The State of Consumer and Business Digital lending Entering 2022

Digital Lending

Digital lending is helping nonbanks achieve deeper customer relationships, increase revenue, and glean vital intelligence on everything from customer satisfaction and shopping preferences to the impact of marketing campaigns and seasonality.

Globally, the digital financing market is set to grow from $311 billion in 2020 to $587 billion by the end of 2025, for a compound annual growth rate of 12%, according to Mordor Intelligence. Online publisher Research and Markets sees a CAGR of 11% for digital lending in the US through the same period.

This demand is driven by five main factors.

  1. The ubiquity of smartphones and rising internet penetration
  2. The advent of technologies around artificial intelligence, machine learning, and cloud computing,
  3. Changing consumer behavior and expectations, spearheaded by younger consumers before and since the coronavirus pandemic started
  4. Especially for banks and other traditional lenders, the competitive need to adopt these new technologies in the face of inroads by nonbanking, digital rivals
  5. Accelerating uptake of digital-financing services by SMEs (small and mid-size enterprises)

In this view, the pandemic has been more of an accelerator than a root cause.

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With help from technology, businesses are natural and obvious lenders

Digital lending positions SMEs of all kinds — consumer-facing or B2B — to provide financing for goods and services while retaining control of their lending programs.

On the consumer side, digital lenders include:

Where businesses are the customers, the specific sectors in play touch almost every economic sector. In fact, almost 80% of US businesses lease or finance the equipment they need to function and thrive. Among the top non-banking industries linked to equipment financing are:

  • Retail and office equipment
  • Manufacturing and industrial machinery
  • IT equipment and software
  • Invoice factoring
  • Farming
  • Construction and off-road equipment
  • Aircraft and drones

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Digital lending is also making inroads in niche corners of commerce such as business loans derived from community development financial institutions, and trade and invoice financing (aka “factoring”).

SMEs are propelling digital financing to new heights for good reason. Nine in 10 businesses are SMEs, according to the World Bank, and they account for more than half of all jobs. Their focus, the World Bank adds, is on services characterized by “low access costs and low resource requirements.” And many, whether they doing some digital business — think bookkeeping software to track payments, and social media for marketing — already.

Where traditional lenders, burdened by legacy systems, fall short

As mentioned, the combined weight of rising SME uptake for digital financing and measures taken to slow the spread of Covid-19 has quickened the shift from manual to online processes — and altered how we live, work, and conduct business.

“While big multinationals have the capital and other resources to effect digital change, SMEs have the advantages of agility and shorter command chains, creating a scenario in which the Davids of the business world can get the jump on the Goliaths,” according to Dmitry Voronenko, CEO and co-founder of lending-technology maker TurnKey Lender, which operates in more than 50 jurisdictions worldwide.

We saw this play out in the US with the 2020 rollout of the Paycheck Protection Program, a fund established to offset business losses due to Covid-19. While many large banks stumbled at the starting gate, beset by over-caution and IT snafus, smaller traditional lenders used software specifically designed for online lending to meet the PPP needs of their SME customers.

“The community banks seemed to be more adept and able to move quicker than bigger banks,” Steve Trollope of LE Capital in Reno Nevada told USA Today in June 2020. “I have another business that applied for a PPP loan with Bank of America, and it never got done. They just kept going around in circles.”

In sum, a number of forces have coalesced to fast-track financing into a digital future — one that features consumer- and business-facing as lenders of note.

Although banks have long dominated the business lending landscape, changing circumstances and tech innovations have altered that equation. Nowadays almost any business that takes payments can own and control their lending operations by outsourcing the technology and maintenance — i.e., the hard parts.

With the help of a specialist technology provider sensitive to the needs of businesses, organizations of all kinds can provide point-of-purchase lending themselves, all in their own right, without sharing fees or any of your business’ new tech-enabled revenue.

Keeping control where control matters most

Though issuing credit on installment seems complex and stressful to many business managers, engaging a specialist technology provider can help get you up and running quickly, and in the long run less expensively, than other alternatives.

The in-house approach also:

  • Reduces human error with AI-powered workflows and intuitive interfaces
  • Provides automation that cuts operational costs and increases overall returns using white-label technology backed by 24/7 support and ongoing consultation
  • Minimizes credit risks via artificial intelligence directed by machine-learning algorithms
  • Eliminates confusing third-party statements
  • Guarantees continuous technology improvement

Tech-enabled in-house lending can also enhance customer loyalty. With fully-supported lending technology you don’t have to worry about clients getting confused by third-party documentation, providing for more ongoing touchpoints between the business and its clients, which leads to opportunities for marketing, loyalty-program enrollment, and up-selling.

The fact that the most advanced in-house lending platforms available features AI to make credit decisions and set rates provides more scope for financing lengthy contracts and big-ticket items needed by, for example, healthcare professionals and manufacturers. Third-party lenders have a habit of rejecting applications because they look riskier than they really are. AI-assisted credit scoring draws on a broader set of inputs, providing a more complete picture of customers looking to finance a purchase.

Financing by installments isn’t a miracle cure,” says TurnKey Lender’s Voronenko. “SMEs still face headwinds from the coronavirus and its economic side effects.” However, giving customers the option to pay for purchases over time through installment financing can “mitigate ticket shock, build loyalty, and help manufacturers close more sales, even in uncertain times.

But, adds Voronenko, “In implementing in-house financing, businesses should consider whether they’re best served by outsourcing the program to a traditional lender or working with a lending-tech vendor to retain control of the program and its rewards.”

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