Post Covid-19, Retail Lending to Get A Boost Through Digitization – Authored Article by Navin Chandani

In a matter of a few weeks, the world has experienced a level of disruption that is likely to change everything that had been the norm in financial services. Before the COVID-19 outbreak, the lending industry was experiencing steady growth. Despite increasing consumer expectations and increased competition from non-traditional financial institutions, most banks were stronger than at any period since the financial crisis of 2008, backed by the role of technology. COVID-19 has undoubtedly changed the way financial institutions are approaching customer interactions in the future. From the lending journey being a mix of physical and digital processes, there is a swift movement towards complete digital journeys.

In India, heavy infusion of capital, liquidity breathers and loan moratoriums are proactive interventions to increase demand for credit. Early evidence from the pandemic suggests that, even with the above interventions, lenders and other financial institutions that are digital natives i.e. organizations that use modern digital technologies from prospecting to fulfilment along with advanced analytics and contextual customer communication have sustainable competitive advantage. The following factors distill how the credit sector will leapfrog soon with lenders offering better capabilities with increasing digitization.

Government interventions are creating an environment for digital fulfilment of consumer credit demand

Gone are the days when you had to stand in queues, dodge between banks to get an approval on your loan. Banks and NBFC’s are incorporating digital propositions along with FinTechs that are no longer limited to just qualification but extend to fulfilment. The Government of India has made significant interventions such as the payment ecosystem and Federated Consent Architecture, which are enablers for digital led lending processes. When viewed in conjunction with the recent measures around liquidity and interest rate targeting, these point to an opportunity for lenders to fulfil consumer demand with a turnaround time in seconds or minutes.

The RBI has also played an equally important role with the introduction of Aadhaar-based Video Customer Identification Process. The launch of video-based know-your-customer (KYC) identification process will provide an additional, more reliable, and economically beneficial method for field verification as part of the customer on-boarding process. Many banks and financial institutions can adopt this route of mechanism to deal with COVID-19 slowdown.

More data is available real time for credit decisioning

Lending institutions are adopting end to end digital platforms to acquire customers. These platforms have two components, Workflow (catering to processes and information capture) and Business Rules Engine (to automate credit decision). Business Rules Engine can read various information classes such as credit bureau scores & data, lender’s credit policies, analytics models amongst others. While the traditional use cases were from retail lending, newer use cases are emerging from business lending as well. Lenders who have adopted this are able to additionally observe the portfolio impact of decisions taken and tweak their acquisition policies to responsibly respond to the market quickly.

Lower technology costs imply that newer lender segments can adopt these platforms. Through this transformation, these lenders can increase their market competitiveness and build in-house capability to better understand the stability of their customer segments by periodically reviewing data stored on these platforms.

Doing more with existing customers is even more important now

Lending institutions will need to put a greater focus on identifying the lifetime profitability of their existing customers. Identifying this value is a key driver to making better contextual interactions that increase customer loyalty & thereby their relationship value.

Behavioral analytics using credit bureau data is a strong driver to identifying the customer lifetime profitability. Lenders can periodically review their customer base with the credit bureau and overlay this with advanced analytics to increase the effectiveness of their customer outreach. This may or may not be combined with alternate data sets like Psychometric data, that introduce a supplementary aspect of the customer profile.

The unique advantage of adopting this practice is the absence of a need to educate the customer about one’s brand. The driving factors from outreach to conversion in this case is purely the product construct, time to fulfil post the offer and most importantly, the current experience of the customer with the brand.

In summary, the future seems to be moving towards a more digitally equipped economy. It is an opportune time for the lending community to revaluate how technology, data, and credit decisioning tools can accelerate their future growth and competitiveness. A dynamic shift can be witnessed in the requirement of real time decision making, digital KYCs and digital underwriting. After effects of COVID-19 might reinstate digital adoption even more than how much demonetization forced it to.

Source: Publication ETBFSI | 28th May 2020