Digital lending has grown as an industry into many diverse business models, but there have been many challenges faced by them all, barriers to sustainable profitability baked-in from early technology decisions...
To buy or build, own or licence, outsource or in-house?
All questions that have been rumbling on for decades in the financial sector. In the online lending space recently, the trend has been "build, own, in-house" - decisions that put launch dates off for at least a year and added millions to the start-up capital required.
As a nascent industry, requirements analysis and software specifications were inevitably flawed. They were pioneers, working it out in concept but building-in obsolescence from the outset, because the reality is always different and changing.
These technology decisions led to high costs on IT and resulted in systems that were, in many cases, just recording transactions, rather than being at the heart of the business, driving fully automated processes in real time. Cost savings can come without huge price tickets or the need to own loan processing software.
Front end customer experience versus comprehensive back office automation, processing and controls?
The battle of the IT budget - customer experience versus back end automation, where 90% of the activity takes place. Both worthy, but recently technology budgets have been skewed too far in favour of the front end, resulting in the necessary addition of people/office cost simply to process the core business.
Upfront investment versus value over the whole life of the system?
Also characterised as "short term versus long term cashflow". Making the right technology investment decisions early, based upon longer term cost-saving goals, is self-evidently the right way to go. Again, recently, the emphasis has been quick starts rather than long term planning, resulting in costly remediation activity to achieve compliance at scale. The Prudential Regulation Authority (PRA) recently highlighted this point, commenting on new banks who were outgrowing their control environment, having to retrospectively invest in control functions, costing them more in the long run.
Remote working versus big, expensive offices in city hubs?
Clearly, the past year and the lockdowns have taught us the right way to go here. More online automated processing enables systems to be operated with fewer people, remotely. Big offices in city centres are an unaffordable luxury in a business operating with slim margins.
Comprehensive back office system versus multiple "paid per transaction" suppliers?
The issue of slim margins is very real in digital lending. Engaging too many IT component suppliers to nibble away at potential income from each transaction processed, is commercially unsustainable. Protecting margins may be better achieved by choosing holistic full function automation, with whole loan lifecycle servicing and payment systems, in the first place.
Near real time payment systems or dinosaur direct debits?
No contest obviously, the ancient art of payment-delaying banking is over. Open Banking provides the solution to this one, providing greater liquidity so more efficient lending and borrowing.
External investors? Then retail inclusive or institutions only?
One of the most laudable aims of early digital lending like "Social Lending", "Community Lending" and "Peer-to-Peer Lending" was to open up the opportunity of decent returns, to the retail investor, no longer just a privilege of the investment firms and institutions. Sadly, it seems retail investors are being abandoned again now. Perhaps the systems weren't built for the inevitably increasing compliance, or critical mass was never really achieved, but diverse sources of lending funds must be an asset in an uncertain world. The Innovative Finance ISA was growing in popularity and retail investors, now more than ever, are looking for opportunities where risk and reward are at acceptable levels, when interest rates are so low today. But how to involve retail investors profitably?
Individual firm or industry-wide solution?
As we come out of this pandemic, lending and borrowing will be an important tool in our economic recovery. So, whatever the challenges, the industry has to get this right quickly. Digital lending firms need to be able to deliver their services at speed and volume, profitably and sustainably.
For most lending firms, automation of back office functions and administrative operations, probably represents about 90% of the business processes.
Start-up firms could look for long-term cost savings by ensuring full automation, and so increase efficiency and auditable compliance. Perhaps some of the established companies too will take the opportunity to review their levels of automation as part of their digital transformation plans.
For individual firms, outsourcing IT to a vendor (full disclosure: like us!) with a comprehensive fully automated digital lending solution, can save an enormous amount of time and lower on-going overhead costs like staff and offices.
But is there a whole of market solution that will benefit all the players and stakeholders?
We believe there is. The answer is a generic Online Direct Lending primary and secondary marketplace providing loan market facilities, matching borrowers (consumer, business and property) and investors (retail and institutional) under FCA regulations where appropriate.
The marketplace will handle the presentation, matching, processing and servicing of the loans, including client money and payments. Loan requests will be uploaded individually or via an API in bulk for lenders, brokers and institutions. Lenders' funds will be matched automatically with borrowers' loan requests or matched with loans offered in the secondary market. The sale or refinancing of written loans can also be processed via the secondary market.
This "Market As A Service" will be charged on a transactions processed basis - for the whole of the loan lifecycle.
This service could also be "Platform As A Service" with a branded portal for businesses and institutions who wish to have their own front-end to the marketplace.
The benefits of this generic Online Direct Lending primary and secondary marketplace?
There are many benefits to this type of generic marketplace, with multiple lenders benefiting from the same core, compliant, loan processing. Economies of scale, innovation, compliance updates all coming together for the benefit of many.
This is achievable for the UK digital lending market and beyond. Obviously, Madiston has the technology to make it happen. Who would like to join us to make this idea a reality?