The future of lending: how technology is shaping the industry
Brian Brodie, Group Chief Executive at Freedom Finance with 37 years of experience in the personal finance industry.
The current financial landscape in the UK continues to be defined by advances in technology and increased competition between traditional banks and fintech – which have undergone massive growth in recent years. The explosion of new market entrants will have a huge knock-on effect for the lending industry. Last year, £2.6bn in venture capital and growth private equity funding was invested in fintech in the UK alone, according to industry body Innovate Finance.
Fintech lending platforms have become increasingly popular with consumers because they are able to provide better financial options for customers who feel they have been underserved and overcharged by the banks. They’ve been given a stronger foothold still, by the fact that the larger, longer established banks are restricted by their cumbersome IT infrastructures and process-driven bureaucracies.
However, the competition between the financial players has subsided since the services that fintech’s provide have matured, and instead, they have begun to work with the banks to develop products they or their customers find useful. As a result, it has – and will continue to – become commonplace for new and established financial players to partner up.
Take for instance, Santander UK’s partnership with Kabbage – a loan platform that offers quick assessment and approvals for small business – or last year’s landmark deal between Barclays and MarketInvoice, a fintech that provides invoice financing online using superior credit-risk-analysis tools. The partnership dramatically cuts the fixed costs of invoice financing, making it viable to offer the service at a much lower cost to customers who would previously have been denied it.
The future of lending will continue to be defined by the development of technology within the sector and the way it is applied by the fintech industry – the success of which, up to this point, is owed in large part to its specific targeting of newer groups of consumers who prefer to do things virtually. At Freedom Finance we are trialling Open Banking
powered journeys to improve existing processes and gather a fuller picture of borrowers’ circumstances. Put into practice, this allows us to present our customers with the best tailored offers available to them. Some banks are also developing solutions to target thin-file customers, using technology that helps to monitor various alternative sources of information on creditworthiness, for example paying rent and utilities on time.
The technologies leading the way on this are AI and machine learning. Both have emerged in the personal finance market in recent years and are driving change in the way that the sector operates, in terms of lending and customer service.
On a business level, both AI and machine learning present numerous opportunities for brokers and should be embraced rather than feared. They enable companies to become much more customer-centric, significantly enhancing the customer lending experience by combining the speed and precision of technology with the human touch of people. This creates solutions that are much more tailored to the customer’s needs based on learnings from large data sets.
Extending lending options to underserved consumers
The benefits of machine learning extend to consumers who have struggled in the past to establish credit, either because they don’t have recent credit or may not have credit, full stop. Machine learning has established ways to conduct risk assessments that can accurately predict credit scores which will allow underserved consumers to present themselves with credit profiles in the future. Again, this is a positive development for lenders who can gain an advantage over competitors using traditional credit scores, because machine learning scores and targets consumers who may previously have been missed.
AI and machine learning are also bringing increases in efficiency, by enabling faster processing times, decision making and lower costs – as was the result of Santander UK’s partnership with Kabbage. It means that brokers can grow their businesses quickly without the additional resourcing costs they currently come up against.
Looking to the future
The banking industry continues to innovate and evolve at a rapid rate and I’m confident that the most interesting advancements have not yet been imagined. There is a certain degree of hype around AI and machine learning technologies and, as with many previous developments, there are risks involved with adopting them prematurely and without a proper measurement of results. It is also crucial to bear in mind, that while these technologies bring about this next phase in the evolution of financial services – and indeed, the future of lending – the importance of human touch should not be cast aside.
While systems will undoubtedly become more self-managing, humans will need to work with these tools to provide the personal touch in an increasingly digitised world. Technology should be used to enhance human interactions, not replace them. Consumers will still value one-to-one conversations with expert lenders when making important financial decisions in the future.