What the pandemic has taught the lending industry
According to popular belief, in Chinese, the word “crisis” contains two characters: one means “danger” and the other “opportunity”. I’m sure you know this misconception, don’t you? A sticky meme for business coaches is in the media and politics whenever something goes wrong.
Even though the second character translated as “a dawning moment” or “a pivotal point”, this mantra is too good to ignore in relation to today’s events. Misinterpreted or not, he’s got a good idea inside.
A time of opportunity for digital lending
As the offline industry struggles with the COVID-19 outbreak, a window of opportunity has opened for those of us in fintech and digital lending. The lending industry is storming the online sphere and the demand for digital products is higher than ever.
For example, New York-based digital mortgage lender Better saw 200% increase in demand from March 1 to April, and there was 72% increase in the use of fintech applications on the European market until the end of March. More importantly, for the lending arena, some of the biggest alternative lenders were approved to participate in the Paycheque Protection Program (PPP).
The CARES law
In response to COVID-19, governments around the world have put in place programs to stabilize economies. In the United States, the Coronavirus Aid, Relief and Economic Security Act (the CARES Act) was expected to provide $ 349 billion under the PPP, which began on April 3.
In 2019, there were more than 30 million small businesses in the United States As of April 16, nearly two weeks after the program opened, the Small Business Administration had approved only 1.6 million PPP Loans, although it is unclear exactly how many small businesses have applied for the program to date. Traditional institutions have been overwhelmed with applications, and many small and medium-sized businesses struggle to get the help they need in a timely manner.
This is where fintech and alternative lenders come in. Scott Stewart, CEO of the Innovative Lending Platform Association Told TechCrunch why he thinks technology is important in this regard: “The banking process (for the loan) is quite long. Our members underwrite loans using algorithms at speed and scale. “
In times of crisis, the biggest flaw in a system inevitably emerges. The credit chain, if I can put it that way, is no stronger than its weakest link: the manual collection and processing of data as part of the underwriting process. This method has been outdated for years and lacks consistency and precision. Do the math: Alternative lenders who use AI get loan approvals within hours compared to the seven to 14 day period of traditional lenders. And AI reinforces every step of the loan process: scoring and underwriting, compliance, document management, collection, etc.
Lenders’ approach to credit scoring needs to evolve
What we are seeing now is a clear sign that banks and lenders should take advantage of digital technological advancements to improve the loan approval process. For lenders, when migrating online, it is essential to change their approach to credit scoring. If they want a clear picture of the creditworthiness of their potential borrowers, they need to look beyond a standard set of data from credit bureaus.
The fintech industry is versatile and has a lot of brains and expertise to adapt to the new reality. In these difficult times, every sector of the fintech industry should rally around promoting value and a customer-centric approach. And moving away from the traditional approach to credit scoring can help both clients and lenders. Beyond providing lenders with a clearer picture of creditworthiness, AI-based scoring also serves as a gateway to financial inclusion. Lending technology is not only about profits, but also about giving equal financial rights to borrowers who do not have Class A credit history, the group we passionately call the “underbanked.” “.
For this reason, I expect digitization and AI-powered technologies to eventually change the lending scene for good. And I’m not just talking about the big players – even community banks will go digital.
And if you are thinking of starting an online loan business, don’t think about it. Today, it is easier to start your business than before. Many solutions have appeared in the area of loan automation, while IT costs have fallen.
After the lockdown, the market will welcome new leaders as some competitors have already left and others are expected to leave. Eventually the pandemic will end and I think humanity will likely enter a second Renaissance era driven by digital transformation. It may sound cynical, but despite global tragedy and loss of life, major crises such as wars and pandemics usually lead to technological advancements. Hopefully the best.