The global lending market witnessed revolutionary changes in 2016, with fintech playing a significant role in restructuring the lending system to be more dynamic and responsive, vis-à-vis the traditional framework of existing banking systems. Per the recent ‘Market and Research’ report, the global P2P lending market is to grow at a CAGR of 53.06% during the period 2016-2020.
Goldman Sachs estimates that when the marketplace lending industry comes of age, it could reduce profits at America’s banks by $11bn, or 7%. Amid the growing competition, technological interception and regulatory reforms, it becomes pertinent that banks address the upcoming challenges and leverage the opportunities ahead.
2016 saw an influx of advanced technologies and new players in the lending space. 2017 will further observe an accelerated impact of these technologies and their seamless integration in the existing framework of lending.
Omni-channel banking was the buzzword for 2016. 2017 will move on to the next level of banking: opti-channel banking. Opti-channel banking strives for optimum utilisation of channels and resources per the requirements of the customer. The opti-channel approach is precise and cost-effective, because it matches the requirements with the appropriate channel and assists in cost control. Per a report from The Financial Brand, only 64% of banks believe that a digital-only communications strategy makes sense, instead opting for a hybrid model of physical and virtual meeting points.
Technology saw a spiralled growth in the current decade, and has significantly impacted all industries. New-age technologies such as BoT (Bank of Things) are already reinventing the way customers and banks interact. For instance, vehicles, properties and other types of loans can be marked on the GPS-enabled IoT maps.
Cloud computing has already made its mark in the lending sector. With the fintech revolution, non-financial players are capturing the interest of the millennial population by offering ease and speed in transactions and processes. Per the Finextra research survey, 83% of respondents suggested their bank’s existing core technology couldn’t support its needs. Cloud computing offers greater scalability and flexibility, and is more agile and cost effective. Banks have already realised the potential of cloud computing and are working towards its implementation. The Finextra research survey also reported that four out of five banks believe they will have to replace their core banking system in the next three to five years, with nearly 90% in favour of including SaaS or cloud-based services as part of the infrastructure.
Three significant pillars
Amid the wake of regulatory inconsistencies, regtech, the use of technology to aid regulatory and compliance management, is pertinent and can assist banks in managing fraud and risks in lending. With its three significant pillars – borrower experience, data science and automation – regtech can ensure effective risk and compliance management in the lending process. At each stage, regtech conforms to the regulatory requirement by initiating KYC and AML checks at the stage of application, using data science and modelling scenario analysis for credit scoring, and apprising and inspecting the regulatory reforms and compliance conformities at the time of acceptance.
Big data is also a significant tool that can transform the decision-making process for banks, and restructure their lending function. Big data can help lenders broaden their scope to measure credit scoring by moving beyond the FICO scores, instead aggregating data from numerous sources such as bank transactions, behavioural patterns, social scoring and mobile apps. This multidimensional analysis makes the credit scoring more precise and accurate.
With the influx of big data and data mining, machine learning, though not a novel concept, is now being aggressively implemented in various industries, from financial services, healthcare, retail to transportation and multiple domains like accounting, audit, marketing and sales. Per a McKinsey Quarterly report, June 2015, in Europe, more than a dozen banks have replaced older statistical-modelling approaches with machine-learning techniques. By doing this, some of them have experienced a 10% increase in sales of new products, 20% saving in capital expenditures, 20% increase in cash collections, and 20% decline in churn. 2017 will further see seamless integration of machine learning with current lending platforms.
Another breakthrough technology disrupting the lending space is blockchain. With the inherent concept of open ledger, decentralised platform, smart contracts and integrated central database, blockchain achieves transparency, cost effectiveness, regulatory compliance and risk analysis in the lending process. The technology has already garnered a positive reception in the banking sector and is being hailed as “the Uber of banking”.
In the US, JP Morgan has moved on from testing and has decided to speed up its plan to leverage blockchain, enabling quick and easy loan transfers. Leaders such as R3, the Hyperledger Project, Post Trade Distributed Ledger (PTDL) and Digital Asset Holding are already carrying out pilot tests for blockchain prototypes.
The year 2017 will see banks onboarding the latest technologies and restructuring their framework to expedite and optimise their lending processes to meet borrowers’ expectations. This would include a partnership with fintechs or tech giants to equip their lending services with technology, data science and automation.
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