The size of a nation’s lending portfolio is closely linked to its economic growth and development. Take South East Asia as an example where the countries that have high GDP growth also have high loan-to-GDP ratios. All these countries have a robust lending market supplying affordable, hassle-free financing to corporate, SME and retail borrowers, creating consumption-driven growth momentum.
But this was not always the case. China in 1975, Thailand in the 1980s and Malaysia in the 1990s were all struggling to grow their GDP. But then they went through a retail boom, when per capita income crossed a threshold US$ 1000 to stoke the aspirations of the people for a better lifestyle, better housing, better transportation etc., which created a demand for retail financing. Today, the world is in a different yet similar situation, with the pandemic denting economic health globally. One way to reclaim growth is to fuel consumption, and one way of fueling consumption is by boosting retail lending.
Currently, there is ample scope to increase the loan-to-GDP ratio in many parts of the world. This is especially the case in developing countries, which need to bring their substantial underbanked population within the ambit of formal banking. However, that would stress the infrastructure of their banking technology landscape beyond tolerable levels. The only solution is to transform the retail lending landscape, across the formal banking industry as well as the informal, unorganized sector. This includes lending processes and banking workflows, as well as the associated technology infrastructure.
The other important thing to consider are the broad trends that are sweeping retail lending across the globe. We can categorize these as changes in the nature of loans, of borrowers, and of lenders.
A loan that is no longer that
The biggest trend here is that the loan has become incidental, almost invisible, in the consumption journey. Customers don’t want loans per se; they are only a means to fulfil a primary expressed need, for a car, for a college education, for a home and so forth. Therefore, banks’ conversations with customers should be about helping them achieve their primary desires rather than pushing a lending product. The product-centric approach to lending is now outdated, and has been replaced by a customer-centric or even customer-specific mindset of helping customers fulfil their unique desires while offering the best financing option in their particular context.
A customer who is demanding but debt-friendly
Today’s retail borrower is very different from the one of even a few years ago. There is no patience for spending hours in a branch gathering information and filling out forms. As a product of the digital age, this borrower expects financing to be delivered to him or her, on a digital device of choice. A key expectation is that the loan application and onboarding process will be digital. Another is that the terms of lending will be a balance of borrowers’ rights as well as their obligations.
Many trends have gone into shaping this customer. Ample choice is one of them. For instance, a customer buying a car can get an attractive loan from a non-bank financing company or from the financing arm of the automobile manufacturer itself. The customer embarks on a redefined journey where a bank has no role to play. Another influencing factor is demography: more than 70 percent of the global population is below the age of 30 and almost everyone is digitally connected. Far from being debt-averse like generations past, these young customers demand deferred payment options such as credit card payments, monthly installments and the popular “buy now pay later” facility from Amazon.
A lender who has raised the bar
Some years ago, “lender” usually meant a commercial bank. Today, the definition includes a plethora of providers, from Fintech companies to retail businesses to even social networks, offering financing in different forms and flavors. Amazon is a standout example, with a loan portfolio in excess of US$ 10 billion spread across its gigantic merchant base. Amazon’s lending process is not just completely digital, it takes all of 3 clicks to boot! What’s more, the company offers attractive rates, with full transparency and no hidden costs.
Traditional banks are at serious risk of being left out of the new lending paradigm. To stay relevant, they need to reimagine their customer journeys to match the benchmarks being set by the likes of Amazon. At a minimum that would mean designing a lending process that is digital from end-to-end, where origination, eligibility checks, approval and servicing can be completed within a few clicks. Secondly, banks should rely less on agents and brokers to sell their loans, replacing them with a digital alternative, such as a mobile app. The pandemic has anyway forced their hand by disrupting the physical agent network; banks should now take that as an opportunity to create a seamless digital selling experience, right from gathering customer information to generating leads to converting leads to loan sales.
One more trend that is changing the face of banking – and consequently impacting lending – is the platform business model. The platform is front and center in digital loan processing. It is also enabling lenders to participate in the primary journeys of customers by creating online marketplaces for non-banking products and services. DBS Bank, with its highly successful platforms for used cars, travel, real estate and utilities, is a great example. The bank makes no mention of its banking products in these marketplaces; however, once a customer has fulfilled a primary need, for a new utility connection, for example, the platform offers an option to use a DBS Bank account to set up a standing payment instruction.
A word on the pandemic
By accelerating digitization in every sphere, including lending, the pandemic opened the doors to simpler, transparent, cost-effective loans. In the latest EFMA Infosys Finacle Innovation in Retail Banking Study, financial institutions cited that the highest levels of innovation success were seen in the lending1. But could it also set off another trend, one where banks participate in improving the health of their customer communities? Just like insurance companies, which tap digital information about customers’ driving habits or lifestyle, to determine premium, could banks link the terms of lending to customers’ vaccination status by accessing their digital records subject to consent? It remains to be seen.