As the UK seeks to recover from the impact of COVID-19, lenders will play a critical role in rebuilding the economy.
Here are four ways lenders can weather the storm ahead.
An unprecedented number of individuals and businesses are in need of urgent financial support, and lenders must find ways to disburse funds quickly to those in need. Faced with a tough economic climate, lenders must simultaneously strive to reduce their own risks and overheads.
That’s no easy task. And difficulties for lenders are exacerbated by the problems persistent in legacy payments infrastructure. The solutions offered by banks haven’t kept pace with the real-time demands of today’s customers, nor can banks offer a smooth customer journey or deliver the speed and agility that lenders require.
Fortunately, payments technology – such as automation, EMI accounts and new Open Banking solutions – could play a critical role in helping lenders overcome these challenges and weather the storm ahead.
This article explores four key areas where payments innovation can have the biggest impact for lenders: generating revenue, reducing costs, minimising risks, and delivering a better experience to borrowers.
1. Generating new revenue streams
We’re shifting rapidly towards an Instant Economy, where consumers are spending and consuming in real-time. With bills to pay and food to put on the table, it’s crucial that customers can access loans at any day or time of the week, and that funds land in their accounts quickly. Unfortunately, legacy banking systems are often confined to working hours, restricting the ability of lenders to disburse loans as soon as funds are needed.
New payments infrastructure can help lenders overcome this problem. By using a payments platform that provides direct access to Faster Payments, lenders can disburse loans to borrowers within seconds, . Crucially, it also means they can offer weekend disbursements. This can help lenders to differentiate their business and attract more customers, by speeding up onboarding and providing a responsive, around-the-clock service.
Virtual cards are another means of boosting revenue. For example, lenders may offer cash advance funding to merchants through virtual cards and create new revenue streams through card interchange. Virtual cards enable lenders to offer more compelling products to customers that provide easier ways to spend funds, with more visibility and control over where funds are spent, whilst earning money through interchange which can be a new revenue stream and way to offer customers more competitive rates..
2. Cutting costs and maximising efficiency
In this tough economic climate, lenders will be seeking to reduce costs and maximise their team’s productivity. There are several ways to achieve this with payments technology.
For example, payment automation can be used to speed up reconciliation, significantly reducing costs and overheads. Traditionally, applying customer repayments to loan balances is a manual, time-consuming and costly process, especially if borrowers make ad-hoc payments and fail to include the correct reference number.
With payments automation, lenders can set predefined rules so that when customers make repayments, their loan balances automatically update without manual intervention. Not only does this speed up reconciliation and save valuable operations time, it means that repayments never slip through the cracks and get missed.
Another way lenders can significantly reduce costs is by taking advantage of new payment methods enabled by Open Banking. Payment Initiation (also known as PISP) is a streamlined and cost-effective way of accepting loan repayments from customers. It means lenders can reduce their reliance on expensive card payments, which typically charge a percentage per transaction. And Payment Initiation doesn’t permit chargebacks, which can further reduce costs and minimise the risk of fraud.
In the P2P lending space, there are further opportunities for cost savings through automation. They can then automate the reconciliation of inbound and outbound payments, eliminating the need for manual intervention.
3. Ensuring repayments and reducing risk
Reducing risk is always a priority for lenders, but it’s even more important in the current environment. Payment Initiation (PISP) can be used to send customers reminders about loan repayments, with embedded links offering ‘pay by bank’ functionality. This is a streamlined and intuitive experience which encourages customers to repay promptly. Lenders can simultaneously set up Direct Debits to collect regular repayments on larger loans, increasing their visibility and control.
For merchant cash advance lenders, risk can be reduced with split payment collections. This can help to guarantee repayments from customers by collecting revenue directly from acquirers, automatically deducting the lender’s share in real-time, and sweeping the remainder onto customers. This reduces the risk of non-payment during uncertain times without impacting customer cashflow. And it has the added benefit of saving operational time, as payments don’t have to be calculated and split manually.
4. Enhancing customer satisfaction and loyalty
We’ve already demonstrated that schemes like Faster Payments can help lenders get funds quickly to borrowers. This can have an immediate impact on customer satisfaction and retention. And there are more ways payments technology can help.
For example, the customer experience offered by Payment Initiation is as seamless as card payments, if not better. When making repayments, customers don’t have to manually enter payment details or reference numbers, all they have to do is click on a link which takes them to payment approval. And this can be done without them leaving your ecosystem, reducing the chance of payment abandonment.
Even for lenders not using Payment Initiation, the ability to open unlimited EMI accounts for customers can streamline the loan repayment journey. It means they don’t need to add references to ad-hoc bank transfer repayments, as they’re always paying into their own individual account with a unique sort code. Customers can be sent an instant notification when repayments have arrived, putting their minds at ease and reducing pressure on customer support teams. And the lender will never miss ad-hoc repayments, so customers won’t be charged unfair interest.
Opening individual EMI accounts for borrowers can have even more benefits in specific lending subsectors. For example, for invoice finance lenders, it can help enable confidential invoice discounting. Lenders can alleviate potential concerns by discreetly collecting funds from debtors into regulated EMI accounts in the names of their customers. By receiving funds directly into these accounts, they can also streamline their entire collection and reconciliation processes.
Recap - Technology will shape the future of lending
To weather the storm ahead, lenders should use payments technology to:
1. Generate new revenue streams
2. Cut costs and maximise efficiency
3. Ensure repayments and reduce risk
4. Enhance customer satisfaction and loyalty
All of these technological advancements – from payments automation and EMI accounts to Open Banking innovations like PISP – have immense potential in the lending sector.
When used effectively, these solutions can help lenders get funds quickly to borrowers in need and streamline the entire customer journey, improving satisfaction and loyalty. And as demonstrated, new payments technology can also reduce costs and minimise risk, allowing lenders to scale their business and process greater volumes of repayments without overburdening their finance teams.
This will be particularly important in the months ahead, as lenders help to rebuild the UK economy by providing a financial lifeline to struggling individuals and businesses. With the right payments strategy, lenders will also be able to future-proof their operations – making them highly resilient for whatever the future brings.
Interested in implementing payments technology for your lending business? Contact us for a payments strategy review.