves customer engagement. Lenders are spending huge money to understand the customer’s behavior and preferences, quickly address their problems or concerns, and create solutions that make sense to the customer on a personal basis.

In order to ensure a long-lasting, high-quality relationship between the FSP and the client, it is important to protect the client through responsible lending practices. For example, by giving simple explanations of the terms and conditions during acquisition, explaining the consequences of not making repayments on time when disbursing the loan, and ensuring accessibility of channels to address customer complaints. Omni-channel customer support would make the entire customer journey more pleasant and will boost brand visibility through word of mouth.

In addition to the best practices of digital lending workflow, we further modeled Digital Maturity Matrix for FSP’s. Click here to know “How digital is your institution?”