2020 precipitated massive change in banking and finance, and the ripple effect is stretching into 2021 and beyond.
While the primary shift was for banks and financial institutions to aggressively move up their timeline for digitisation, plenty of other lending trends surfaced in 2020, and these have been driving change in other areas as well.
The biggest anticipated changes are focused on meeting the rapidly evolving demands of consumers for fresher, more personalised, and more flexible banking and borrowing experiences.
As the COVID-19 pandemic sequestered consumers in their homes and online banking and spending skyrocketed, banking and lending customer pain points evolved and became more prominent. Here are five trends that have emerged as game-changers for providing solutions as we move further into 2021.
1. Non-banks entering the lending space
“Non-banks” have been entering the lending space in greater numbers and with more alacrity than ever. These institutions are seizing on the chance to meet consumers where they have been spending large amounts of their time, and leveraging their trust in the company of origin to launch new financial products.
One of the biggest targets has been small- to mid-size business owners. Spiking unemployment and a dearth of available jobs set many individuals on the path to entrepreneurship, expanding hobbies and side gigs into businesses and adapting to emerging societal needs.
Amazon’s lending program makes it easy to apply for working capital loans funded and approved directly by the eCommerce giant. Qualified Amazon sellers can apply conveniently online and receive approval and disbursement in as few as five business days. Businesses seeking a line of credit can apply through Amazon, subject to approval by Marcus by Goldman Sachs.
Online payment platform PayPal also offers working capital loans to members, with funding often available in minutes and repayment made easy by garnishing a percentage of each day’s payments received through the platform. This has made it easier for non-traditional workers like freelancers or independent contractors to get much-needed cash to grow their business without rigorous credit checks or other barriers.
Apple provides easy access to their products through business financing via a leasing program. They deliver two pathways to equipping an office with Apple devices, including Mac, iPhone, iPad, Apple Watch, and Apple TV. Equipment totalling $4,000 or more is eligible for the lease program, which can end with either the return, refresh or purchase of the equipment at fair market value, or buying out of the lease for a final payment of $1.
These desperately needed cash infusions or equipment setups can make all the difference for small-business owners who can’t qualify for a standard bank loan. Other alternative financing options include Peer-to-Peer (P2P) platforms that match borrowers with investors, and online non-bank platforms like Kabbage, Quicken Loans and So-Fi, according to Business Insider.
2. Embedded finance
Finance and tech are an intersection to make purchasing seamless. Digital wallets allow information to be stored and instantly accessed to make a purchase by scanning a QR code, or tapping a “pay now” button embedded in an application.
Perhaps one of the most familiar non-bank payment set-ups was Uber’s cashless rideshare service, which rapidly expanded into Uber Eats and other associated offerings. The most beneficial aspect, however, may not be the consumer-facing app, but the driver-facing one; With Instant Pay, drivers can access their earnings without waiting for a paycheck or dealing with a bank.
Other embedded options include financing at point-of-sale (POS) which snagged a full three percentage points away from credit cards between 2015 and 2021 (capturing $10 billion in revenues), and is expected to grow by an additional 50% beyond that by EOY 2021, according to McKinsey. This option allows buyers to finance something as small as a $50 t-shirt over a six-week period with four small payments at 0% interest.
Fintech companies like Quadpay integrate into eCommerce sites, and allow buyers to finance with instant decisioning and no credit score impact. Meanwhile, The Paypers notes traditional credit cards like Mastercard and Visa are toying with their own versions of buy-now-pay-later (BNPL), while companies like SplitIt allow customers to use existing credit cards to manage their payments.
3. Rise of the Gen Z buyer
Gen Z is the first digitally native generation, and has never known a world not connected to the internet. As such, they turn to technology for solutions, and are the biggest users of non-banking lending, with only two-thirds holding a traditional bank account, according to Banking Journal.
Cushman-Wakefield notes that while millennials may have jump-started the shift to using Fintech for lending (a trend that surpassed traditional bank loans in 2015), Gen Z is more cautious about money, and more apt to finance a large purchase through a loan than use a credit card. Gen Z can be expected to heavily influence the continued growth of non-bank institutions in the lending space going forward.
4. Commonplace digital borrowers
It’s not only the digital natives of Gen Z taking advantage of digital borrowing. The pandemic forced many traditional banking customers out of their comfort zone, and into the world of online purchases and contactless payments. Lending also underwent a massive shift, according to The Financial Brand, as the bar abruptly rose for customer satisfaction with digital financial services.
Almost overnight, loan officers went from in-bank desks to at-home environments. Borrowers saw the stacks of documentations and multiple visits for authentication streamline into cloud interface, document upload portals, and rapid, remote authentication resulting in speedy digital approval for their home and auto loans. According to The Mortgage Reports, 43% of 2020 homebuyers completed their entire mortgage application online.
5. Use of AI and ML
Artificial intelligence and machine learning are also changing the face of lending. Massive amounts of data are now available to be crunched on every applicant. According to CNBC, this leads to a higher, more accurate approval rate for buyers, lower loss rates for lenders, and shorter times to funding.
As real estate rates bottomed out and lending went digital, mortgage companies stepped up their game to provide online application and approval options, and other lending sectors followed suit. Investing in AI and ML can be the single most effective way to lower costs and expand operations in a brave new world of lending.
These tools can help you generate complete birds-eye views of customer credit lifecycles, dive deep into transactional histories, and identify risks to make informed lending decisions. The result is a strong loan portfolio with inbuilt risk management and high return on investment.
GDS Link is the leader in AI, Machine Learning, and analytics solutions for lending that can help you stay on pace in 2021. Contact one of our analytics experts today.