5 DIGITAL LENDING CHALLENGES & HOW TO OVERCOME THEM

It began in March 2023, when Silvergate Bank in California stated it was closing its doors. Silicon Valley Bank (SVB) was closed two days later by US regulators after a customer-led bank run. Later in the month, Signature Bank in New York began to run out of cash, so regulators also closed it a couple of days after SVB closed. While Silvergate and Signature both focused on cryptocurrencies, SVB was the preferred bank for numerous startups what  maintained balances in their accounts beyond that insured by the Federal Deposit Insurance Corporation (FDIC).

While lenders may be nervous because of these three bank failures, the real story here concerns decisions that were made by the bank’s board members, who paid insufficient attention to the risks involved. That’s a lesson from which all lenders can learn without following a similar path to these banks, including those concentrating on digital lending. Challenges faced by online lenders are in many ways the same as those faced by any other finance company, where risks must be appropriately measured to ensure their continued existence and profitability.

5 Specific Digital Lending Challenges to Overcome

There have been three phases through which digital lending has gone. The first phase concentrated on loan originations, increasingly automating loan origination to establish the creditworthiness of loan applicants. The second phase focused on customer experience, digitizing e-signatures and e-contracts, along with self-service workflows that sped up processing and tracked compliance-related documentation.

Digital lending is now in its third phase, with a focus on end-to-end loan solutions. It’s in this new phase that financial technology (fintech) companies are busy linking all these aspects together onto a single software platform. This allows lenders to create a seamless process for both their customers and workforce. Ironically, it was a global event, the Coronavirus pandemic, that pushed aside many arguments against digital lending. Challenges consumer finance companies once faced have been overcome through technology, and these new challenges within the digital lending sector will be resolved by new technologies.

Below, we will discuss these challenges that today’s lenders face and their accompanying solutions. These are:

1. Quit the Piecemeal Approach to Digital Lending

Too often, lenders approach digitization in a piecemeal fashion, only adding technologies and automating certain processes incrementally to resolve specific issues as they arise. This is understandable, as delivering end-to-end lending solutions for digital lending challenges often comes with high costs in both time and resources. Yet automating only part of a customer’s journey can cause unforeseen complications and may even result in a return to manual processes when the automated ones aren’t properly integrated into a lender’s system. When formulating digital lending solutions, it’s often better to utilize a modular approach that addresses and improves all the steps in a specific process, whether it involves originating, reporting, servicing, or underwriting a loan.

2. Personalizing the Digital Lending Process

When finance companies modernize, they need to ensure that different components within their system can communicate with each other, which is why integration is so important in digital lending. Challenges inherent in information siloes create inefficiencies for lenders, just as they do for any organization. Without being able to put together a complete picture of a customer’s qualities, lenders won’t know what they need, making it more challenging to cross-sell other lending products. Personalizing services for customers is a key goal for all modern lenders, so it’s crucial that finance companies ensure when upgrading their lending systems that they’re properly unified and can seamlessly transfer information between their various elements.

3. Incorporating AI Technology

Introducing and incorporating artificial intelligence (AI) and its sister technology, machine learning, into the lending sector has been a bit slower than in some industries. AI helps digital lenders meet customer expectations regarding speed of service, accuracy, and accessibility.

Lenders can use AI to:

• Analyze customer data to offer recommendations on other lending products that fit their profile.
• Decrease workload on employees by utilizing AI-enabled chatbots to assist with the loan application process, as well as with responding to standard customer questions and concerns.
• Evaluate a potential borrower’s ability to make payments on a loan to lower delinquency rates and limit losses.

Additionally, AI provides both accuracy and speed to workflows, which is necessary for any finance company embracing digital lending. Challenges related to automated tasks, verifications, and applicant assessments are all made easier with this technology. However, digital lenders must also ensure their use of AI technology still allows them to maintain compliance with relevant regulations.

4. Managing Decision Rules for New Regulations

One of the key and ongoing digital lending challenges involves the response of lenders to frequently changing rules and regulations within the consumer lending industry. These days, decisions on loans are often based on information gathered during an automated application process, often without the involvement of a human being. Being able to change automated decision rules without any trouble is thus an important factor for any lender, which is why any digital solution should be configurable. The ability to alter decision rules to align with any regulatory changes shouldn’t require special programming skills but should rather be easily accessible to any business user. 

5. Simplicity

Consumers want lenders that use automated processes that make applying for a loan and making payments simpler. These days, it’s not enough to have an online presence. Though enabling mobile access for customers is important, that isn’t enough either. A key complication many digital lenders face is ensuring their online processes, whatever they are and from wherever they’re accessed, are simple to use. This is especially true for younger customers who are comfortable with transacting online and with using the type of automation now common in digital lending. Challenges lenders face instead involve making their software applications more user-friendly, which will save customers’ time and lead to increased efficiency.

Creating Solutions for Digital Lending Challenges

To increase productivity, efficiency, and revenue, lenders should look at improving, or perhaps replacing, the software platform they utilize for digital lending. Challenges for consumer finance companies in the coming years will continue to be about creating an end-to-end lending solution, personalizing lending products, incorporating technology to increase efficiency, promoting automation to maintain regulatory compliance, and simplifying the process for customers. While there will always be challenges in the industry, modern digital lending technology will increasingly help lenders pivot to face them and make their products better for their customers in the process.