The exponential rise of digital financing has brought forth new risks and threats for banks and financial institutions, but it has also led to the emergence of new trends and pockets of opportunities, according to one expert.
To understand the changing lending landscape within the digital context, one must weigh two significant factors, according to Guru Raghavendran, the senior vice-president of banking practice at Azentio Software: the significant unbanked population and rising consumer expectations of the banked population.
“Close to 1.5 billion adults (globally) are still unbanked … close to four billion don’t have access to credit. These are on the retail side,” said Guru. “On the SME side — the global trade finance gap increased to US$2.5 trillion in 2022 compared to US$1.7 trillion in 2020. While SMEs contribute 40% to the economy, on the other hand, 40% of trade finance applications by SMEs get rejected. This is where digital lending comes into the picture.”
According to Guru, these unbanked and underserved segments call for more accurate underwriting, enhanced access to data, cheaper borrowing while delivering higher returns for savers and maintaining consumer-friendly and time-efficient services.
“These are the key characteristics required for future lending models based on the alternate data that are coming in,” said Guru.
Within the banked population, on the other hand, consumers are seeking a full virtual experience. As a result, we see the digital lending sector gravitating from cloud-based services and application programming interfaces (APIs) toward open interfaces, aggregators, plug and play and artificial intelligence. In other words, the sector is moving to an open banking and open API world.
Amid this digital wave, there is also the tsunami of risks and threats.
“There is no doubt that digital frauds have increased because as we move toward personalized journeys for each customer, these are vulnerable to fraudster attacks,” remarked Guru. “There is no one-size-fits-all when it comes to risk management framework because during origination, you have applied complex and personalized techniques.”
To manage risks on both the provisioning side and customer acquisition side, financiers are applying advanced risk analytics into their risk management practices.
This is an excerpt from an interview with Guru Raghavendran from Azentio Software. To listen to the full discussion on risk management for digital lending, log on to IFN Podcast.