How responsible lending can drive innovation and revenue for financial institutions
By Lauren Applegate (pictured), Director Customer Success & Marketing at Envestnet | Yodlee.
The lending landscape in Australia and indeed around the world is rapidly changing, largely due to the rise in demand for Buy-Now-Pay-Later (BNPL) services.
These providers offer consumers and businesses the benefit of a flexible and convenient payment option. They can increase conversion for merchants and give consumers greater freedom by enabling them to purchase in installments, rather than in an immediate lump sum.
There are, however, risks. BNPL operates in a slightly grey area where consumers who may not be able to repay loans can be approved lending. The risks are such that National Debt Helpline published a guide entitled ‘Risks of using buy-now-pay-later‘, which educates and assists consumers on the various pitfalls.
Australia has begun taking strides to regulate the industry, with plans being mapped out to determine the changes necessary to modernise payments system legislation to accommodate new and emerging payment systems, including BNPL.
As we move forward, there are technologies that all lenders can adopt which help to drive financial wellness and ethical lending. AI-driven data aggregation and open banking, for example, can give lenders greater insights into a borrower’s financial position, allowing them to make better informed and more immediate lending decisions.
Technology to promote better lending practices
Locally, we’ve seen lenders, such as Tic:Toc, implement AI driven data aggregation into their lending processes to garner a more comprehensive look at customers’ financial commitments to create more accurate and efficient lending decisions. This includes identifying key credit risk and lifestyle factors, such as whether applicants have children, regularly eat out, pay their bills on time or pay large amounts of interest on their credit card. The technology not only creates a quicker and more seamless process for the customer, but through vigorous financial data aggregation and analysis, lenders can ensure borrowers are only lent to if they are in a financial position to service the loan without causing financial stress.
The introduction of open banking – a more immediate, reliable, and API-driven form of data aggregation, will allow for even quicker, more accurate lendability assessments. The Commonwealth Bank, for example, recently launched its new digital loan – Unloan, which aims to approve home loans within 10 minutes utilising open banking technology.
There is a big opportunity for BNPL providers to follow suit. Fast, accurate assessments of one’s financial standing can enable BNPL providers to onboard users and authorise payments with the confidence that they can pay the loan back. National Australia Bank’s head of personal banking, Rachel Slade, for example, recently said that “open finance” will eventually help the bank understand a fuller picture of its customers’ debts. The comments came after NAB launched its first buy now, pay later product.
Paving the way for greater innovation
Embedding sophisticated open banking and data aggregation can be a real growth driver and enabler of innovation. Consider traditional mortgage applications like the mentioned Tic:Toc. The sheer volume of paperwork involved in the mortgage application journey is reflected by the volume of data required to verify an applicant’s income and expenses.
When organisations embed technology that can digitise, automate, and streamline application processes, it can become a great revenue driver. Automation allows organisations to better resource staff who would previously have been manually processing applications and actually increase the number of loans that can be processed. And the best part? This is all done while having the peace of mind that consumers are only being lent to responsibly.
Tying it all together
Ultimately, the current state of lending in Australia needs to be, and is being, re-examined in order to ensure consumers’ financial wellbeing is protected. Technologies including open banking and data aggregation may be the best solution to achieve more ethical and responsible lending practices, but also drive product innovation and business growth. The necessary technologies are available, it is now down to lenders to use them.
The information, analysis and opinions expressed herein are for informational purposes only and do not necessarily reflect the views of Envestnet. These views reflect the judgement of the author as of the date of writing and are subject to change at any time without notice. Nothing contained in this piece is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type.
