The speed and degree of the transformation in digital lending, spurred by the COVID-19 pandemic, will determine which financial institutions survive and thrive in the new lending ecosystem.
Those that do will have leveraged data, analytics, modern technology, and a culture of innovation, according to “The Future of Digital Lending,” report by Jim Marous, owner and publisher of the Digital Banking Report, and sponsored by MeridianLink.
The following is the second part of an overview of the report, which draws from an August 2021 survey of over 300 banks and credit unions from Asia, Africa, North America, South and Central America, Europe, the Middle East, and Australia. Respondents included 14% from large national or regional banks, 15% from community banks, and 71% from credit unions.
The combination of accelerating consumer expectations, competition from fintechs and large technology providers, a significant shift in traditional business models, and the fact that traditional lending institutions have been slow to adopt change is putting the long-term viability of many banks and credit unions at risk — a trend intensified by the pandemic, according to the report.
To respond to this competition, legacy financial institutions are aiming to offer consumers more credit options in an “almost instantaneous manner” much like the buy now, pay later solutions.
The good news is that banks and credit unions have responded quickly; however, they need to do much more, suggests the report.
"Outdated manual processes must be rethought, with all employees that are involved becoming part of the solution,” according to the report. “Digital lending transformation needs to happen quickly. This will require ongoing innovation through iteration, usually partnering with fintech firms and/or third-party solution providers.”
Embedded Finance: Risk & Opportunity
When it comes to digital borrowing, consumers are looking for simple, holistic, embedded, and direct experiences. They don't have the time—or the patience—to waste on clunky systems. They understand that banks and credit unions have the ability to deliver personalized and seamless lending experiences by leveraging data, analytics, and modern technology.
Responding to increasing consumer expectations, more lenders are developing lending platforms that embed financial products and services to offer a better borrowing experience.
"The growth of embedded finance is driven by the desire to retain customers and increase their lifetime value without requiring the consumer to leave their app,” the report notes.
"Organizations like Amazon, Uber, and PayPal are building [banking-as-a-service] lending platforms that increase engagement while providing increased value.”
For example, by uploading their payment methods on the Uber app, customers allow Uber to process their payments, making the experience easier and more personal.
Traditional financial institutions are starting to realize that embedding financial products within non-financial platforms can jeopardize their existing customer relationships. However, by creating their own banking-as-a-service platforms, they can provide more financial transparency options by opening up their application programming interfaces to let third-party organizations develop new services.
"Building a banking-as-a-service platform can create alternative revenue models, with funding coming from sources beyond the end consumer,” according to the report. This will allow traditional banks and credit unions to keep the fintechs at bay.
Digital Lending Success Requires Digital Leading
Moving forward, legacy financial institutions must “forecast the future state of the lending ecosystem, identify gaps that require immediate action, and reset priorities and investments appropriately,” the report notes.
This means leadership has to embrace this new world of lending, communicating their new digital visions every day across their institutions, inspiring employees to embrace changes to the old ways of doing business.
"Organizations must redefine what it means to be a ‘digital lender’ and what is required to be ‘customer-centric,’" according to the report. "Leaders must share the vision they have for employees, customers, their strategic partners, and investors despite not knowing for sure what the future may bring.”
Download the Report
As sponsor of the publication, MeridianLink is making the $495 report available at no charge to a limited number of readers. Click here to download your copy.
In our next two blog posts, we'll focus on what the report has to say about the importance of operational excellence in digital lending.