Consumer lending: the new value proposition
Consumer lending is a type of credit granted traditionally by financial institutions to individual borrowers to purchase consumer goods or services. These financial institutions can be banks, specialized credit institutions, or more recently, Fintech companies. Considering that the economic model of the main great powers is based on consumer spending, the amount of outstanding loans is a strong indicator of the health of economy.
These past few years, the credit market has deeply evolved, empowered by the digitalized channel and the evolution of uses.
The new face of the credit market …
The credit marketplace has been growing since 2012, after years of low demand. The value of outstanding credit granted in the 28 countries of the European Union (before Brexit) reached 1 124 billion euros in 2015, registering an increase of 3% compared to 2014. This growth can be explained by two main parameters:
- The strategy and the positioning of the financial institutions distributing credit have evolved. Indeed, they have been considered for a long time to be fostering the over-indebtedness of consumers through products such as the revolving credit that has become a symbol of the generalized distrust in the financial system. After the financial crisis, banks pulled back on other ways to distribute consumer credits to the mass-market and the emerging middle-class customers: they developed a strategy much more focused on the customer and its funding project, rather than on the volume of business transactions. Consequently, their social image has been positively improved as they are perceived now as the perfect business partner in the customer’s mind. The consumer is now more encouraged to take a loan because it is considered as a personalized service and an investment leverage. In this context and as mentioned earlier, this remarkable turnaround has led, at least in Europe, to the significant increase of the value of outstanding credits.
- New financial actors have emerged in the marketplace. In fact, until 2008 financial crisis, banks and specialized credit institutions were monopolizing the market, but since then, a new kind of financial institutions entered the game: the Fintech lenders. Fintech companies are startups or already established companies that use technology to make financial services more efficient. Different segments of the financial market are concerned: wealth management, means of payment, factoring … and the consumer credit is not spared! This model is disrupting traditional consumer loans granted by banks or specialized credit institutions. Indeed, most of the Fintech lenders are building their business model on a peer-to-peer lending basis (Lending Club, Younited Credit, etc.) meaning that instead of borrowing from a single institution, individuals can directly borrow money from other individuals. On one hand, the interests paid by the borrowers are directly remunerating the investment of lenders. On the other hand, the lenders are literally financing the real economy. These new actors are therefore a real new alternative for individuals that need a consumer loan.
… Empowered by the digitalized channel
Today, the evolution of the credit market is in fact empowered by digital technologies. Financial institutions are aware that the digitalization of their distribution processes will help them to develop successful lending transactions with individual borrowers.
The use of digital technologies is however not new for a number of banks that have already digitalized many of their processes. Digital credit products are indeed growing rapidly in several leading financial institutions. Indeed, as consumer borrowing behavior is increasingly shaped by digital technologies, banks and specialized credit institutions have to evolve to adapt to the new emerging needs.
The benefits of the digital technologies in the distribution of the consumer credit can be perceived from both the borrower’s perspective and the financial institutions’ perspective.
First of all, borrowers are expecting fast delivery of the credit. The digitalization of the subscription process enhances the possibility for customers to get liquidity in a simple, nearly-instant manner. In fact, numerical recognition of documents, dematerialization of contracts and electronic signatures save a valuable time for all the parties and enhance the hybridization of the customer journey and the real-time interaction between all the channels. Besides the gain brought to borrowers, financial institutions can make cost savings of up to 50% by automating their credit processes and digitalizing their key steps.
Borrowers are also expecting a personalized customer experience. Among other vectors, Big Data enhances the client knowledge that let financial institutions develop this personalization. Indeed, Big Data involves the collection, management and analysis of structured and unstructured data that will help to better know the customer. These data are then used for instance to better identify products that match with the customers’ needs. Many types of data-driven algorithms are used by financial companies to create custom-made products for specific borrowers. Besides that, financial institutions use different sources to draw customers’ data in order to further specify the profiles of their clients. Social media are for example for some Fintech companies a crucial source to extract data on current and potential borrowers.
Last but not least, the digital channel also gives a wiser approach to risk measurement for financial institutions. In fact, the credit scoring methods have been considerably improved these last few years and banks are now able to make predictions about their borrowers’ behavior. In fact, all the data recorded from the digital channels help to refine the assessment of customers’ ability to repay their credit. It strengthens the prevention of financial fragility situations with better solvency calculations, and provides greater transparency to risk profiles. In addition to that, fraud detection solutions have also been developed to secure credit delivery.
Nowadays, the challenge for financial institutions is to fully take advantage of the current positive lending environment. In fact, the digitalization of credit distribution is an opportunity to attract more clients, minimize risk and deliver fast and more personalized services to improve customer experience.