Digital Lending – Thematic Research
All the vital news, analysis, and commentary curated by our industry experts.
Digital lending as a whole experienced a contraction amid the pandemic. Subsequent analysis looks at market share evolution from 2016 to 2020 in five key markets (the UK, Australia, Hong Kong, the US, and Spain) and growth prospects based on consumer survey data regarding channel preference and provider preference in those same markets.
Some of the key players in the digital lending industry include Rocket Mortgage, Wells Fargo, Affirm, Klarna, GreenSky, Funding Circle, LendingClub, Prosper, Zopa among others. The critical elements of lending value chain common across most products include pre-sales & sales, set-up & onboarding, processing & underwriting, and closing & disbursement.
What are the main trends shaping the digital lending industry in the recent future?
Lending, particularly mortgage lending, is an infamously manual, paper-based process. There is an enormous amount of low-hanging fruit in applying basic, proven technologies such as RPA, optical character recognition (OCR), automated document recognition (ADR), Workflow, and machine learning. Bank of America and Wells Fargo have made huge investments with RPA vendors, such as Automation Anywhere and Blue Prism, and managed to take out significant costs with no ‘broken glass’ in terms of customer satisfaction.
Modern digital lenders compete on personalization across all dimensions of digital experience. The pandemic accentuated the need for personalization, as it had a highly individual impact on customers and sectors, invalidating many of the generic assumptions underpinning long-standing credit risk models.
Incumbent banks generate revenue by holding deposits and lending a ‘fractional’ amount to customers at an interest rate higher than they put out to attract deposits. Meanwhile, new independent platforms that either do not partner with banks or seek to obtain a bank license through acquisition, raise debt and equity funds through institutional investors, and make funds available through a direct online channel, as OnDeck and Kabbage do.
The best approach for alternative lenders is a laser-like focus on one underserved segment. Pre-COVID, that may have meant a small but significant unbanked, underbanked, gig economy, or ethnic-/gender-based group. But amid COVID-19 it can mean millions of consumers who were until only months ago very high-scoring credit applicants. COVID-19 also increased the need for more financing, more quickly, to individuals and firms that were difficult to assess.
As open banking initiatives mature worldwide, lenders are moving from manual, portal-based data ingestion to direct integration into credit risk, affordability, and customer management rules. Several aggregators are now adding open banking to their customer journeys, allowing lenders to use open banking data at the quotation stage, eliminating the potential confusion of a late-stage rejection.
Non-traditional approaches can rely on metadata from mobile devices and context-aware notifications, which present data privacy issues. Those providers that can obtain the widest range of the most granular data will be able to score users most accurately, which makes real-time, intuitive processes and procedures for consent management key.
What are the insights of the digital lending industry analysis?
Credit card balances outstanding
Across all assessed markets, outstanding credit card balances have declined (with very few and small exceptions), from 2018 to 2020. Those notable exceptions include Capital One and JPMorgan Chase (which both have fully digital application processes) and Capital One (which can assess sub-prime lenders using alternative data sets and maintain low single-digit percentage point non-performing loan ratios).
Personal loans outstanding
Personal loans outstanding follow a similar trajectory as credit card balances outstanding. Certainly, in Australia, Hong Kong, and the UK, incumbent market shares declined in 2020 versus 2019. In the US, which is overall more stable for incumbents, Wells Fargo lost 10% market share in just 12 months and Capital One-due to the same factors driving its success in credit cards-is managing to grow share.
Residential mortgages outstanding
Mortgages continue to be the anchor of the customer relationship. In Hong Kong and the UK, all incumbents have increased their market share. Yet it is noteworthy that in the US key incumbents have lost sizable market share, with Wells Fargo being the biggest loser (and also the biggest loser in credit card balances outstanding).
Looking at consumer channel preferences in these same markets indicates openness to digital lending, but overall, the picture is mixed. UK consumers are the most open to digital lending, insofar as ‘preference for branch’ when arranging money is the lowest of all countries included, while ‘preference for mobile and online’ is among the highest.
What segments of the digital lending industry value chain?
In order to succeed in digital lending, incumbent banks running on legacy-based platforms must digitally transform by acquiring critical new technology capabilities and partnering with a variety of innovative software vendors as well as public cloud providers. The critical elements of lending value chain common across most products include pre-sales & sales, set-up & onboarding, processing & underwriting, and closing & disbursement.
Pre-sales & sales: Channels are moving away from something that banks control-like proprietary channels-toward ecosystems or platforms in which the bank is just one participant or partner. Banks and payment processors need flexible and open technology platforms to deliver this, as well as careful strategic analysis of the risks inherent in different partnership options.
Set-up & onboarding: Depending on the product, set-up and onboarding can be a complex, time-consuming, painful process for end users. The aim of all providers here is to help new clients perceive the entire journey as a single process, despite the other verifications and processing complexity that occur in the background.
Processing & underwriting: Processing complexity varies greatly by product and provider type. Based on contrasting penetration strategies the categories include start-up approach, big tech approach, fintech credit risk, and traditional incumbent bank approach.
Closing & disbursement: In a fully digital mortgage transaction, the final step is completing post-closing tasks electronically. Lenders can eRecord the security instrument, eVault the eNote, and verify the loan data. In a fully digital transaction, the security instrument is recorded and notarized electronically.
Digital lending industry, by category
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Who are the leading players in the digital lending industry?
Some of the leading digital lenders in the following credit categories, consisting of both incumbents and new entrants include:
- Mortgage lending: Quicken Loans (Rocket Mortgage), Wells Fargo
- Buy now pay later (BNPL): Affirm, Klarna, GreenSky
- P2P lending: Funding Circle, LendingClub, Prosper, Zopa
- Marketplace/aggregators: Lendio, BankBazaar, MoneySuperMarket
- Embedded lending/banking as a service: Fidor, Railsbank
- SME lending: Starling, Tide, OakNorth
- Micro lending/unbanked: WeBank, MYbank, Tala, SEBx
- Crypto lending: Celsius, CoinLoan, Compound
Digital lending industry, by key players
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Market report scope
Industry value chain segments
|Pre-sales & sales, set-up & onboarding, processing & underwriting, and closing & disbursement.|
|Key players||Quicken Loans (Rocket Mortgage), Wells Fargo, Affirm, Klarna, GreenSky, Funding Circle, LendingClub, Prosper, Zopa, Lendio, BankBazaar, MoneySuperMarket, Fidor, Railsbank, Starling, Tide, OakNorth, WeBank, MYbank, Tala, SEBx, Celsius, and CoinLoan, Compound.|
Across all assessed markets, outstanding credit card balances declined from 2018 to 2020, testament largely to the growth of buy now pay later products. The impact of new digital entrants in the US can be felt clearly from the encroach of Rocket Mortgage, which increased its market share by 4% in 2020 alone, with Wells Fargo down 2%. Overall, UK consumers are the most open to digital lending, insofar as “preference for branch” when arranging money is the lowest of all countries included while “preference for mobile and online” is among the highest.
Reasons to Buy
- Understand key technology, macroeconomic, and regulatory trends impacting digital lending.
- Access the latest consumer survey data on evolving channel behavior, provider preferences, and product holdings for digital lending.
- Identify leading digital transformation efforts based on cost/income and customer satisfaction metrics.
- Access firm-level insight on leading players within the digital lending theme.
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Frequently asked questions
What are the key segments in the value chain of digital lending industry?
The critical elements of lending value chain common across most products include pre-sales & sales, set-up & onboarding, processing & underwriting, and closing & disbursement.
Who are the leading players in the digital lending industry?
The key players in the digital lending industry include Quicken Loans (Rocket Mortgage), Wells Fargo, Affirm, Klarna, GreenSky, Funding Circle, LendingClub, Prosper, Zopa, Lendio, BankBazaar, MoneySuperMarket, Fidor, Railsbank, Starling, Tide, OakNorth, WeBank, MYbank, Tala, SEBx, Celsius, and CoinLoan.
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