In the Renaissance , anyone who wanted to borrow money went to the local marketplace where money lenders set up benches or ‘banka,’ from which they conducted their business. The bench would be smashed up or broken, hence the term ‘banca rupta,’ (bankrupt) if the money lender failed to make a success of their business.
With no such thing as a bank account — at least not as we know it today — and presumably no protracted decision-making process involving complex risk models, in Renaissance times successful borrowers most likely had the money in their hands instantly, or, at the very least, same day.
It was only as banking became more industrialised that lending decisions and the speed with which borrowers got their hands on the money, became more protracted, with lenders using complex risk scoring models and other forms of cross referencing and checking.
Even with the advent of credit cards in the 1950s, the consumer lending experience was still a slow and highly manual process, with telephone calls having to be made between merchants, banks and credit-card issuers to check credit balances.
With the advent of the computer in the 1960s, speed improved, but it wasn’t really until the arrival of the internet and online lending, with applications and approvals being managed online, that the lending process really started to gain momentum.
Still, that didn’t necessarily mean instant money in the consumer’s account. Whilst online lenders may have invested millions in making customer-facing front-ends slick, not as much money went on digitising the back office. So, whilst the credit or loan application process may have been more streamlined, loan approvals were not necessarily ‘instantaneous,’ and the payment probably still took days, or longer in some cases, to reach a bank account as legacy payment systems that relied on batch processing were still used on the back-end to transmit the funds.
Lending decisions in seconds
Enter the truly digital age, post the 2008 global financial crisis, and a new generation of consumer lenders emerged, leveraging mobile, online technologies and different data sets (social media, bank account information, third-party data) to which machine-learning and other sophisticated analytical and computational techniques were applied to speed up the lending application and approval processes to a matter of minutes, if not seconds.
Arguably, consumer lending has come full circle. Much like their predecessors during the Renaissance period, the new generation of digital lenders have set up their benches or ‘banca’ online or on smartphones. They may also claim to know or understand their borrowers, or at least their spending patterns, as well perhaps as some of the lenders did in Renaissance Italy.
But today’s consumer lenders are having to contend with raised customer expectations. “Empowered borrowers,” says consultancy firm PwC, expect not only a simple, but also a fast loan process.
Consumer lending research published by PwC found that other than economic factors (interest rates and closing costs) or “having an existing relationship,” the speed of the process was the most important factor for borrowers in choosing a lender. With other industries now typically providing a fast, intuitive and seamless experience, PwC says lenders need to adapt quickly or be prepared to lose share as younger borrowers grow to become the largest in the market.
The demographics of borrowers has shifted considerably. According to research published recently by Equiniti Credit Services, in the 12 months to December 2017, borrowing by so-called ‘millennials’ (typically born in the early 1980s), demonstrated the biggest increase (17%), compared to a 9% increase for Generation Xers, and ‘neutral’ for the baby boomer generation. Almost 50% of millennials obtained a loan using their mobile phone, according to the research and 47% said they were prepared to borrow from an unfamiliar lender.
With most consumers now applying for loans online, they are demanding a quick, easy and frictionless customer experience. As Jaidev Janardana, CEO of UK marketplace lender, Zopa, pointed out recently at Finovate in London: “No customer will wait three minutes for a loan decision. Zopa takes less than 10 seconds, which requires a more advanced tech stack than what the banks have.”
What about the payment?
Fast loan approvals need to be matched with instant payments to ensure a seamless, more convenient and consistent customer experience from start to finish.
“Our main selling point is financial wellbeing,” says Antony Broadbent, Chief Risk Officer at Salary Finance, which partners with progressive employers across the UK to provide their staff with salary-linked savings and borrowing benefit solutions. “A lot of our customer testimonials talk about what a relief it is for them to take out a loan that is easy to repay. It’s easy to apply, and the money is with them in a matter of minutes, which is also a major benefit for our customers.”
Just as the consumer lending industry is in the middle of a revolution aided by digital technologies and sophisticated analytics, the payment industry too is undergoing significant change thanks to the emergence of a well-funded fintech sector and the UK government’s Open Banking initiative, which provides non-bank third parties with access to customer account information, based on their consent.
Instead of relying on an outmoded banking infrastructure that only operates nine to five, Salary Finance partnered with fintech and B2B payments specialist Modulr, which provides an open Application Programming Interface or API, dedicated accounts, complete with a unique sort code and account number, which can be created instantly, and flexible 24x7 payment initiation.
Using Modulr’s API, Salary Finance can automatically trigger payments to its customers and access real-time payment schemes like Faster Payments, reducing the need to send batch payment files, which require more manual processing and can create bottlenecks when high volumes of payments need to be sent frequently and rapidly. Money reaches the borrower’s account more quickly, even outside of normal office hours, which means they can access it whenever they want. Salary Finance is automatically notified of fund movements, making reconciliation quicker and easier.
Administrative overheads, payment delays, high bank fees, and more frequent errors are minimised, which supports Salary Finance’s objective to operate a low-cost business model that makes lending quick and effortless.
This article was first published in Credit Strategy
Find out how Modulr is helping consumer lenders like Salary Finance.