Lending has been a fundamental mean of money circulation in the economy. Over the years, we have seen a remarkable shift in how lending is undertaken. The shift from physical to phygital to digital has been massive and we are still evolving!

In the past, lending was an independent process that had rigid prerequisites. Owing to technology, the approach has transformed and at present, financial institutions are devising ways to disburse loans within minutes.

What created value in the past?

The past two decades of value creation in the lending business has been through a focussed execution of time tested formula of raising Current Account Savings Account (CASA). Traditional banks focused on individuals with the capacity to deposit money with them thereby creating value. This deposited money is then circulated in the market as ‘loans’.

In the individual lending area, customers plan their purchase and then hunt for the right lender to borrow yet, retail lending, through the cycles, has been the biggest value driver for banks in the lending business. However, this approach is set to change in the next decade or even earlier. For instance, Buy Now Pay Later (BNPL) is changing how customers function. Financial institutions are offering immediate credit to individuals transforming the entire ‘plan your purchase’ notion. 

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Why is it going to change?

  1. Customer engagement- Customers view banking tasks as a standalone activity and use banking facilities for specific tasks. Not all banking activities are embedded in the transaction flow and this is likely to change in the coming future. 
  2. Customer experience- Banks have largely replicated branch processes into digital workflow with no real change in the first design principles of banking service delivery. With upstarts emphasizing on customer journey, customer experience will be heavily emphasized upon.
  3. Data- Banks possess legacy transaction and customer data making them work on stale financials. This approach is likely to transform with a change in workflow owing to technology, innovation and customer demand.
  4. Asset Quality- With better positioned platforms to judge capability, banks have the intent to innovate and will eventually indulge in the following to transform-
  1. Banks do not have dynamic propriety transaction data and democratisation of access to static data with account aggregators and OCEN can help banks maintain asset quality.
  2. Platforms that are used by customers are not only to offer better CX but will also be in a better position to judge capability with bank’s own transaction data.
  3. Platforms will be able to feed the credit to drive purchases and transaction on their own program.

What will be the impact of emergence of new business models?

  1. With emergence of fully integrated financial services model of manufacturing (banks), digital platform and customer acquisition will be unsustainable with rising CACs and no differentiated value proposition from banks.
  2. Business models will segregate and specialize into manufacturing (banks), platform infrastructure and customer front ends. For instance, Zomato, Udaan, Amazon etc. have already integrated and offer an end to end platform.
  3. The opportunities associated specifically with business models are-
  1. While platforms and customer front ends are quickly moving to adopt lending as a feature, regulatory guidelines and the obsession with leading current manufacturers (banks) is leading to almost no players constructing this.
  2. Platform (API) Infrastructure players enabling any/all companies to offer financial services products

The likely outcome – Lending to become a product ‘feature’

  1. With infrastructure development, customer ownership and engagement is shifting to platforms. 
  2. Retail Lending will be embedded in the transaction flow.
  3. Every tech platform with customers/sellers will offer lending as a ‘feature’.
  4. Reasonably priced embedded credit at the time of transaction to be part of customer experience and product proposition.

Conclusion

Infrastructure plays a very critical role in the given scenarios and their achievement. Embedding ‘lending as a feature’ on all platforms will require a robust and secure infrastructure and platform wherein customers have a seamless CX.