How digital lending is a game-changer for FinTech companies

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Traditional banking systems are heavily cluttered with legacy systems that lack innovation, so much so that they lack the agility and technological expertise to develop and deliver advanced financial products. In contrast, fintechs are technology-based financial service providers, using cutting-edge technology to deliver efficient financial services to the masses, thereby disrupting traditional financial service providers.

The credit revolution: a red flag for digital credit

Speaking of traditional means of lending, when in need of capital, an individual or business turns to a traditional bank or financial institution like the NBFC for a loan. PSF / traditional lenders come under one umbrella that fits all loan products and are unable to meet the specific and different requirements of loan products.

For example, a home improvement loan, a travel loan, etc. In addition, the cost of the service is much higher, which makes it economically viable only for larger loans like business loans or mortgages. In addition, the requirement of collateral is essential for access to credit, while it can take 10 to 15 working days to approve the loan, which is time consuming and discourages urgent requests from applicants. credit.

Easy access to credit has been the biggest challenge both in India and abroad.

Digital lenders being the new addition to the lending industry have disrupted the problem of delays in accessing credit. These lenders used digital payment data to underwrite in near real time and efficiently.

They mainly use advanced analytics, machine learning models on customer data, and cost-effective digital channels to remotely deliver loan products in the shortest possible time.

This allows all real-time transactions that take place on the internet to be replaced by fintech’s credit-based payment products, such as Buy Now Pay Later (BNPL) or Convert to EMI Products. FinTech companies use their clients’ financial and transactional data to take out digital loans using an API-based approach, reducing the time it takes to access personal or payday loans.

The rise of digital credit

Digital lending is a global effort to create a more financially inclusive world and provide nearly three billion people excluded from these services with access to a wide range of financial products. By allowing easy access to credit for the masses, unlike traditional methods, underserved customers or businesses can be offered better and faster products and services in a highly profitable and engaging manner.

Innovations in digital lending are driven by intensive research and development by fintechs or new age financial service providers. Even political bodies encourage the growth of these products to help promote financial inclusion and bring good quality credit products to disadvantaged communities and cash-strapped businesses.

Fintechs around the world are also gaining competitive advantages by introducing digital lending. The use of technology, internet access and increased use of smartphones increase customer expectations, which can constantly change based on their experience. Adding digital loan offerings to the current product portfolio will help fintech companies stay ahead of the game.

The power of new age lenders

New age fintechs don’t need mortgages to take out a loan application. Rather, they use financial transactions and CIBIL scores to calculate risk factors. There are several structures around repayments in digital loans, from advanced ways of incorporating real-time payment deduction mechanisms from customer POS transactions, to normal / timely EMI repayments on their applications. /Web sites.

Fintechs also have the ability to collect additional data about their customers, which helps increase line of credit limit, define customer personality, and sell other financial products. Digital lenders are more focused on unsecured loans and have underwriting engines that can process loan applications in minutes.

Fintechs with neo-banking products, insurance, equity trading, and financial management applications, among other financial products, can leverage digital lending to expand their revenue. This gives access to their product catalog by providing credit in a very transparent way.

Designing a successful digital credit transformation

However, adopting the digital lending methodology brings a whole new set of challenges and risks that can have damaging effects for both clients and fintechs. Digital lending needs to be implemented in a very sustainable way or it could have negative effects as the risks involved are higher.

The development of such loan systems and the design of product finance should incorporate appropriate risk factors, have advanced underwriting processes and advanced systems to mitigate defaults, and make substantial efforts in creating collection systems for digital loans.

Some of the digital lenders struggle with the risk management changes and optimizations needed in the loan repayment cycle. Many of them have not yet reached profitability.

As digital lending makes credit accessible to masses across demographic lines, the subject of the collection process is the elephant in the room. The probability of non-repayment is high in case of unsecured digital loans, thus impacting Non-Performing Assets (NPA).

So the probably easiest solution is to use cutting edge technology to evolve the collection process and add / evolve an ethical collection system.

It’s only a matter of time before fintech companies receive a new set of regulations from the Reserve Bank of India (RBI). In the meantime, it is hoped that these regulations will stimulate businesses, allowing them to continue their financial reach and services to financially underserved communities and businesses, and also establish a more fluid collection process.

Digital loans are expected to transform the lending segment in the near future, effectively meeting the credit demands of customers and businesses.

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)


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