Innovation and Digitization in Credit
A Global Perspective
Alex LaPlante PhD, Managing Director of Research, Global Risk Institute
Charlotte Watson, Research Analyst, Global Risk Institute
Digitization and other forms of technological innovation are dramatically changing credit markets around the world, creating opportunities for consumers and new market participants, but also challenges for traditional financial institutions and regulators. In this report, we draw from a wide range of sources to provide a comprehensive overview of the global digital lending landscape. We survey recent growth trends of peer-to-peer (P2P) and other forms of alternative lending that have been enabled by digitization, and compare and contrast the major digital lending markets around the world. We also discuss applications of new technologies like machine learning and blockchain to lending, and highlight the risks that these developments pose for consumers, firms, and regulatory agencies.
Digitization has changed the game. It has fundamentally transformed how we engage, how we do business, and who is on the playing field, effectively rewriting the rules of competition. Pair that with technological innovations like big data, advanced analytics, and blockchain, and we find ourselves in a whole new paradigm.
Much of the shift towards digitization and innovation over the last decade has been driven by the widespread proliferation of internet-connected computing devices coupled with the dramatic reduction in the cost of storing and processing massive quantities of data (Figure 1).
Figure 1: History of GFLOPS [i] prices
Broadly speaking, these trends have had three significant impacts on businesses. First and foremost, consumer demands and expectations have changed significantly. Increasingly, consumers are looking for more tailored products, faster delivery times, digital user interfaces that minimize human-to-human interaction, and overall convenience. Second, businesses have access to a wide range of new capabilities that allow for increased efficiency, productivity, and cost savings, amongst other things. A few examples include the use of big data and advanced analytics for improved modeling and business insight extraction, the digitization and automation of processes for cost savings, and the integration of advanced cloud computing platforms for increased agility and scalability. However, these new opportunities are by no means exclusive to incumbent firms and, in many sectors, have dramatically decreased barriers to entry. Ultimately, this has led to a surge in new market entrants who are able to take advantage of current technological advancements and scale up rapidly at a lower cost than legacy firms.
The financial services sector is no exception – consumers are coming to expect vastly different relationships with their Financial Institutions (FIs), investment in and adoption of financial technology (Fintech) solutions have skyrocketed, and the number of non-traditional Fintech firms continues to grow. Although these trends are seen across all lines of business, the credit and lending space has seen many of the most transformative innovations in finance.
The rapid pace of innovation in the lending business is driven by the confluence of a number of factors. As mentioned, consumer demands have changed with consumers now expecting convenient, fast and cost-effective products from their chosen lender. Changing demographics have played a large role in this shift with the lending consumer base being increasingly comprised of digital natives [ii] and other tech-savvy people. Moreover, adoption of mobile devices and mobile-based products has grown rapidly in many emerging market populations which are historically under-banked, allowing the lending market access to whole new consumer bases.
New digital innovations have allowed firms to automate nearly the entire lending process. Furthermore, advanced analytics using large amounts of data from non-traditional data sources like Facebook and Google has led to new credit-scoring methodologies that, when combined with traditional metrics, may provide more comprehensive credit risk profiles for prospective borrowers.
Decreased barriers to entry have led to considerable growth in the Fintech credit industry. Internet-based Fintech platforms have been able to enjoy the cost advantages of not having cumbersome legacy systems or brick and mortar branches as do many traditional lenders. These platforms can also offer the ability to efficiently scale upwards, with customer acquisition costs remaining relatively low. Furthermore, non-deposit taking Fintech lenders are subject to a less stringent regulatory burden - fewer capital and liquidity requirements and lower overall regulatory compliance costs. In addition to these cost efficiencies, traditional lenders’ post-financial crisis withdrawal from certain market segments, including small business lending, has left under-served populations and market gaps to be filled by new firms. Finally, the prolonged low interest rate environment has led investors, in their search for yield, to purchase loans generated by Fintech credit platforms, further boosting the nascent Fintech credit industry.
In this report, we present a detailed look at the major trends and innovations in the credit and lending space across the globe.
[i] The number of GFLOPS measures the amount of floating-point calculations (in billions) a processor can compute every second. It is used as an indicator of computer performance.
[ii] People who have spent their entire lives with access to the internet, mobile devices, etc. and have become accustomed to doing most things online.
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