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The Coronavirus pandemic has had, and continues to have, a disruptive and transformative effect on businesses across the financial services industry, and lending is no exception.
A year on, and lenders are having to adjust to a very different landscape. The legislative and business conditions imposed by the pandemic have had a profound effect on personal finance with the market appetite for personal loans and credit falling dramatically. UK consumers have cut their borrowing at a record pace and in February this year the Bank of England reported the biggest contraction since records began, with people paying back more than they borrowed. And, while bank lending and government-backed loans have provided a lifeline to many companies, growth in business lending volumes is set to halve by the end of this year and slow further in 2022, as firms focus on balancing the books, as opposed to expansion or growth.
With more stringent eligibility criteria further contracting the market and the prospect of some borrowers not being able make the required repayments, lenders are facing an uncertain path to recovery.
What’s clear is that lenders now need to evolve and innovate, not only to make their proposition more appealing but also to keep up with what is now an accelerating pace of digital adoption. According to McKinsey, the COVID-19 crisis is compressing a half-decade’s worth of change into less than one year. The shift toward instant, digital payments and cash displacement has increased significantly, while in-person financial transactions are being shunned in favour of online interactions.
This challenging climate has left lenders walking a fine line as they navigate between investing in the technologies that will enhance their proposition on the one hand and cutting costs on the other.
However, lenders can overcome this dilemma, and it all starts with taking a look at the processes that sit at the heart of a business – the payments.
Solving the lending dilemma
Research shows that archaic processes are costing businesses a huge £1.5m when dealing with payments; with costs spiralling due to manual processes and outdated systems. Payment processes represent 12% of a business's operational expenditure (Opex), revealing just how costly poor payment processing can be. And a poor payment strategy is not just inefficient, it can have a significant and hidden impact on bottom line performance and customer satisfaction.
Faced with increasing amounts of digital payments and a tough economic environment, lenders must ensure they have a robust payments strategy in place if they are to be in the strongest position to move into the new normal with confidence. And, it’s a strategy that needs to place new technology at front and centre, only then can they address the hidden inefficiencies that threaten to impact their commercial resilience.
There are three key things every lender should do now to optimise long-term competitiveness, in the post pandemic world:
1. Identify hidden inefficiencies
As well as adding cost and delay, inefficient manual processes have now been shown to have a wider impact on business agility; customer, employee and supplier experience; and ultimately commercial success. The cost of internal admin and compensating for rudimentary legacy functionality can become a major issue but businesses can drive these costs right down.
As a first step, lenders must locate these hidden inefficiencies and leverage innovations in payment technologies to provide a faster, easier, and more reliable way to move money. A Payments Map Analysis will help them identify these, as well as the quick wins that will improve both business performance and customer experience.
2. Automate to innovateAutomation is key to driving operational efficiency by replacing manual error-prone and time-consuming processes with real-time, responsive digital ones.
Thanks to advancing technology, companies can now automate many of their back-end processes and the good news is that by doing so, they will reap the benefits at the customer facing front-end – it’s what we call the Butterfly Effect of Payments.
By eliminating internal inefficiencies that waste time and money, lenders can transform their proposition with digitised end-to-end lending journeys that appeal to consumers and businesses alike. After all, today’s customers expect instant experiences with faster payments, immediate information and instantaneous reconciliation of transactions. And, for those businesses that still need loans to survive the COVID-19 crisis, having to wait too long for approval or disbursement can be the difference between sinking or surviving.
Modernising the payments infrastructure and making processes more efficient not only reduces operational cost but can deliver a measurable competitive advantage. By adopting automated payments processes for faster onboarding and loan disbursal, simplified payments reconciliation and real-time notifications, lenders can deliver the best possible experience to borrowers.
3. Embed new payment innovations
In today’s highly competitive lending market, differentiation is key. Thanks to the rise of the infrastructural fintech, it’s never been easier for businesses to deliver a first-class lending solution by embedding payments at the heart of their proposition and customer experiences.
Lenders can take advantage of the wider capabilities of API-enabled digital payments platforms, like that offered by Modulr, to cost-effectively launch innovative lending services that add new dimensions to their customer proposition; helping them to both acquire new customers and retain existing ones.
For example, by partnering with a Payments as a Service provider such as Modulr that plugs into the wider payments ecosystem, lenders can extend their offering and create a financial hub for customers by adding payments, direct debits and more, for an unrivalled borrowing experience. Lenders can benefit from streamlined card issuing solutions that allow them to further innovate by offering either virtual or physical cards, so that customers can start spending loans straight away. Funds can be drawn down flexibly, rather than in one lump sum and spending restrictions can be applied, for greater control.
Lenders can also take advantage of Open Banking initiatives such as Payment Initiation – a friction-free and cost-effective way of accepting loan repayments from customers. With Open Banking Payments, lenders can reduce their reliance on expensive card payments which typically charge a percentage per transaction. Borrowers can instead be sent a link with prepopulated details for a fast, user friendly experience.
Put pay to the lending dilemma
A poor payments strategy is something lenders can no longer ignore. The Coronavirus pandemic has given lenders new impetus to digitally transform in order to optimise their long-term competitiveness and ultimately make their proposition more appealing.
Lenders who look at the payment processes at heart of their proposition, eliminate hidden inefficiencies and adopt fintech-driven innovations will not only reduce operational costs but also enhance customer satisfaction. Only then can they solve the lending dilemma and ensure they are well-placed to not only survive but thrive in this, the new normal.