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An Ultimate Guide to Digital Lending

Nov 23, 2021

Sources: KMS Solutions

Digital lending is transforming the financial service sector. Innovations in this niche have
allowed financial service providers (FSPs)—be it a digital-native fintech company or an
incumbent bank—to provide effortless loan products that today’s market requires. Customers’
preferences today are dictated by the experience they have with mobile apps, fintech, and social
media. Digital lending is a way for FSPs to satisfy those expectations.

This article explores common definitions and concerns related to digital lending, and offers
insights into the digital lending framework that FSPs can use to enter into this market.

Table of Content
1. What is digital lending?
2. 3 components of digital lending
3. Types of digital lenders
4. Any lending products can be digitized
5. The digital lending process
6. Pre-build Digital Lending Platform: an alternative way to get started with Digital
Lending

———-

What is digital lending?

Digital lending refers to the form of lending that is applied for, disbursed, and monitored by
digital channels such as mobile apps or desktop apps. In digital lending, the FSPs leverage digital
data to inform credit decisions and deliver customer-centric experiences.

In terms of output, digital lending is all about enhanced operational efficiency and faster
turnaround time. Regarding the technicality behind the process, digital lending is the automation
of one or some parts, or the entirety of the lending process—from acquisition and servicing to
post-disbursement.

Below is an example of a digital lending customer journey.

3 components of digital lending
Many sorts of lending products are only digital on the surface. They come under a well-designed
app. But unfortunately, lots of manual work are still happening in the backend.

A loan product only fits the definition of digital lending when it possesses the following three
components. Together they form an iterative process, where the previous enables the next.

The use of digital channels

In digital lending, digital channels are used for servicing. Web apps and mobile apps are the most
popular forms. But conventional digital means such as email and SMS are just equally important.
An effective mix of these channels allows customers to apply for loans, get disbursements, and
search for the information they need everywhere and whenever they are—at home or work, or on
the go.

By being the collector of customer data (with their consent), these digital channels enable the
next component, which is the use of digital data.

The use of digital data

Thanks to digital platforms, FSPs now can reduce in-person and time-consuming assessments.
Instead, they use digital data to assess customers’ credit and behavior.

Relevant data sources including bank statements, credit scores, or credit bureau data are
collected to predict if a given customer is willing and able to repay. Sometimes, this prediction
can be automated with Machine Learning.

Moreover, lenders exploit the data to provide personalized experiences in the form of targeted
communications, promotions, or product offerings.

The focus on customer experience

From the customers’ perspective, digital lending is about them able to receive the fund super
quickly. To make this digital lending experience possible, FSPs leverage the modern banking
tech to provide self-service loan applications, near-instant loan approval, and faster disbursal.
Moreover, digital channels and data are utilized with care to offer personalized experiences while
not compromising security.

Better customer experience is the product of the above components. As customers are satisfied
with how they are serviced, they are more willing to provide their data and information. This is
where we come back to the first component.
Types of digital lenders
Digital lending is not the arena for only fintech companies or traditional financial providers.
Taking advantage of the changing market structure, regulatory environment, and customer
experiences, many types of players have found their way into this niche.

There are many venues to becoming digital lenders. But the most popular ones are either by
offering a comprehensive package of digital lending products, by digitizing only some lending
products, or by partnering with other companies.

 Online lenders: FSPs that position digital lending as their core product, which is
provided mainly via either mobile apps or web apps.
 P2P Lenders: digital platforms that act as an intermediary facilitating the provision of
loans and the relationships between lenders and borrowers.
 e-Commerce and Social Platforms: lending is not the core product of these platforms;
they leverage the strong brand, rich customer data, and powerful platforms to offer
certain types of credit products to their customer base.
 Marketplace platforms: The key roles of these platforms are to originate loans and
match one borrower with other lenders, and charge the origination fees.
 Supply Chain Lender: they offer non-cash loans for certain kinds of asset financing,
invoice financing, or pay-as-you-go asset purchase within a supply chain or distribution
network.
 Mobile Money Lender: this is where the lenders partner with mobile network operators
(MNOs) to provide loan products to the network providers’ customers, where mobile
phone data is used to calculate credit scores.
 Tech-enabled Lender: traditional financial service providers, such as banks and
financial institutions, that have digitized parts or the entirety of the lending process. The
digitization is done either by an in-house team or a partnership with an external service
provider.

But the list is for reference only. Digital lenders are experimenting with new ideas, enhancing
their existing products, and evolving with new models. It’s hard to find one FSP that fits exactly
into a category. As a result, they are making the digital lending landscape more diversified and
complex.

Any Lending Product can be digitized

Regulations allow—even encourage—any types of lending product to be provided digitally. This

applies to loans of any size, whether it’s personal loans or SME loans, or even mortgages, as
long as the lenders have measures to evaluate the borrowers’ willingness and ability to repay.

Loans can be divided into two categories. They are personal loans (where credit is evaluated on
limited data, which leads to increased risk) and SME loans (where the credit must be thoroughly
evaluated on the client’s financial health).
When diversifying loan products, financial service providers will intentionally or not find
themselves diversifying the ways they design products, assess credits, manage risk, source data,
and serve customers. These diversifications are made clear as below.

For personal loans

FSPs usually have to evaluate customers’ willingness to repay, which requires behavioral
assessment of the customers. Additional data to collect include mobile phone data and bureau
data.

When a given customer refuses to pay off their debts, their future access to loans must be
restricted or prevented; and information of these debtors should be sent to the bureau for
blacklisting.

Digitizing personal loan products has implications for both lenders and customers. For lenders,
they must support and engage customers throughout the repayment periods to maintain high
interests and encourage repayments.

Non-paying loans of 60 days or more should be written off, in which case FSPs should consider
taking legal action. For customers, the loan products are offered digitally via mobile apps, web
apps, or SMS, where borrowers are required to provide their personal data to support credit
assessment.

For SME loans

FSP needs to evaluate the borrowers’ capacity to repay based on financial proofs. The types of
data to collect include customers’ monthly income or revenue, cashflows, and expenses (digital
invoices and tax returns).

In consequence of non-payments, the borrowers will shoulder the immediate financial loss of
collateral and access to inventory. To restrict or prevent their future access to loans, blacklisting
should be applied.

Providing this kind of large loan will have impacts on both the lenders and the customers. For
lenders, they have to thoroughly assess customers’ affordability to repay. Non-payment should
be punished by costly legal action to recover funds. For customers, they can apply, be disbursed,
and repay on digital channels, but assessment should include physical checks. FSPs should limit
access to funds for those lacking digital records.

Common differences between digital personal loan and digital SME Loan
Main data
Product Credit Scoring Punishment for non-payment
sources
– Personal – Preventing access to future
Personal Evaluate the willingness to repay—
data loans
Loan based on behavioral assessment
– Bureau data – Blacklisted by the bureau
SME Loan Evaluate the capacity to repay—based Income Financial loss of collateral,
 Cashflow access to inventory
on financial proofs
Expense Blacklisted by the bureau

——

Implications on lenders and Customers

Product Implications on Lenders Implications on Borrowers
– Support and engage customers
throughout the repayment periods to – Loan products are offered digitally via
maintain high interests and encourage mobile apps, web apps, or SMS
Personal repayments
Loan – Borrowers are required to provide their
– Non-paying loans of 60 days or more personal data to support credit
should be written off, in which case FSPs assessment.
should consider taking legal action
– Able to apply, be disbursed, and repay
– Thoroughly assess customers’
on digital channels
affordability to repay
SME
Loan – Assessment should include physical
– Non-payment should be punished by
checks. FSPs should limit access to funds
costly legal action to recover funds.
for those lacking digital records.

The Digital Lending Process

The lending process is a course of activities performed by FSPs to provide loans. It includes
acquiring and onboarding customers, assessing their credit, disbursing loans, collecting
repayments, and following up on due loans. A lending process is digital when parts or all of
those activities are delivered via digital channels.

Throughout the digital lending process, data is collected and algorithms are built for credit
operations, collections, and customer engagement.
Customer Onboarding

To acquire new customers, digital lenders should have a mix of digital marketing tools and
onboarding channels. They can also add physical touchpoints to enhance the digital ones.

SMSs, search engine optimization, online banners, and online ads campaign are the most
effective digital marketing tools to consider. For digital onboarding channels, FSPs can consider
web apps and mobile apps. Remote onboarding can be supported by human call agents and smart
chatbots. In digital onboarding, customers’ identification is an integral activity. With access to
verified records of the government or other credit bureau, FSPs can use electronic Know-your-
Customer (eKYC) technology to verify customers’ information online, without them having to
come to physical branches.

These tools and channels for digital acquisition can help banks reduce significantly the amount
of manpower and paperwork. They also bring in a huge volume of customer data, which can be
used for credit decisions and personalized engagement. All in all, they are a more cost-effective
venue to promote products and provide key information to potential customers.

However, physical forms of marketing (such as POSs) and banking channels (such as branches)
are still necessary to resolve issues during this first stage of digital lending. This is particularly
true for underbanked or unbanked customers or those with low familiarity with digital tools.

Approval

An essential aspect of digital lending is the ability to access and utilize customer data to
automate the underwriting process. Both traditional and alternative data sources can be used and
enhanced by algorithms and analytics to assess customers and automatically make credit
decisions. Digital lenders commonly combine the data they collected and independent bureau
data with call data records, digital payments, and social media to understand customers. Hence
they can make decisions in seconds rather than weeks, which improves turnaround time and
customer experience.

Digital lenders score customers by feeding data into algorithms designed to predict the capacity
and willingness to repay. And algorithms should have the ability to iteratively learn to improve
their analysis over time.

Disbursement and Repayment

Loans are disbursed and repayments are collected digitally on digital channels that customers
have registered, such as bank accounts (the most common), e-commerce accounts, or mobile
wallets. Since these channels provide a clearer and more traceable audit trail, they help to
prevent fraud. They also allow for rapid or even instant disbursement. Repayments will come
through these channels, but FSPs can use auto-debiting, where customers can either approve or
disapprove the repayments.

Collections
Delinquency scores can be applied by the Bank to track customer behaviors and support
customizing recovery strategies. FSPs should blacklist delinquent customers and prevent their
future access to loans, and make this clear to potential borrowers to encourage them to repay.

Another way to motivate customers to pay off debts is by educating them on the financial
consequences of negative credit scores. One way is to provide educational content such as
articles or videos explaining credit and repayment, which can be consumed on phones, tablets, or
desktops

Customer Engagement

Throughout the digital lending processes, digital channels and customer data are used to design
intuitive and personalized experiences. Customer engagement in digital lending is a two-way
process, where lenders can interact with the borrowers and vice versa. On the one hand, lenders
send personalized communications, notifications, and offers based on customer behaviors. On
the other, borrowers can manage their accounts, have questions, or report issues on the digital
channels. This is where having a central system for data management, such as a customer data
platform, is so important.

Building a long-lasting relationship with customers requires FSPs to apply responsible practices.
This includes giving easy-to-understand explanations of the terms & conditions during
onboarding, underlining the consequence of not making repayments on time, and providing
access to channels to resolve issues.

Pre-build Digital Lending Platform: an alternative way to

get started with Digital Lending
There are typically three ways for traditional FSPs, such as banks and credit institutions, to join
the digital lending niche. They are (1) building a digital lending platform from scratch, (2)
partnering with fintech, or (3) buying a pre-built digital lending platform.

Of these 3 strategies, purchasing a pre-built digital lending platform is the fastest and most
economical way.

In our experience, building such a large system from scratch would take anywhere from 12 to 18
months. Meanwhile, a commercial digital lending platform can be implemented within a couple
of weeks. As most vendors support customization, FSPs can rest assured that the pre-built
platform will work and have the look they want.

If FSPs choose to buy over build, here are 5 commercial digital lending platforms to consider:

1. Lend.In
2. Temenos Infinity Loan Origination
3. Finastra Digital Lending Solutions
4. FIS Commercial Lending
 5. Mambu SME Lending

You can learn more about each of them in this article.

Conclusion
FSPs across the world now can leverage available digital lending platforms, increasing customer
data, and new technologies to provide digital lending products at much lower cost but with
customer-centric experience and improving efficiency. If designed and built correctly, digital
lending will enable FSPs to innovate and compete in this ever-changing landscape.

Recently, KMS Solutions has partnered with Kuliza to introduce Lend.In digital lending
platform to Vietnam. Read about the release here, or discover the platform today to know
how it can help incumbent banks in Vietnam digitize their lending process.