The financial industry has remained relatively stagnant when it comes to the borrowing and lending of finances. Despite increased technologies and competition, as well as increased demand not just for secured loans such as mortgages but also for short term finance options such as an online payday loan, trends have remained more or less the same within the industry. However post-pandemic there has been a shift in consumer behaviour and with more privacy regulations hitting the industry, we’re likely to see some significant changes over the next few years. Here, we’re taking a look at the future of lending and our top five predictions for 2023.
Data Aggregation Techniques
While already a core part of modelling credit risk, lenders are going to need to aggregate more data from more sources in order to provide better lending options for their customers. Alongside credit history and behaviour, demographics and affordability, we may see a rise in lenders gaining access to other account information and POS transaction data. However, with the rise in GDPR and other privacy regulations and guidelines, lenders may need to strike up partnerships to acquire the data needed to make better lending decisions, helping to minimise risk.
The lending market is increasingly competitive, with new lenders entering the market regularly with new processes and technology. With more competition, some lenders have made key decisions to better streamline their operational processes by partnering with Fintech companies. This can help to speed up their application processes while also helping to reduce costs with further automation and machine learning. Ongoing collaboration and partnerships will be a future trend as the market becomes increasingly squeezed. Open banking is a key example of this, with 70% of lenders expected to use open banking by 2023.
A vast majority of lenders use some form of machine learning and automation throughout their processing and decision-making areas. Utilising advanced analytics and machine learning further to help build decision engines will ultimately allow lenders to capitalise on agility and speed in the ever-changing market. It is predicted by McKinsey that new-entrant lenders may be able to automate up to 95 percent of their underwriting process, while positively impacting the accuracy of their credit decisions by using more machine learning and AI. This can also help to better monitor customers and credit lines, while improving limit and pricing setting. This will help to provide lenders with greater flexibility and help to minimise lending risk further.
Customers in all industries are demanding more personalisation from the products and services that they are receiving from businesses, and this is also true within the finance industry. The online lending realm is facing stiff competition from challenger banks which offer a consumer-first approach. Accenture’s Global Financial Services Consumer Study stated that one in two consumers were interested in personalised financial advice. This further showcases the need for lenders to build truly personalised systems through their digital capacity to build stronger relationships and consumer trust.
We wouldn’t be talking about the future of lending without mentioning crypto lending, even if this is a highly controversial topic. Despite the increasingly volatile nature of crypto currency, the rise in popularity of this type of finance and NFTs alongside this may see a future in borrowers taking out cryptocurrency loans. This usually decentralised financial service could see more pick up with a wider audience in the coming years, although this form of lending remains high risk. In 2023, we would expect to see more chatter around this subject and while it may not become a core opportunity just yet, more groundwork is likely to be laid to make this more of an accepted form of lending and borrowing for the future.