Lending is a term which arose in ancient days. We all have heard or spoken about this word in our day-to-day life. Until the world exists, the term lending will evolve with humans. Firstly, let me put a question before you.
What is lending?
Every individual has a different form of an answer but ends up with a common statement, i.e. “getting the money for interest”. A Lender gives a loan to a person to repay with a certain amount of pre-defined interest.
Let’s have a look at the lending system journey throughout the ages!
It’s the year 1754 BCE in Mesopotamia. The Sumerian worship places started serving as banks for the population. This is where the very first system of credit and loans began on a large scale. The code ofHammurabi was introduced, which defined the price of silver and how to regulate interest rates on silver loans.
Then came the ancient times of Greece and Rome in 400 BCE, where pawnbrokers used to lend money with items to be kept as collateral or security, thus reducing their risk. This is where secured lending originated.
The first ever loans in India are mentioned to be dated back to 200 BC during the time of the Mauryan Empire. But, charging higher interest rates to lend was considered a sin. But, this changed when something called “adesha” was introduced in the 2nd century. It was a kind of promissory note to lend between people.
The middle ages, roughly around 1400 AD, brought the largest form of authority from religion. Be it the Christians in Europe or the Muslims in the Middle East, both outlawed lending practices. Only Jews at that time could lend money to people with or without interest.
International trade was booming in the 18th century. And the banking system had to have much-needed control over it. So, Mayer Amschel Rothschild cleverly set up five banks by placing his sons in Europe’s major cities (France, Frankfurt, London, Naples and Vienna). He created a network of transferring money, thus responsible for pioneering the concept of international finance by establishing a centralised banking system.
There was a Zamindar system introduced in India in 1793. The population relied on getting loan amounts from zamindars and then repaying the debts by working for the zamindars. This practice was abolished in 1951.
The early 1800s saw a new era of lending when the Philadelphia Savings Fund Society opened its doors to provide loans to the average population and also a means of savings. In fact, it became the very first savings bank in the US.
Throughout the middle ages to the 1800s, the rich used to lend money to the poor without interest, and in turn, borrowers had to pay off the debt by means of working on the rich lenders’ estates.
A new era of mortgage lending was ushered in 1932 when the Federal Home Loan Bank Act was established to support mortgage finance by local financial institutions.
The 1950s-70s saw another lending revolution. Frank McNamara was the first to pay a restaurant bill using a card (now called Diner’s Club Card). In 1958, Bank of America introduced BankAmericard (now known as Visa). In 1959, FICO scores were popularly used by lenders to make savvy credit decisions in mortgage lending. Dee Hock, the CEO of Visa, computerised the credit card system in 1973, cutting down transaction times to just one minute.
Before computerisation, transactions and payments were very slow and manual, with phone calls. But, post-computerization saw a reduction in transactions and payments time from days to minutes.
Computers came into play just in time as a result of the hundreds of hours of paperwork involved in handling and filing loans, as well as the growing population and demand for loans. The development of computers and electronic data also influenced the evolution of lending practices.
Quicken Loans in Detroit significantly sped up the mortgage lending system by making the majority of their loan origination stages (application and review processes) online in 1985. In 1999, online banking became commonplace, and borrowers were no longer required to leave their homes or engage in social interactions to submit a loan application.
A completely new online lending era has begun due to this enormous technological leap, which has eliminated the massive amount of paperwork and hassle associated with traditional loans. This is the era of FinTech Lending.
What is it, actually? This means financial institutions integrate technology, machine learning, data analytics, and digital marketing into finance to serve their borrowers better.
The First generation of FinTech Lending came into being in 2005. The first group of digital lenders emphasized offering better risk modellings with standard loan products that banks provided. This group consisted of LendingClub, Prosper, PayPal and Zopa. Later Amazon and Square also joined. The products they provided were credit cards, personal loans and lines of credit (LOC).
This industry expanded in the 2010s. There was a 40% increase in FinTech Lending from 2013 to 2018. The reason for this was
This resulted in lowering operational costs and risk for lenders.
The second generation of Fintech Lending started in the late 2010s (2019 to present). These new lenders focus more on personalising credit products with less cost and are able to provide less risk for borrowers. New credit products and concepts are being leveraged, such as co-lending, BNPL, embedded finance, mobile financing, etc. The growth in this sector factors to borrowers demanding more innovations in loan products and ways to build credit while lowering debt risk.
FinTech Lending is gradually swallowing the traditional lending model while providing a quicker, user-friendly, modern and seamless lending process and emphasizing solely on borrowers. These transformations and transparency in the process are going to be more in the upcoming years as we are now giving importance to uniting all the different parts of the lending process, starting from loan origination and loan management till closure, on a single platform. We are on the path to building a smoother, quicker process with very few bottlenecks is the end result.
Paul Thomas, former MD of Provenir, states that the fundamental idea behind lending and the extension of credit hasn’t changed throughout history, but how lending actually occurs has. Due to the advancement of technology and the requirement for innovation to satisfy changing customer expectations, this change will only continue. Customers demand quick responses and smooth transactions. Institutions can only stand out to gain by embracing the opportunities presented by the internet, cloud computing, predictive analytics, and other such innovations to grow in the future.
What’s to expect from the future? Well, digital lending is going to be the norm in the upcoming years. It will upgrade and flourish as there will be more financial inclusion to grow and strengthen the economy of the world. New products and services like BNPL, TNPL, embedded finance, co-lending, etc., will continue to drive greater digital lending penetration among the population. We will also see digital lending software as a one-stop solution for all lending processes. And it is definitely an exciting future in lending we all look forward to!
The most common tools used by banks to quickly onboard borrowers are cloud-based loan origination software and loan management software. Technology has completely changed the lending market to the point where lenders can now access their lending platform anywhere, anytime. The fact that cloud-based software is platform independent (using only a web browser), enhances user experience, is much smoother to update and upgrade, and generally maintains data integrity are just a few of the many advantages it offers. As a result, the lending process is more cost-effective, quick, efficient with regard to data management, and secure.
A business requires a financial boost on several occasions. It
After smartphone penetration, people are not watching their SMS at all. They use SMS only for OTP related transactions. That’s it.
But What can a Lender see in your SMS after you consent to them?
Lender can see income, expenses, and any other Fixed Obligation like (EMIs/Credit Card).
1) Income – Parameters like Average Salary Credited, Stable Monthly inflows like Rent
2) Expenses – Average monthly debit card transactions, UPI Transactions, Monthly ATM Withdrawal Amount etc
3) Fixed Obligations – Loan payments have been made for the past few months, Credit card transactions.
It also tells the Lender the adverse incidents like
1) Missed Loan payments
2) Cheque bounces
3) Missed Bill Payments like EB, LPG gas bills.
4) POS transaction declines due to insufficient funds.
A massive chunk of data is available in our SMS (more than 700 data points), which helps Lender to make a credit decision.
An interesting insight on vehicle loans for lenders.
A trend we are seeing today – the first-hand vehicle ownership is decreasing with time. Why? People are upgrading their vehicles in every few years because of technological advances. And, this can be seen more with the millennial generation.
So, what should a lender do in terms of financing?
– Estimating the residual value of the vehicle at the start of the financing period.
– Charging a borrower only for the residual value (which is the difference between the value after a few years and the current value)
Example: A bike currently is INR 1 lakh. You want to buy the vehicle for 2 years. A lender will estimate the residual value of that bike today and what it would be after 2 years. If the estimated residual value = INR 45,000, the lender will charge you only that (say, INR 55,000 with interest for this instance) during your tenure.
At the end of 2-year period, you have 3 choices:
1. Return the bike and upgrade to a new one without going through the struggle of selling it.
2. Pay the lump sum remaining amount to own the vehicle outright.
3. Extend the financing and own it by keep paying the EMIs for the remaining amount of the vehicle for the next 12 or 18 months.
Benefits for the borrowers?
– Flexibility to use a vehicle and upgrade to a new one.
– Affordability to not pay for the complete value of the vehicle with the intention to use for a lesser amount of time.
– Convenience in owning the vehicle.
Say goodbye to the old lending option and embrace the new way of financing for vehicle by lenders!
How many of us know this?
1) Tiktok does Lending ( is it an entertainment company or social media company or a fintech company?
2) Youtube China does Lending
3) Top 100 internet companies in China(no matter what business they are in) do Lending
The team which was heading Lending in Tiktok was the Advertisement team. If we do Ads, we do X no of revenue. But if we do lending, we’ll get X+30% more revenue. This is on the same Ad spot.
Ad team has transformed into a lending team, and in today’s world, it’s possible because the subject matter expertise can be put in as an API and given to you.
Embedded Lending as a service is becoming popular in India too, and I am happy to be part of this ecosystem.
The answer is No. Only the top 10 crore people have access to many credit products in India. Almost all Banks focus on this market.
Once you go beyond that, the credit access rate has dropped significantly due to multiple factors.
1) Customers who are having low income(30-40K per month)
2) Not earning from an employer who belongs to Category A or B
3) Not from Tier 1 or 2 cities
NBFCs and Fintechs focus on the above segment, pushing another 10 crores of people.
But in India, 70 crores more people are formally or informally employed, which still needs to be tapped.