Banking On Evolution: The Urgent Need For Better Business Models And The Rise Of Digital Lending In The Banking Sector

Alok Mittal, Co-Founder & CEO, IndifiA successful first generation entrepreneur, Alok is passionate about creating value through startups and foster entreneurship development. At Indifi, he aims to expand access to debt financing for Indian SMEs.

Ever since its advent in the mid-14th Century Europe, the modern banking system has remained largely unchanged. Few minor alterations aside, the processes followed across banks today, are still similar to the ones were formulated more than six centuries ago. To understand the true scope of this sector-wide rigidity, it is important to note that, since the modern-day banking first came about some significant developments, have completely altered the way the world functions. Here's a snapshot:

• Three different industrial revolutions (with a fourth currently underway)
• Humankind has made its foray into space
• Air travel has become commonplace
• Non-human super intelligence has become a tangible reality

So why has the banking sector resisted an in-depth technological evolution for so long?

Evolve or Die: Why the Banking Domain is Ripe for Disruption?
One of the main reasons why the banking sector has remained impervious to large-scale changes is because it has faced no pressing demand to evolve its processes. It is still heavily dependent on human involvement and manual documentation across all levels. This approach is rapidly becoming out dated, particularly for critical functions such as lending, because of the speed of business today. Financial transactions now largely take place at the touch of a digital button across the globe. In the age of near-instant fulfilment, the traditional lending approach does not stand up to scrutiny at all.

To begin with, the turnaround time between loan application and approval is unnecessarily extended by excessive documentation and procedural delays that the traditional lending methodologies are prone to. Underwriting mechanisms still use conventional parameters to analyse loan applications, often eliminating potentially creditworthy borrowers from the credit system. The rising NPAs amongst public and private sector banks in India and abroad are further proof of the inefficacy of this approach.

The post-approval disbursal can also take weeks and months, which makes traditional lending even more unappealing to the end-consumer; by the time the amount is disbursed, an SME applicant may have already missed the business opportunity that it sought the loan for. Traditional lending channels are also limited by their physical presence and miss out on the credit demand from geographies where they don't have a branch. Many borrowers also hesitate to approach traditional institutions due to a lack of transparency in the loan application process.

These challenges clearly indicate that traditional lending is not very well-equipped to deal with the
changing realities of today's world. This is exactly where digital lending steps into the picture.

Riding the Digital Wave: Factors Driving the Unstoppable Rise of Fintech Lending
The ideal lending objective is rather straightforward: to shorten the customer's loan journey by providing creditworthy borrowers with seamless access to credit. Digital lending platforms accomplish this by deploying cutting-edge technologies to bolster their operations. They use proprietary underwriting algorithms, which take into account non-traditional data points such as social data to create more accurate and inclusive borrower profiles. Technology also helps them to better understand the specific requirements of individual borrowers, enabling them to offer highly-customised loan products catering to the end-user needs.

While banks can develop their in-house digital lending platforms, the costs and time involved in such a massive undertaking can be extremely prohibitive

Another major reason why digital lending is becoming increasingly popular is the seamlessness and transparency that it facilitates. Loans can be applied for in a few clicks by filling a simple form, with the minimal documentation required post-approval. Leading fintech platforms also deploy automated loan approval workflows to enable swifter disbursement. Through digital lending, loan disbursements are known to happen in as low as 24 hours of application. The entire process is extremely transparent and provides borrowers with full visibility of their loan application status. Digitisation also removes the physical barrier in the loan process, enabling loans to be availed even by the underserved borrowers in tier-2 and tier-3 markets.

Digital processes optimise lending operations, as well as minimise the infrastructural and operational costs; the savings thus realised are then passed on to the end-user in the form of lower interest rates. It additionally helps in extending the ambit of credit to those who have been left unserved or underserved by traditional lending institutions, such as freelance professionals, SME business owners, and first-time borrowers.

How Traditional Banks Can Benefit from Partnerships with Fintech Firms
While banks can develop their in-house digital lending platforms, the costs and time involved in such a massive undertaking can be extremely prohibitive. This is why many traditional banks are now exploring partnerships with leading fintech lending platforms for fulfilling the credit demand.

Such partnerships can unlock a host of benefits for traditional banks. For instance, by leveraging the robust technological frameworks that fintech lenders have created, banks can fulfil the credit needs of creditworthy borrowers whom they would have otherwise missed out on. Digitisation of lending processes also allows traditional lenders to significantly improve productivity and loan closure rate.

Moreover, through such technology partnerships, banks can optimise loan origination, automate approval, streamline documentation and data validation, and increase the accuracy of their underwriting processes. This can deliver a significant reduction in costs and NPAs for traditional lending institutions, which in turn can increase their revenue per loan and help them in delivering faster and cheaper loan services to their customers.

All this can be done without making large-scale changes to how they operate; banks can customise their partner fintech platform to fit their lending practices, with unparalleled agility and at rapid scale. They can even outsource loan applications outside of their remit to their fintech partners through referrals, adding a new revenue stream by essentially converting what would otherwise have been a lost opportunity. With banks providing access to trusted relationships and low-cost funding and fintech players providing the technological support, such partnerships are a win-win scenario for all stakeholders across the entire lending value chain.

The Survival of the Fittest ­ Darwin's Theory of Natural Selection holds true even in the global business landscape. Every successive technological revolution makes it essential for industries to overhaul their existing processes. When faced with such transformative change, organisations need to evolve their current business models or risk falling by the wayside. Having resisted the lure of a technological evolution for a long time, the banking sector is finally at an inflexion point where it must embrace this change. There is no other option.