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Automating Digital Lending Operations: A Comprehensive Guide

May 21, 2024

digital lending

Following the 2008 economic downturn, e-commerce took the business world by storm.

Businesses moved online and the industries changed. As customers got used to new online business norms, demand started to rise, and we are now starting to see this same shift in the digital lending landscape.

People who haven’t been keeping up with lending technology may still associate digital lending with cumbersome integrations, unintuitive flows, steep learning curves for staff, and rigid credit decisioning logic.

However, today, this is no longer the case. Thanks to digital banking platforms, a fully functional, secure, and even affordable lending automation solution can now be deployed within several business days allowing lending businesses to convert more clients, branch out into new audiences, and diversify income.

Advances in fintech has created an enormous window of opportunity for those wanting to enter the digital lending niche. Furthermore, now any business owner can offer lending products and services to customers in installments without involving a middleman in the form of a bank or a credit union. After all, why share the profits when you can keep them.

Everything from application processing, borrower evaluation, underwriting, servicing, collection, and reporting can now be fully automated. Modern e-lending fintech solutions use intelligent AI-driven models to help all businesses, from a retailer or auto dealer to a bank or enterprise-grade telecom company offer both affordable and profitable financing to their customers.

Further, now that the entire economy is embracing digital, more flexible and adaptable SMEs can take part of the market share from traditional financial institutions. To give you an insight into the world of digital lending, let's go over the basics.

How does digital lending work?

Digital lending simplifies the loan application process for borrowers, while presenting lenders or debt investors with diverse investment opportunities. Borrowers and lenders follow the steps below to receive funds via digital lending.

  • Registration: Borrowers and lenders must register with digital lending institutions for identity verification and authentication purposes. Now, the digital lender verifies banking information, credit history, and income statements of both borrowers and lenders. Many lending platforms rely on digital mortgage closing tools to automate the creation of digital application forms and manage loan applications. 
  • Credit assessment: The next step involves credit assessment, during which a digital lending platform uses algorithms to check creditworthiness of borrowers. Digital lending institutions also consider factors like borrowers' income stability, credit score, and debt-to-income ratio during this stage. Lending platforms often use loan servicing software to manage credit decisioning and payment processing related tasks. 
  • Loan application and disbursement: The digital lending platform now asks the borrower to submit the loan amount, purpose, and repayment term. Upon verifying all the necessary details, the platform matches a borrower with a lender, which can be an individual of a financial institution. Once lending platforms approve everything using loan origination tools, the loan amount is deposited in the borrower's bank account.
  • Repayment: Borrowers must repay the loan amount based on the repayment schedule shown to them during the application process. Most digital lending platforms use direct debit to automatically deduct the loan amount from a borrower's bank account. Lenders receive the capital they lent along with interest. Most platforms use loan servicing software to automate and manage the tasks that emerge during the entire loan lifecycle. 

Digital lending platforms use advanced technology infrastructure to monitor borrowers' creditworthiness, implement risk-based pricing, manage repayment schedules, and adhere to digital banking regulations. 

Digital lending challenges

Digital lending platforms experience multiple challenges such as legal uncertainty, increase chances of default, and cybersecurity risks.

  • Legal uncertainty: Digital lending institutions adhere to varying legal frameworks and regulatory guidelines based on their geographies. They must follow data privacy requirements, fair lending practices, and anti-money laundering (AML) regulations regardless of their locations. Despite meeting all these regulations, digital lending platforms face the risk of newer financial technologies outpacing regulatory developments. Moreover, there can be gaps in oversight as well. Altogether, these regulatory uncertainties pose legal risks and increase compliance costs. 
  • Credit risk management: Digital lending platforms use risk modeling and credit assessments to predict behavior of borrowers and evaluate their creditworthiness. These risk management mechanisms don't work for borrowers with no credit histories or files. Moreover, economic uncertainties may increase loan delinquencies and default rates. That's why digital lending platforms must focus on stress testing and proactive debt collections to reduce credit risks. 
  • Data privacy concerns: Since digital lending platforms store sensitive personal and financial data of borrowers and lenders, they are prone to different cybersecurity threats, such as malware, phishing, hacking, and ransomware attacks. Moreover, these platforms must meet General Data Protection Regulation (GDPR) and the California Consumer Privacy Act (CCPA). Not meeting these regulations can result in penalties, reputation damage, and financial losses. 

Benefits of digital lending automation

No business can brush aside a viable low-maintenance monetization source. Especially when said income source doesn’t put a strain on the employees and the business owner. But just to give you a better idea of the tangible and intangible return you can get on digital lending, the biggest benefits you can receive include the following and much more:

Reduced credit risk

The combination of traditional and alternative borrower evaluation approaches used in modern digital lending solutions allows for an unmatched risk assessment accuracy and speed.

Improved operational efficiency

Automation should solve problems, not create them. Digitalizing lending the right way, you will notice that your business’ operational efficiency starts to improve exponentially.

Reduced human error

Lending automation technology is sophisticated enough to put most of the crediting work on autopilot. By automating recurring tasks and analyses, you leave very little room for human error.

Increased customer LTV

An intuitive interface and streamlined business shows your clients that you’re a reliable business owner who puts borrowers' needs first. User-friendly, fast, and accurate lending automation isn’t a matter of science fiction anymore.

Increased speed of origination and servicing

With a modern lending automation platform, a loan can be originated, approved by an underwriter, and disbursed in under two minutes.

Advanced tracking and reporting

Internet and all-consuming digitalization only make sense if you utilize the data your business collects. Get lending automation software that allows for granular analysis, action tracking, and reporting.

Easily set up remote work processes

As the business world goes remote, lenders can’t but abide by this trend. Luckily, it’s more than possible with today’s technology. So as a business owner, you’d have separate workspaces for different employee types and instant tracking of all the actions taken by borrowers and staff within your lending portal.

Fast time-to-market

Given that you’ve made the right lending automation software choice, the fully functional end-to-end lending automation solution can be launched in a matter of a few weeks or even days. We’ll get into this more in the next section.

9 steps to help you choose the best digital lending automation software

Choosing a new software provider that will automate a large part of your business is probably the most important thing about lending digitalization. The wrong solution will slow your operation down, make risk assessment mistakes, increase expenses, and take months if not years to fully deploy. These risks can’t be tolerated and need to be addressed when you consider digital lending software providers.

1. Define short and long-term business needs

Before you commit, you need to figure out exactly the functionality your business will need tactically and strategically. If you’re not sure about your needs, in the beginning, don’t worry, just ask a lot of questions during demos and you’ll quickly start getting a firm grasp of what you can get.

2. Consider an all-in-one system with a modular structure

Integrating multiple complex products together is an extreme undertaking even if you have an amazing team. The problem is that you can’t always predict which part of which solution’s legacy code is causing your lending portal to crash. That’s why it’s recommended to get an all-in-one solution that is capable of automating every step of the lending process.

3. Cloud-based vs. on-premises

Depending on your operation’s peculiarities, you may need to have your lending portal deployed on the cloud (faster and more efficient) or on-premises (may be slower for the client but arguably is safer).

4. Comprehensive, integrated origination, servicing, and collection functionality

Ideally, all the parts of your lending solution should work like a well-oiled machine. But even if you decide to do with separate solutions for parts of your business process, make sure that all the steps that have to do with money are automated within one solution.

5. Advanced technology applied to automation and proprietary credit scoring models

Just the traditional borrower evaluation approaches don’t cut it anymore. With the rise of artificial intelligence and the evolution of fintech, credit decisions have made a light-years’ leap in terms of accuracy and speed. And lenders can’t ignore that.

6. Consider user-friendliness of the solution (UI and UX design)

In the age of Uber and Stripe, users have come to expect a certain level of user-friendliness of the software they use. Creating a solution of sufficient intelligence and usability in-house is a herculean task, but you can put together an optimal platform for you with a solution that has a modular structure and is easy to adjust.

7. The platform should be tailored to your business needs and local market

Getting the most advanced platform on the market isn’t going to do you much good if it’s not flexible and agile enough to quickly and efficiently adjust to the way you do business. You don’t want to be like everyone else. Digital lending technology these days allows you to stand out.

8. Time-to-market and learning curve

The speed makes a real difference in today’s digital space. The lender who is able to launch a reliable, user-friendly, and intelligent solution in your local market first will get a chance to score a bigger part of the target audience.

9. Software provider’s track record

Last but not least, make sure to get detailed information on the provider’s previous project for clients with similar business models. Reviews, awards, mentions on authoritative resources, high-profile partners - anything that makes you trust a vendor, run your checks, cause this is a big technological decision.

Hopping on the digital lending trend

Let’s take a look at a few more reasons digital lending is the latest trend to take the world by storm. 

The growing need for credit funds

Using credit as just another financial tool started as the American dream and now has become a global phenomenon. With economic, health, and nature crisis happening, borrowers need lenders that provide easy-to-use interfaces, intelligent business flows, quick decisioning, simple disbursement, and automatic collection.

And as businesses put all this on cruise control, there is less spend invested on operations and the overall portfolio health grows.

Contactless lending and remote work trends have taken over the world

Even if you prefer to work from an office, it is smart to have a plan B. It’s safe to say that each month more businesses switch to digital, contactless, and remote processes. There’s no avoiding these trends, you can just postpone the transition at a cost of losing business to entrepreneurs who didn’t.

Lowering crediting risks for lenders

Not only does digital lending save costs and streamline processes, if done right, it can also allow you to make more accurate decisions than all of the traditional players around. The reason being the flexible scorecard models, credit decision rules, and loan decisioning logic within the system you use.

As traditional decisioning approaches become obsolete, more and more lenders turn to use things like bank statements scoring or psychometric evaluation of their potential borrowers to get a better insight into how these people think, how likely they are to pay back the loan, and what terms will work for them.

Enable peer-to-peer lending or invoice financing

One nice part of lending digitalization is that one doesn’t necessarily have to stick to the classic funding models. A business can just as well enable things like P2P lending allowing investors into a portal to make money as the middleman instead of outsourcing this to a bank. Alternatively, or in parallel, one can use lending to support vendors and practice invoice financing or factoring.

Digital lending statistics

Digital lending is a relatively new force in the financial services market, but it’s already a force to reckon with. It can be an amazing asset for a business or, if digitalization is not utilized, it can cost a lender their business.

To give some numbers on the development of the fintech space and how quickly and effectively this industry automates financial products and services:

  • 20% is the expected annual ROI on fintech-related projects.
  • 82% of financial service incumbents expect to increase fintech partnerships in the next 3-5 years.
  • Lending is the second least regulated financial business in the current regulatory environment based on a PWC industry survey.
  • The transaction value in the consumer lending segment amounts to US $33.31 billion in 2024.
  • The average transaction value per user in the consumer lending segment amounts to US $8.63 million in 2024.

This shows that digital lending currently has a lot of opportunity for anyone wanting to claim their market share with a modern crediting automation solution. And whereas in the past, both clients and SMEs were forced to work with clumsy large enterprise-level financial institutions, now this niche of the economy is getting more democratic.

Conclusion

The industry entry barrier is getting lower and like with most things technology reached, it gets immeasurably better. Borrowers get fair rates, quick approval, and stress-free user experience, and lenders can return and multiply their technology investments.

Automation isn’t going to stop due to economic crises. If anything, it’s going to become more important and faster to implement. This enables your business to enter areas that weren’t accessible before. Retailers, auto dealers, healthcare providers, banks, credit unions, as well as many others are competing for the same borrower right now.

Explore the best financial predictive analytics tools that can help you predict future financial events based on historical data.

This article was originally published in 2020. It has been updated with new information.

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Automating Digital Lending Operations: A Comprehensive Guide Discover the ultimate guide to automate digital lending operations for efficiency and success. Learn about digital lending tools, challenges, and benefits. https://learn.g2.com/hubfs/iStock-1150203445.jpg
Vit Arnautov Vit Arnautov is the Chief Product Officer at TurnKey Lender, a company creating intelligent AI-driven solutions for lenders. With more than 10 years of experience leading product teams for tech companies, Vit is happy to share his expertise in running the product team of a lending tech company. https://learn.g2.com/hubfs/G2%20Content%20Brief%20-%20TurnKey%20Lender.jpeg

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