Three Big Trends in Digital Lending

By Tina Orem

Fintech firms aren’t the only ones fueling the revolution in digital lending—banks are doing it too. But reinventing borrowing in the tech era can still feel like a Wild West kind of endeavor. So, which way is up? Industry pros point to three big trends in digital lending and share their thoughts on how to get in on the action.

Trend: Fragmentation

Digital lending isn’t an across-the-board pursuit for many banks; today it’s a strategy surgically applied to specific lending areas, says ABA VP Rob Morgan.

How to get in on it: Focus on digitizing one or two lending areas; don’t try to do everything at once. Uncollateralized lending, for example, has been simpler to digitize because credit report data is easily available and valuing physical collateral is still hard to do digitally, Morgan says. That’s why small business loans and personal loans are popular entry points for banks. For example, ABA has endorsed the small business loan origination platform offered by Akouba and a consumer origination platform offered by LendKey Technologies.

But listen to your customers, he warns. “If your customer base is one that’s looking for a certain type of loan, that should really be the asset class you’re looking at first when you’re thinking about digitization,” he says.

Trend: Partnership instead of resistance

Many fintech lenders started out as “anti-banks” but later pivoted and now collaborate with banks. The result is a potent combination of customers, capital and cutting-edge technology, says ABA SVP Helen Sullivan.

How to get in on it: Generally, there are two ways to get into digital lending: buy the technology and talent yourself, or partner with a company that already has those things. Partnering can get banks in front of clients they wouldn’t otherwise connect with, and it can general referral fees, Sullivan explains. Of course, due diligence on software and underwriting is crucial.

Think ahead before you sign on the dotted line, adds ABA SVP Debbie Whiteside. “The best place to start is to determine, from a business perspective, which products you want to offer digitally,” she says. “Are you focused on building or augmenting your small business, consumer or student loan programs? And once your business goals are clear, choose a provider to partner with.”

Trend: Digitizing the humans

Banks can handle on average only 7 percent of products digitally from end to end, and customers submit only 14 percent of applications digitally, according to a recent report by Bain & Company and SAP Value Management Center. That could give banks with tech-savvy loan officers a chance to pull ahead of competitors quickly.

“Any bank’s customers are going to expect the same level of service they get from Amazon or other digital services,” Morgan warns. “So, customer expectations are quickly shifting and being driven by nonfinancial activities. There’s a need to keep up.”

How to get in on it: Figure out how to digitize face-to-face lending processes. Loan officers using tablets to take applications will soon be the norm, Whiteside explains. That can boost productivity as well as the bottom line because the same loan officers can serve more customers.

But avoid confusing digital lending with fully automated lending—people still need people, Sullivan warns. “When ATMs were first introduced, they thought that tellers were going to go away—and they have not.”

Tina Orem is a regular contributor to the ABA Banking Journal.