August - 20198IN MY OPINIONThe initial phase of digital lending was characterized by entry of new fintech companies promising a disruption of traditional lending markets through fundamental innovation in customer experience, processing speed and risk management. Since then, banks and traditional lenders globally have recognized the need to evolve. As they migrate, what lessons can be distilled about digital lending?We have identified five bedrock principles essential for banks and other financial services companies to drive excellence in customer experience and create sustainable profitable growth. Importantly, these principles are relevant for all types of credit ­ consumer, small business, commercial, real estate lending and a variety of credit products such as term loans, lines of credit, merchant financing, etc. The key principles for digital lending are:1. Recognize that data and decision analytics are core to successIt is impressive to see the rapidity with which the expression "data is the new oil" has gained currency. There is good reason. An unprecedented amount of digital data is being gathered from an ever-expanding set of sources, including smart phones, browsers, apps, electronic files, digital cameras, accounting software, call centers, social media and satellites. Data from wearables, drones, autonomous vehicles, home voice assistants and other internet-enabled devices are not far behind.Indeed, a senior bank executive of a midsized bank mused recently, "We need to be better prepared to deal with the next 10 years of data."Digital lending can take advantage of the torrent of new types of data that have become available and the new analytic techniques from machine learning and AI required to avail of them.First, and especially important, is to use the data responsibly ensuring that there is customer consent, both implied and written. Then, there is need for a platform that can effectively ingest data from multiple sources and flexible enough to incorporate new sources. Lastly, functional expertise is critical to ensure that technology and human intuition are effectively leveraged.There are several challenges confronted by traditional lending organizations in these respects which need to be overcome. Too much data itself can be a burden (e.g. a data landfill)... the value is derived from intelligent use which requires investment in talent and technology.2. Maximize customer experience and risk control simultaneously rather than making trade-offsTraditional lenders have historically navigated a tricky divide: they can offer either customer convenience, especially in terms of instant decisioning or exercise prudent credit and fraud risk management but have not been able to do both simultaneously.This trade-off was made painfully apparent during the subprime housing crisis of 2008 and its aftermath. By simply putting their signature on a piece of paper, customers could arrange for a home loan without verification of income, employment and assets. This unrivaled level of convenience afforded to customers almost brought down the entire global financial system!Since then, banks have undertaken a far more disciplined and careful examination of borrower creditworthiness. Except in the simplest cases, such an examination is often distressingly manual, time-consuming and expensive. It is also increasingly at odds with consumer expectation in the new digital economy, where they can shop for products, summon a cab, order food or arrange accommodation in a new city entirely through mobile phones and tablets.By adopting mobile and digital approaches, banks have begun to resolve this fundamental trade-off. Customers can be on-boarded through an online loan application, either remotely or in a branch. The questions asked are relevant to the loan and the whole experience is paperless. The customer can give their electronic consent to KYC, income and asset verifications, and these can be conducted automatically through third-party APIs.Other relevant information possessed by the customer can be digitized, analyzed, cross-referenced and assessed for By Venkatesh Bala, Chief Risk Officer, Biz2CreditBedrock Principles for Success in Digital LendingVenkatesh Bala
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