Man with glasses explaining lending technology

DIGITAL LENDING BUSINESS MODELS THAT DRIVE SUCCESS

The defi Team defi INSIGHT, Originations

Man with glasses explaining lending technology

As a rule, new technology makes business practices more efficient. For example, look at how technology made crossing the Atlantic Ocean both quicker and easier. The first historically recorded voyage from Europe to the Americas in 1492 took ten weeks, though Christopher Columbus didn’t even reach the mainland. Just over a century later, Henry Hudson’s third attempt at crossing the Atlantic in 1609 still took two months. Now modern ocean-crossing cruise liners can cross the Atlantic in as little as seven days, though flights from Europe to the US take just hours.

With the introduction of technology driving digital lending, business models have advanced in a similar manner to improve the speed and efficiency of financial institutions. Digital technology gives lenders the ability to do more with less. It allows smaller lenders to compete with bigger ones while giving bigger lenders an advantage over rivals that don’t embrace digitization. By increasingly adopting digital lending business models to improve efficiency, reduce costs and build their customer bases, lenders will continue to expand their portfolios, in turn improving their profit potential.   

What Is Digital Lending?

In a nutshell, digital lending refers to the use of software applications that assist with applying for, disbursing of, and servicing loans. The key to digital lending is leveraging data collected throughout the application and other processes. This data is used to create a better customer experience while enabling lenders to make better decisions regarding to whom they lend. Key aspects of digital lending include greater operational efficiency and quicker decisions throughout the loan process.

Digital lending includes:

  • Communications via digital means like mobile or web apps, along with text messaging, emails, and other more conventional methods.

  • Creation of personalized experiences based on the data gathered, often through targeted product offerings, promotions, and other communications, all done without compromising security.

  • Collection of data, with customers’ consent, to enable greater efficiency throughout the lending process.

  • Digitization of bank statements, pay slips, and other documents that establish creditworthiness.

  • Online applications that allow applicants to apply for loans more conveniently.

  • Near-instant approvals and faster disbursals for applicants.

  • Reducing arduous evaluations and the time it takes to assess loan applicants’ creditworthiness through the use of digital platforms, particularly cloud-based ones.

Digitizing the lending process allows lenders to make better decisions, improve customer relations and reduce costs. The use of digital technology also allows consumers to make digital payments while allowing lenders to glean valuable insights into their relationships with their customers. But the key to all digital lending business models is data.

Some Popular Digital Lending Business Models

When it comes to digital lending, business models are based on technology rather than regulations. This isn’t to say that digital lending doesn’t support regulatory compliance. Rather, the technological focus of digital lending makes it possible for lenders to better comply with the ever-changing rules and regulations surrounding consumer lending. This saves lenders both time and money, allowing resources to be better spent elsewhere.

There are innumerable ways to operate a digital lending business. Models of these fall into the following basic types:

  • Marketplace platforms play a significant role in loan originations by matching borrowers with lenders under specific fee structure arrangements.
  • Mobile money lenders partner with cell phone network operators, calculating credit scores with the help of phone-based data to provide products to the customers of the network provider.Online lenders center their services around digital lending as a core product, which is primarily provided by various software apps.
  • Peer-to-peer lenders utilize digital platforms to facilitate relationships between borrowers and lenders, acting as an intermediary in the provision of loans.
  • Social and ecommerce platforms feature lending as an ancillary product, leveraging strong brand recognition and extensive data gathered from users to offer certain types of lending products.
  • Supply chain lenders work within distribution networks to offer specific types of non-cash loans for pay-as-you-go asset purchases, along with asset and invoice financing.
  • Tech-enabled lenders are traditional loan providers like banks, credit unions, captive finance companies, and other such financial institutions that utilize technology to provide a digital experience throughout the lending process, either through an in-house team or a third-party provider.

As digital lending business models continue to evolve, lenders will continue to experiment with how digitization can enhance their existing products. The future of digital lending will additionally bring new, hybrid business models that are customized variations of the above and which cater to a lender’s customer base.

Benefits of Digital Lending

Moving from a traditional paper-based to a digital lending business model isn’t just a trend. Consumers see the numerous advantages of digitization, which is why lenders are digitizing. Business models continue to develop that optimize the lending process so that lenders see real benefits.

A truly digital business model for lenders focuses on the customer and their experience. Like modern-day transport has cut travel time, the speed and relative ease with which customers can apply for loans and access funds are the most popular aspects of digital lending. Business models that can take advantage of this will allow lenders to provide more products to more customers while minimizing risk to the lender. As a result, digital lending focuses on putting the customer experience first.   

Digital Applications

Filling out paper applications is an arduous and antiquated process. Lenders can save their customers the hassle by making applications available online. Not only is it quicker, but it also saves lenders money on paper applications and makes supplying duplicates to the relevant stakeholders much easier. Digital applications also allow people to apply from anywhere with mobile apps.

Minimizing Documentation

Paper documentation is both an expense for the lender and a hassle for the applicant. So eliminating this element of the traditional lending process is a no-brainer. Forms, references, copies of required documents, and other paperwork can all be put into digital format. Plus, it helps get loans granted quicker.

Quick Disbursements

The convenience that comes from making the application process frictionless also enables near-instant loan approvals for those with excellent traditional credit scores. For other applicants, automated applications also speed the process considerably as decision-making becomes quicker while significantly reducing human error. Following traditional lending practices may mean waiting weeks for a disbursement, whereas digital lenders can now process applications in hours and often disburse to a borrower in just a couple of days.  

First-Time Borrowers

For very good reasons, banks and other lenders are often leery about lending to people with minimal or no credit history. However, while these applicants may not have conventionally acceptable credit, many have a history of making regular payments. Often, digital lending platforms are integrated to be able to ascertain alternative credit histories for applicants, which track such things as paying telephone bills, utilities, rent, or other monthly payments.

How defi SOLUTIONS Can Help

Like travel, lending has come a long way since the days when ships with sails were the fastest means of getting around. Yet digital lending business models continue to evolve as new technologies make borrowing and lending easier. The digital technology that defi SOLUTIONS brings to the table helps optimize lenders’ processes, leading to greater efficiency and happier customers.

Whether you need an originations platform, a mobile application to communicate with customers or other technology to serve your borrowers, it’s best to go with the most cutting-edge solutions. This means not just choosing the equivalent of a modern ship over one with sails, it means developing a digital lending business model that enables lenders to fly over their competition.

Getting Started

defi SOLUTIONS offers solutions for a lender’s complete loan or lease lifecycle. Partnering with captives, banks, credit unions, and finance companies, defi’s market-leading solution helps lenders exceed borrower expectations. From digital engagement through the complete lending process, defi sets new standards for flexibility, configurability, and scalability in originations, servicing, and managed servicing. defi SOLUTIONS has the backing of Warburg Pincus, Bain Capital Ventures, and Fiserv. For more information on digital lending business models and how defi can help, please visit www.defisolutions.com.   

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