Digital Lending
The practice of lending money, property, assets, etc., has been popular among us for many years. The evolution of lending has also been flowing alongside financial revolutions, like the one taking over today- digitization.
Digitization of financial elements has proven advantageous for the global economy. With advanced technologies like artificial intelligence, machine learning, and cloud computing taking over the center stage, the digitalized financial domain is gradually becoming omnipotent in its way.
The digitalization of the numerous branches of the financial system has caused immense disruption in this world and its economy. Lending is one such tangent, which is undergoing a mandatory but relevant makeover with digitalization.
What is Digital Lending?
Any lending, through online websites and mobile applications, from one entity to another for investment or financial falls into the category of digital lending. The processes involved in digital lending are remarkably simpler than traditional methods, without compromising on credit and data evaluation, security, and authenticity. Banks and financial institutions too have started pivoting around digital banking to improve customer experience and process efficiency.
Advantages of Digital Lending
Digital lending is rapidly getting absorbed into the traditional banking system because of its numerous benefits. The prime advantages of digital lending are:
Customer Experience
The biggest benefactor of customer satisfaction and improved customer experience is digitalization. Digital lending has immensely contributed to enhanced customer experiences because of several qualities that stem from digitalization, like efficiency, quickness, versatility, etc. In the present day and age, customer experience holds the highest value, making it one of the most important KPIs (Key Performance Index) in any business.
More Efficiency
Digitization provides the gateway to faster and simpler processes, making the overall system more efficient than earlier. In digital lending, the processes involved in turning over a successful transaction become quicker by engaging lesser paperwork, a better credit evaluation system, customized plans, etc. Such augmentations bring better efficiency compared to traditional methods.
Cost Saving
The concept of digitalization has found extraordinary success because of two factors, process efficiency, and cost saving. In digital lending, because of less paperwork and documentation, and simpler streamlined processes, the cost of turnover is much lesser than in traditional methods. The costs involved in the process also include the time spent on successful turnovers.
Types of Digital Lending and Digital Lending Applications
Like traditional methods, digital lending also has many types. The digitization of the lending process has enabled better accessibility and practicality by letting different entities connect with the lending parties, which, again, could be other types of entities, like individuals, businesses, banks, and financial institutions. Some of the different methods of digital lending and its various applications are:
Loan Comparison
Many digital lending applications provide comparison services to users, where users can compare loans from different entities, their interest rates, and other deciding factors before making their final choice. Such services give more power and control to the users by enhancing the efficiency of the process and improving customer satisfaction. These digital lending platforms use algorithms that analyze and match lenders and borrowers according to their offerings and requirements.
P2P Lending
Peer-to-peer lending, commonly referred to as P2P, is a lending method that allows borrowers and lenders to connect without the involvement of banks and financial institutions. Digital lending platforms that completely cut out the involvement of banks in the process of borrowing and lending make up P2P. Such methods are also known as crowd lending. In this, borrowers and lenders create an account on the P2P platforms or applications, updating all their details. The application then connects prospective lenders with borrowers by analyzing their requirements. P2P has gained immense popularity in the past few years because of its practicality.
Supply Chain Lending
Under this method, Non-banking Financial Institutions fund merchants and businesses by providing credit for the products they sell to their buyers, in which the buyer can make the payment at a later date, thus allowing both buyers and suppliers financial cushioning. Supply Chain lending works similar to BNPL (Buy Now, Pay Later), where a third party gives instant credit to the buyer to execute the transaction and allows them to pay later. In BNPL too, the third party makes the payment to the seller instantly on the buyer’s behalf.
The differences between Supply Chain Lending and BNPL are that Supply Chain is for businesses and merchants involving bigger amounts, while BNPL is for individuals and smaller sums. Another key difference is that Supply Chain reads into the credit worthiness of the buyer, whereas, in most BNPL services, the credit score is not taken into account.
Line of Credit
In digital lending, the line of credit conceptualizes credit cards to offer similar services. Under this method, the user creates an account with their bank, which comes with a preset limit, and the user can avail of the allowed credit as and when they need it.
SME Lending
SME lending entails bank loans and credits for small and medium enterprises. These are digitized versions of the traditional bank loans for SMEs.
Crypto Lending
The finest augmentations of the financial domain are cryptocurrencies and blockchain technologies. Crypto lending allows crypto owners to lend their cryptocurrencies to borrowers for various purposes, to earn interest on the borrowed currency amount. The ideology behind crypto lending is similar to traditional loans, except for the currency and the platform.
The Future of Digital Lending
Digital lending has emerged as an essential counterpart of traditional lending methods, where the accessibility, versatility, and practicality are increased considerably. There are diverse options available for users to choose from in the spectrum of digital lending. From companies, both big and small, to individuals and SMEs, everyone can benefit from digital lending, with comprises more than just the digitalization of lending services.
The future of digital lending suggests vast possibilities for improved lending solutions. One of the critical areas for growth in digital lending is the unbanked and underbanked sectors. Although these sectors have already gained enormous focus from fintech owing to the endless opportunities, digital lending, particularly, can step up to accommodate unbanked and underbanked entities under its umbrella, which, otherwise, would lose out on efficient financial services.
