Winning the Lending Race in the Post COVID-19 World

June 16, 2020

Michailas Traubas, Solution Architect @ETRONIKA

I started to write this article just before the COVID-19 pandemic hit Europe with its ferocious intensity. It forced everyone to go through a paradigm shift in terms of priorities including lenders, borrowers, solution providers, and me. Given the trying circumstances, writing a new article did not appear to be a logical reaction for a while. 

Today, however, I feel that getting back to my article and adding post-quarantine reflections is not only necessary but also critical to our success.

Pre-COVID Market Realities

Back in February, I shared my pertinent insights regarding the lending market demands and realities, which you can read here. Some of the common observations I made included the following:

• Different lending automation and digital transformation approaches may ultimately lead to a variety of long-term outcomes
• Multiple SME borrowers are underserved due to slow onboarding and origination processes;
• Product development focus appears to be more inclined towards regulatory compliance instead of better service delivery;
• There is an ever-increasing list of operational risks when a lender’s growth is driven by manual processes;
• Challenges of organisation-wide IT-driven transformation efforts.

Later on, it was a conference in Prague dedicated exclusively to the lending topic. SME lending community gathered to discuss the hottest lending topics and learn about new trends. The event focused on two major domains – Digital Lending and Agile Transformation. What were the challenges and opportunities in these domains?

Modern Landscape of Digital Lending

Digital lending is still a key economic and business driver in the lending industry, and the coverage of digital lending varies from basic consumer lending such as payday/cash loans to long-term undertakings like mortgage and SME lending operations. However, there are major differences in the offerings and lender capabilities region wise. For instance, digital lending has developed a successful legacy in the Nordics, where a vast amount of information is available, and lenders rely on modern technology to deliver seamless customer experience through swift decision-making and loan disbursement in minutes.

The COVID-19 situation combined with the extent of state-supported loans means the significance of digital in SME lending is growing, and the availability of accurate data and the ability to set up and disburse new loan products quickly has become even more significant.

One of the promising developments for digital lending is Open Banking. Nordic countries including Baltics have set the pace here as well with open banking being truly open and transparent. They allow access to data via account aggregation services in the same manner as you do through your regular online banking. I think that EBA’s opinion on the implementation of Open Banking APIs published last week will have a positive impact in all 31 countries that comply with PSD2 regulation and will help in breaking through the corporate protective bastions of incumbent players.

Significance of Agile Transformation in Lending

The agile transformation was another huge focus of LendingUp. It should be kept in mind that when we talk about ‘Agile’, it is not one dimensional and vastly different and diverse ideas and approaches fall into the category.

As an individual with extensive software development experience, my mind automatically thinks about agile software development every time someone brings up the word ‘agile’. This particular approach is frequently pursued by technology-driven lending organisations to provide required assistance in speeding up the development process and build highly product-focused teams.

The second approach is undertaking the agile transformation of the whole organisation. This is where the Agile Manifesto is applied throughout including building tribes, running scrums, and sometimes even changing office space layout to create an environment that facilitates agile teams. The outcomes can be impactful, especially considering the much faster product development and update, but I did miss the alignment between the organisation and its technological capabilities (the way you develop software to run new products).

COVID-19 Reality Check

For better or worse, COVID-19 has turned into an effective source of new opportunities, challenges and trends in the lending space. From mandatory shift to remote channels to a multitude of new lending products based on liquidity support, impact relief and other programs – the significance of digital lending has jumped almost overnight. The new lending landscape requires new abilities:

• Fully digital processes, including but not limited to submitting loan applications, running required KYC checks and ensuring effective remote decision making;
• Faster decision making at all the stages of loan origination;
• The agility of product development and services organisations, which helps in creating new products and adjusting internal processes rapidly;
• Rapid modifications in business rules based on evolving business and regulatory requirements.

All these new capabilities require effective support by effective purpose-built tools. What options are available here?

Dedicated software development approach. In the wake of requiring new remote processes and faster decision-making, some organisations have opted for dedicated software development approach, which has helped them in achieving their primary outcomes quickly, however bespoke development has also hindered their agility and ability for cost-efficient future development. This is not surprising since rushed bespoke development frequently results in the solutions which are expensive to maintain and even more expensive to change and further adapt. Therefore, bespoke development does not appear to be a viable option in the long run.

Dedicated loan lifecycle management systems. Dedicated loan lifecycle management systems help in overcoming some of the limitations of the pure bespoke approach. Typically, they are flexible enough to rapidly change the scoring and decision rules and provide support for varied decision-making flows. However, they are often limited when you need to change the way you interact with the customer or when you need a major change in your loan origination process e.g., disburse first and assess later or change the customer interaction flow.

Process management solution. A process management solution, tailored to meet the challenges of digital lending and assuring the agility of the organisation can be the right choice. However, we need to identify the characteristics it might need to be included:

• Omnichannel – integrating different channels and access points into a lending flow;
• Universal – capable of supporting a wide range of products and different customer types;
• Supporting agile business by means of low-coding and rapid prototyping;
• Ability to support rapid changes in decision making, scoring and data access;
• Delivering great experiences to your internal users as much as to your customers.

My Final Word

The COVID-19 crisis has changed the lending landscape much more than we could have expected just 3 months ago. Today, the banks and many public agencies have a crucial role to provide effective financing support to SMEs and freelancers. To address the challenges quickly and adequately three success factors should be considered:

• Organisational agility and the ability to transform business decisions into solutions rapidly. It does not matter if you are official followers of an Agile Manifesto or not, it matters how you behave;
• Ability to support SMEs digitally with the same effectiveness of retail lending practices – remotely, fast, efficient. 24 hours between application submission to disbursal should be the target, not a lucky exception;
• Adequate purpose-built tools, which unlock your abilities and allow to create new financing products within matters of days and not months and years.

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