The digital lending industry has transformed the landscape of borrowing and lending money. Today, traditional banks are not the only option for financing. Digital lending solutions have evolved as potent catalysts for economic growth and financial inclusion, predominantly in emerging markets. Experts predict that the digital lending sector will reach a massive USD 1.3 trillion by 2030
Using data analytics, mobile connectivity, and digitalisation, these innovative solutions transform the way people in need are given loans. Moreover, through the digital lending solution for the unbanked, the gap between the formal financial system and the underserved population has considerably reduced. This has benefited a large number of people as well as small businesses.
What is Digital Lending Solution?
Digital lending means offering loans/credit facilities using digital technologies and innovative online platforms and evaluating borrowers’ creditworthiness of the borrowers using data analytics. With any internet-capable device, and irrespective of location, the digital lending solution enables borrowers to apply for loans – be it consumer loans or commercial loans.
Financial institutions or banks can enhance their efficacy and loan income/revenues through digital lending while delivering quicker services at the point of sale (POS). Since all documents and transactions take place online, digital lending removes the need for physical paperwork. This has led to convenience and a lesser likelihood of fraud and errors.
Moreover, digital lending platforms offer personalised loan products and interest rates based on borrowers’ needs and credit profiles. This has resulted in more attractive loan offers and an improved borrowing experience.
Role of Digital Lending Solutions in Emerging Markets
Fuelled by favourable socioeconomic factors, digital lending has risen exponentially in recent years. Speeder credit approval and addressing prevailing credit-related challenges have given digital lending significant advantages and an edge over traditional lending in emerging markets.
Moreover, the application of innovative technologies, and the digitalisation initiatives by governments of various nations, have given a fillip for enhanced digital financial infrastructure. These factors have driven the lending revolution in emerging markets.
The role played by digital lending is as follows:
1. Financial Inclusion
World Bank’s Global Findex database showed that, globally, approximately 1.4 billion adults are unbanked. Most of the unbanked live in emerging markets, lacking access to crucial financial services owing to limited traditional banking infrastructure and obstacles to financial inclusion.
However, the rapid progress of digital lending alleviated the disparity and challenges related to financial inclusion. Digital lending platforms evaluate borrowers’ creditworthiness using cutting-edge technologies such as machine learning (ML), big data analytics (alternative data sources (borrowers’ payment histories/social media behaviour/mobile phone usage)) and artificial intelligence (AI), going beyond the limitations of traditional credit rating techniques.
Hence, this has enabled people with no formal credit histories to build a credit profile and avail of loans customised to their specific needs. Moreover, easier access to credit facilities empowers the underserved population to partake in different economic activities and have better financial futures.
2. Faster and Efficient Credit Access
The efficacy of digital lending solutions is unmatched. The digital lending solution platform allows borrowers to apply for loans online and submit all documents online. This speeds up the approval process, in most cases, the approvals being granted within a few hours.
This is unlike the traditional lending process, which encompasses cumbersome paperwork, and borrowers needing to submit various documents in person. Hence, this leads to delays and prolonged waiting periods.
In the majority of emerging nations/markets, small- and medium-sized businesses are key drivers of economic progress. Timely and speedier financing enables these businesses to expand their operations and create employment opportunities, thus contributing to the nation’s economic growth.
3. Financial Innovation
The digital lending environment acts as a hub for financial innovations. The digital lending solution platforms partner with various fintech and financial service providers to offer an assortment of products such as insurance, investment opportunities, and digital wallets.
This combination of services and products builds a holistic financial ecosystem, catering to diverse groups and needs, further improving financial inclusion. Digital wallets help users (who do not have a proper bank account) in storing, transferring, and managing money effectively. Hence, such individuals benefit from better financial management options.
In addition, the wide range of products available on digital lending platforms encourages individuals to use digital mediums for all financial transactions. Increased digital adoption accelerates the digital transformation pace in the lending/finance sector in emerging markets resulting in cost-effectiveness and great efficacy.
4. Scalability and Reach
Conventional lending institutions generally face many obstacles in terms of geographical reach in emerging markets. Being online, the digital lending solution can be accessible using mobile phones, hence scaling quickly and reaching rural/remote areas. This enables to extend financial/lending services to the underserved and unbanked population.
As previously mentioned, digital lending solution platforms are pioneers of innovations, especially credit-scoring innovation. These platforms constantly enhance their algorithms with the incorporation of new machine-learning methods and data sources. Hence credit evaluations of prospective borrowers (especially the unbanked/underserved) are more accurate and inclusive.
Furthermore, in emerging markets, informal sector economic activities can be formalised through digital lending solutions. Most of the businesses in the informal sector struggle to get credit facilities.
However, digital lending platforms offer loan facilities to businesses in the informal sector. To evaluate the borrowers’ creditworthiness effectively, these platforms adopt sophisticated risk assessment methods, thus reducing the probable risks related to informal sector lending.
Providing loans to the informal sector enables formalisation (requiring borrowers to register their businesses, maintain proper financial records, comply with regulatory requirements, etc.) and foster transparency. This leads to the growth of the informal sector, thereby contributing to economic development, employment opportunities, and inclusion.
Digital lending solutions have reshaped emerging markets through the promotion of financial inclusion, aiding small- and medium-sized businesses, and empowering individuals. The digital lending solution platforms provide cost-effective and speedy financing by effectively using advanced technologies and data analytics.
Nevertheless, care must be taken to ensure issues such as data privacy and regulatory compliance are addressed. Partnering with banking institutions, regulators, and fintech firms will ensure inclusive and ethical practices. This will help to make full use of digital lending potentials, augmenting the development and progress of emerging markets.
Finezza is an all-in-one Lending Lifecycle Management Platform and Credit Evaluation Services platform that simplifies lending management and enables efficient loan handling and credit assessment. It automates loan origination, underwriting, and servicing, offering advanced credit evaluation tools.
With Finezza, financial institutions experience faster loan approvals, improved risk management, and enhanced customer satisfaction. This comprehensive platform streamlines the lending process, empowering financial institutions to optimise operations and provide efficient lending services.
Sign up to learn more!