Brief History of Lending Innovation
Innovation has always been a crucial part of lending throughout the ages. From the very first signs of civilization, lenders have leveraged best practices to survive and prosper in the evolving environment.
From Mesopotamia, to Greece and Ancient Rome, lending has been going through continuous transformation.
Today, lending institutions find themselves facing an arduous digital transformation challenge. But looking back at the past can often offer some explanation to the changes in the present, and where better to begin than in the cradle of human civilization?
Planting the seeds of modern-day lending
Nestled between the Tigris and Euphrates river, the fertile land of Mesopotamia gave birth to the first cities in history. The ancient civilization saw the rise of numerous inventions such as writing, mathematics, astrology and astronomy, the wheel, and our very own consumer loans.
A Mesopotamian farmer would borrow a single seed, which would yield a plant with hundreds of seeds that the farmer could return to his lender. Animals would be lent in the same manner, with the borrower returning the animal’s offspring later on.
Then, the first coin – the shekel – would be used for lending and for settling debts. But coins weren’t the only innovation to influence the practice of lending.
Code of Hammurabi, 1750-80 BCE
The Code of Hammurabi is the most complete collection of Babylonian laws. It established standards for different kinds of commercial interactions, including setting interest rates for lending practices.
“If a merchant lends grain at interest, for one gur he shall receive one hundred sila as interest (33 percent); if he lends money at interest, for one shekel of silver he shall receive one-fifth of a shekel as interest.”
Hammurabi was the king who elevated Babylon to its position of prestige. According to various scriptures, he was devoted to the financial well-being of his subjects and his realm. He was the first to introduce the innovation that would make the lending system “fair”.
Ancient Roman Innovation
After the Greeks established temples as their safehouses for lending and banking, the Roman Empire implemented the very first structured lending system. The Romans devised several forms of secured loans to protect lenders from unexpected losses due to missed payments. In fact, one of the reasons behind Rome’s great success was its special type of loan: Maritime insurance.
Rome relied on maritime trade to import food from abroad, but it was a perilous trip filled with storms, pirates and potential mutinies. To insure their cargo, sailors took out special loans with high interest rates using their ship as collateral. If the journey was successful, the borrower would pay back the loan. If he wasn’t able to pay it back, the lender could repossess the ship to compensate for his losses. This innovation guaranteed the growth of the city and the benefit for all parties.
Lenders who embraced these innovations kept their place in the financial ecosystem, allowing them to grow and progress to become modern-day banking and lending institutions. Adopting them as best practices has helped lenders avoid risk and maximize their returns, while addressing the needs of the people.
Lending in the 21st century
But customer needs have evolved, as have our ways of addressing them. Now, modern-day lenders find themselves in the middle of the chaotic era of digital transformation, where new tools and new players aim to replace the old.
Customer needs and expectations have changed. New applications and technologies are raising the bar for user experience, and their users are quickly adjusting to the new normal.
New forms of lending have also started to emerge, such as crowdfunding, P2P lending and instant loans. These new approaches to finance have raised the bar in the lending space with consumers expecting:
- Digital: Everything, including the loan application and KYC/Digital On-Boarding, should be available through digital channels
- Agility: Lenders should have the agility to adapt to new conditions and to deliver new products and features quickly
- Speed: Consumers expect to receive notification on application and payment as soon as possible.
- Personalisation: Consumers share their data to receive personalised experiences and services.
- Transparency: Throughout the loan application process, customers need to know what’s going on with their applications
New players are picking up on these new expectations and have responded by finding new ways to deliver value.
- Revolut has a completely digital loan application process that can be approved within minutes, and the funds can be accessed directly from the Revolut wallet
- Kabbage offers fast, flexible, and technology-driven SME finance that leverages open banking technology
- Amazon Lending, once an online bookshop, is now offering business financing options through a 100% digital loan process
- Paypal Working Capital allows users to get a cash advance in minutes with no interest and flexible terms
- Shopify Capital provides access to working capital loans based on transaction history in the Shopify platform
This newfound, instant access to funds is changing how consumers interact with their finances and lenders.
Future of Lending
The financial ecosystem is moving towards a future where finance is frictionless. Borrowers want a seamless lending experience that lives up to their new vision of normality.
Beyond customer expectations, lenders also have something to benefit from these new advancements. By adopting this era’s lending best practices, just like Ancient Roman lenders, lending institutions can maintain their competitive edge in an ever-changing landscape.
8 Best Practices that will define the future of lending
1. Omnichannel Capabilities
Having omnichannel capabilities means that your customer can start her loan application on her computer and finish it on any channel without losing data on the way. The experience should be seamless and connected.
2. Digital Marketing
One defining characteristic of new fintech players is their ability to connect with their target audience through digital marketing. For example, P2P Lending platform Zopa uses its blog and social media channels to deliver educational content to its audience.
By building and engaging their audience digitally, fintech companies increase trust and position themselves as competitive lenders. Digital marketing offers a wide range of opportunities, from retargeting website visitors to generate more sales, to following up on all leads to improve conversion rates, and overall growing your loan book.
But to run a successful digital marketing strategy, you need high-quality, real-time data.
3. Real-Time Data and Analytics
Lending institutions are often burdened with decades-old infrastructure that only allows them to analyse important events one or more days after the event takes place.
Needless to say, this can affect the organisation’s agility, as well as its ability to make critical decisions in a timely manner. Analysing yesterday’s data leaves you with a significant blind-spot. But real-time information reveals problems immediately, giving you enough time to solve them without incurring great losses
Lenders that leverage new analytics dashboards can examine their loan book growth or conversions in real time, giving them a real view of their business and enough time to intervene where appropriate.
Real-time data enables institutions to be flexible, prepared, and agile.
Agility is about capturing data and delivering information to the right people at the right time, thereby accelerating the decision-making process.
Though the financial services industry is known for being slow-moving, lenders must create a culture of agility within their organisations. This will impact their ability to quickly design and deliver new products and features to the marketplace.
Speed-to-market is becoming increasingly important in the financial services space. Thanks to the speed and capacity of cloud environments, fintech’s release products and features quickly, making them better positioned to respond to shifting consumer needs.
Lenders need to find their agility to adapt to the current pace.
5. Open Finance
Open Finance and Open Banking enables customers to share their financial data with trusted third parties. By accessing the applicant’s account information, lenders can make more informed credit decisions. Transactional data can verify information that’s fundamental to AML and KYC, as well as paint a clear picture of a person’s financial behaviour.
6. Digital On-boarding (AML/KYC)
Digital on-boarding has become critical to customer experience. Even before the lockdowns, neobanks such as N26 and Revolut offered 100% digital on-boarding and ID verification.
Manually inputting customer data into the system is time-consuming, and time is always of the essence in the lending process. By leveraging digital KYC, lenders are going paperless and delivering a smooth experience whilst maintaining high levels of security.
7. Underwriting Automation
The underwriting process can be slow, arduous, and sometimes invasive. These weak points take a toll on the overall customer experience.
In addition to solving these issues, underwriting automation can help lenders process the growing number of data points to quickly make profitable decisions.
8. Streamlined Application Process
The loan application process can look daunting for someone who has never taken out a loan. New lenders offer guidance during the process, ensuring that the lead completes the application and uploads all the required documents.
A task-driven lending management system can help users keep an eye on what’s missing, streamlining their loan application experience.
As noted above, innovation has always been a part of lending. It doesn’t matter what year or millennium, successful lending institutions have always leveraged best-practices that ensured their survival and prosperity.
Today isn’t any different. By being proactive and leveraging best practices, lenders can keep ahead of the innovation curve and maintain their competitiveness, now and in the future.
If you feel the need to future-proof your lending institution, contact us at email@example.com.
The Luna Connect team is always ready to share actionable information and recommendations.