The evolution of credit towards a digital ecosystem, in 4 graphs – Tearsheet

Lending is experiencing a digital transition, driven by evolving technology, alternative and real-time data sources, and an ever-changing customer-centric financial landscape.

The evolution of lending comes against the backdrop of a banking and financial services industry that has changed dramatically over the past decade – new technologies have lowered barriers to entry and computing and storage power has grown exponentially, giving financial institutions the ability to collect, structure and analyze data in real time.

“API technology, the platform economy, integrated finance and open banking have created fertile ground for innovation in lending. We are seeing loan transformation, where every step of the borrower process is data-driven, real-time and personalized,” said Ian Johnson, SVP and Managing Director of Marqeta.

In a new report, Marqeta presented a timeline of the evolution of the lending industry and defined a third stage of lending:

Ready 1.0 – Borrowing money was paper-based and slow, repayments were fixed, and lenders had poor visibility into how loans were being spent.

Ready 2.0 – After the 2008 financial crisis, credit providers used digital technology and real-time data to offer online applications.

Ready 3.0 – Accelerated digital transformation and alternative data sources have enabled lenders to digitize analog processes at every stage of the customer journey, resulting in better lending solutions for consumers and businesses.

Fintechs are innovating the lending process by streamlining identity verification without compromising onboarding, assessing risk through new data sources. Others are making credit more accessible to underserved segments of the population, using new underwriting and risk assessment techniques.

This new era of digital lending is about personalized and intuitive lending that offers lenders better approval rates, fewer defaults and lower distribution costs, according to the study. Digging deeper into the different stages of the lending process, Marqeta outlined the changes brought about by this new digital lending ecosystem.

Identity checks

Verifying a customer’s identity is no longer a tedious process involving physical documents. Lenders can now use digital attributes like facial recognition and biometrics to approve borrowers in minutes, reducing KYC and compliance costs and streamlining back-office processes.

“The main asset of digital is the ability to do things quickly and at scale. If we were trying to subscribe to the analog style, we had to enter the numbers somewhere and make a decision based on human eyes,” said Alex Miles, UK managing director of Capital on Tap.

Source: Marqueta

Credit scores

Analysis of transaction data allows credit scores and background checks to be more accurate and personalized. Lenders can use this information to customize rates, terms and payments to help borrowers manage cash flow volatility.

“If you can understand where people have transacted in the past 24 months, you can build a solid profile of who that person is and what they want from you. And you can provide them with a much more personalized offer. and therefore much more intuitive,” said Tim Davis, CEO of Butter, a UK-based BNPL provider.

Source: Marqueta

Disbursements

Previously, customers had to wait days for their credit card to appear in the mailbox, but now card issuance happens instantly in mobile wallets. This means real-time access to capital for borrowers, a convenience that helps build long-term loyalty. It also removes some of the psychological barriers to borrowing, as borrowers don’t have to go through lengthy application processes.

“In the modern banking world, the demand for credit is perfectly integrated at the point of sale. All the information needed to subscribe a company is automatically extracted from several databases after approval by the applicant, via Open Banking with PSD2. And lending decisions are made instantly,” said Christian Grobe, co-founder and managing director of Billie, a BNPL provider for businesses.

Source: Marqueta

Refunds

Repayments can now reflect a borrower’s unique circumstances, helping to reduce default rates. Lenders can adjust and improve credit risk modeling and create comprehensive customer profiles using real-time transaction behavior. With digital tools like Dynamic Spending Control, borrowers can budget and monitor their finances more easily.

“In the UK, financial behavior insights provided by open banking have been a key data source for Lending 3.0. The benefits to lenders of adopting the technology are well understood and measured in pounds and in cents of increased acceptances and reduced defaults,” said Angus Clacher, Product Manager at Credit Kudos.

Source: Marqueta

The challenges of lending 3.0

While introducing exciting new changes to the traditional lending system, Marqeta found that this new era of digital lending also comes with some challenges.

Data: Despite the ever-growing pool of data, this resource remains fragmented, owned by different vendors. It is therefore difficult, in practice, for financial service providers to use more than a tiny fraction.

“Extensive collaboration with third-party data providers, such as utility companies, social media providers, mobile network operators and other specialist data providers, is required,” Marqeta said in the report.

Regulation: The legal environment contributes to the complexity of digital lending, as the increased use of data raises concerns about data privacy and ownership.

Regulators are also increasingly seeking to intervene in new markets like BNPL, fearing that it will become too easy for consumers to increase their leverage without the benefit of protections like with traditional credit products.

Technology: The rapid digital transformation of financial services is leaving some incumbents behind, forcing them to overhaul their internal systems to keep pace.

“Longstanding vendors can be at a disadvantage due to the inflexibility and complexity of legacy systems. And if they are limited in their ability or willingness to adopt the latest technologies, this will soon result in a decline in competitive and customer advantage,” said Justus Roux, Head of Solutions Engineering at Mambu , in Marqueta.

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