The banking industry is well-known for relying on legacy core banking systems and rigid architectures designed for specific banking functions. As you can imagine, this presents many challenges in moving forward to modernization and digitization.
Banking cloud architecture, instant approvals, streamlined processes, access to a wider customer base, and more - all possible thanks to constant innovation in the fintech ecosystem.
One might say that staying ahead of the curve is crucial for any finance leader (particularly smaller banks) looking to record strong growth amid the current macroeconomic environment. Simply put, banking executives need to look ahead to integrating digital lending if they’re to really embrace digital transformation.
That’s why we’re here today, so you can take a look at the key movers and shakers when it comes to digital lending operations.
Rise of Digital Lending Platforms
Ever since the pandemic, we have witnessed a shift driven by younger generations who are comfortable navigating the digital world and prefer getting things done via their mobile devices and from the comfort of their homes.
From the start, digital lending platforms were there to serve this need, leading the charge with faster and simplified processes that offer paperless and hassle-free access to funds. They opened the doors for borrowers who not only like the convenience that the digital-first approach brings but also don’t meet strict loan criteria imposed by the banks due to alternative credit measures.
As a result, the $12.2 billion digital lending platform market will reach $46.4 billion by 2032 - that’s how big of a “thing” digital lending growth is. Increasing automation in lending and collection processes is helping the industry grow faster, and it’s safe to assume we’ll be seeing more of the same in the next few years.
For banks, it’s a slightly different story. Those that drag their feet on adopting digital tools risk falling behind the competition. It's not just about churning out more loans or automating processes through digital lending platforms. It's about staying relevant to a customer base that increasingly prefers the convenience of online interactions over traditional branch visits.
Regulatory Landscape and Compliance Challenges
If there’s one word to describe the current state of regulation in digital lending, it’s dynamic.
There is no shortage of risks and challenges that regulators and, by proxy, lenders need to address, primarily concerning maintaining ongoing compliance. While a shift from paper-based applications to digital automation is a natural step, it comes with certain question marks as the use of cloud based systems further complicates things.
In the European Union, the Consumer Credit Directive (CCD) is constantly being revised, extending its scope to cover more types of loans, credits, and leasing agreements. In the United States, there is a discrepancy between federal and state regulators on what constitutes a loan, which means you’re subject to multi-level guidelines and rules. The Indian government released guidelines on Default Loss Guarantees (DLG), basically saying lenders have to share some of the risks.
That’s just a small part of the regulatory tug-of-war. It doesn’t help that it takes time to keep up with these developments. So, lenders need to be ready to innovate in order to ensure that automated compliance, KYC procedures, and other layers of their service (transparency and accountability) adhere to governing standards in an industry expanding at an astounding pace.
Challenges in Digital Lending Operations
As if keeping up with the ever-changing regulatory landscape while innovating wasn’t difficult enough, sophisticated fraud tactics emerge faster than you can say ‘firewall upgrade’.
Since data is becoming more integral to lending every day, data protection and privacy have once again turned into crisis areas that need proper solutions. Simply put, as digital lending grows, so does the risk of data breaches. From a security perspective, integrating robust cybersecurity measures like advanced encryption and authentication technologies is paramount to protecting sensitive customer data.
There’s also the matter of unifying data so that all the necessary information is in one place. Adding open data and cloud based systems to the mix brings its own set of challenges (besides maintaining compliance with relevant regulations) as it can create information silos. This can lead to inefficiencies in lending procedures such as processing loan applications, as well as make it much more difficult to deliver a seamless, personalized experience across different channels and devices.
With everything mentioned above, it’s important to remember that digital lending is more than digitizing the ways of old - it’s a strategic move aimed at leveraging digital lending technology. Confident lending depends on utilizing fintech solutions that employ automation and streamline all lending services. Otherwise, you’ll have a hard time remaining competitive.
