Bank lending has been transformed in recent years through the application of technology. Increasingly sophisticated data analytics and improved digital capabilities are managing to widen access and reduce risk at the same time.
The supply of credit is the biggest source of revenue for banks and is also vital to the smooth running of advanced economies. The banking crisis of 2008, which precipitated a seizing up of credit markets across the US and Europe, brought home just how dependent we are on credit, and how vulnerable its supply is to external shocks.
However, since the crisis, banks have recapitalized and are once again looking to expand their lending activity. New technology will not only help banks meet their growth targets, it will help them to do so while minimizing their risk exposure.
These are three of the main areas where technology will transform lending activity:
Today, consumers are less likely to have permanent jobs, are more mobile than ever before, and those in developing markets are demanding more access to credit. A lack of conventional data on these individuals means traditional underwriting models are largely unable to accommodate them, but new fintech specialists are filling the gap. Lenddo, for example, uses consumers’ social data and online behavior – including social media profiles, smartphone data, browsing history, and other sources – to create a non-traditional credit score that is particularly suited to markets with large unbanked populations. Lenddo claims its model is accurate enough to reduce risk by 12%, and it currently operates in 20 markets.
Speeding up loan approvals is another area where technology is having an impact. mBank in Poland lets customers apply for and gain approval on a loan via its mobile app in as little as 30 seconds. It does this by continuously monitoring each customer’s behavior and setting them a maximum credit limit based on its analysis. In effect, customers are being pre-approved for loans in real-time, and hence when they apply via the mobile app the approved funds can be transferred almost instantly.
Technology is also eliminating much effort from the onboarding process. Avoka, a digital sales and servicing specialist, offers a mobile-optimized three-minute loan origination service that reduces manual data entry by applicants to a minimum. The service, which banks can integrate into their own systems, enables consumers to scrape data from their LinkedIn profiles to automatically populate their loan applications, with ID verification and credit checks being carried out in real-time. Avoka claims that one client increased its loan conversion rate from 36% to 51% in the four weeks following implementation.
The provision of credit is being revolutionized, and banks should take advantage of these new opportunities to grow their lending-based revenues.
By Daoud Fakhri, Prinicipal Retail Banking Analyst