Top 5 Predictions for Digital Lending in 2021

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As we reflect on the many curveballs that were thrown during the year 2020, lenders should feel proud of the way they responded to a crisis that wasn’t on any enterprise’s radar. Faced with high rates of impaired loans, and the need to create digital capabilities ranging from end-to-end digital account opening and lending capabilities to new features and loan products on increased pressure from regulatory bodies, many organizations did things that once seemed impossible – sometimes in a matter of days.

The ability to stay afloat and continue with business depended on how quickly banks and financial institutions could adapt to consumer needs, using technology to enable legacy systems and streamline back-office processes while operating remotely. The acceleration of digital transformation occurred across the entire lending ecosystem.

But transformation is an ongoing process and the evolution of digital lending is far from complete. In spite of the expedited digital adoption in 2020, a recent Digital Banking Report by Infosys even revealed that financial institutions ranked themselves lower in digital transformation maturity this year than they did in 2019, reflecting consumer expectations that are increasing at a pace faster than their collective ability to deliver. The report also found that innovation and data/analytics maturity in the banking industry also fell in 2020 for the same reason.

The year 2020 has proved to be a huge learning experience for lending institutions, who now stand at the brink of 2021 wondering what to focus on in the future and how to optimise the use of technology that is already in place. So through our research with lenders and analysts alike, we have compiled a list of our five predictions for digital lending in the coming year:

Video KYC: The New Norm for Lockdown and Beyond

The introduction of remote working, for both bank employees and customers, accelerated the adoption of Video KYC which came as a huge blessing this year. It has ensured the safety of customers and bank officials alike, allowing them to complete critical KYC processes with the same level of security and diligence, but from their spaces. Video KYC has enabled the onboarding of businesses and consumers virtually, has increased customer satisfaction, retained customers, and reduced acquisition costs for financial institutions. Moreover, it has significantly reduced the overall time taken for this process, making it indispensable even post the lockdown. 

How OCEN can reshape the lending ecosystem

Cash Flow Based Lending

The current system of lending to small businesses in India is broken and OCEN was developed with a view to fix it. The Open Credit Enablement Network has put together an infrastructure protocol that enables consent-based access to verified information from multiple public and private data sources and connects borrowers with lenders through an ecosystem that offers access to affordable credit. Through consent-based data sharing and Aadhar/UPI enabled infrastructure, the credit process for small businesses will be completely digital and enable quick access to funds. Thus a major change in 2021 will be the movement of financing from a ‘one size fits all’ to ‘customized’ credit solutions, evaluated primarily on continuous cash flows (Read: Cash-Flow Based Lending)  rather than income and assets.

The Rise of Conversational AI

Conversational artificial intelligence has created a lot of buzz this year, and for good reasons. As lockdowns closed FI branches and pushed banking online, the adoption of chatbots and virtual agents soared. Many lenders are turning to chatbots to take on the heavy lifting of customer support even into the coming year as social distancing mandates stretch on. Many see AI as an exciting way to achieve cost reduction and replicate popular customer experiences with disruptive fintech and AI-assisted chat interfaces are currently saving time for sole proprietors while also resulting in better and faster lead conversions. 

Enhanced Data Analytics and Credit Decisioning Capabilities

Leading analyst firm, Forrester has remarked on the current weakness in risk assessment and underwriting models. In the wake of Covid-19 Banks responded quickly and empathetically, providing assistance and credit to customers and allowing flexibility around loan repayments, however the same can’t continue indefinitely, especially with a resurgence expected in the coming year. The rise in unemployment in 2020 caused the rise in impaired loans and NPAs, and according to Forrester “Banks’ ability to assess the impact of stress factors such as unemployment, supply chain disruption, and increasing debt will determine their loan performance and uncover new opportunities.” 

Leveraging API Ecosystem for Lending

The rapid shift in technology forced many financial institutions to accelerate their digital transformation efforts to meet the new consumer demands and improve productivity, all while still focusing on scale. To thrive in the new year, taking an outside-in approach to digital business ecosystems can help enterprises harness existing resources and relationships to drive innovations and efficiency.

According to Gartner, “The API economy is an enabler for turning a business or organization into a platform. Platforms multiply value creation because they enable business ecosystems inside and outside of the enterprise to consummate matches among users and facilitate the creation and/or exchange of goods, services, and social currency so that all participants are able to capture value.” Needless to say, the future of lending is OPEN and the coming year will expedite the usage of Open APIs especially for open banking. 

As we see the trends unfold in the year 2021, one thing can be certain for lenders that digital is the way forward. From artificial intelligence to digital decisioning and connective technologies, the main focus should not just be on adopting new technologies but to actively embrace the upskilling of legacy skill-sets and change in legacy culture.