This is a column by Dmytro Voronenko, Ph.D.
Digital lending keeps rapidly evolving despite the soaring cost of capital accompanied by geopolitical and economic turbulences. There remains a huge growth potential for innovative lenders. And in this transformative time, it’s more important than ever to understand what trends will drive and affect the digital lending industry the most in 2023.
- Resilience and efficiency via automation. Businesses will continue to cut costs and look for efficiency improvements. This will put in-depth lending process automation on top of their agenda.
- Embedded lending will break into new business verticals. Segment-focused, niche players will use their unique customer data and context knowledge to offer unmatched financing terms and experience.
- Digital banking transformation will be moving full steam ahead 2023-2024. The next two years will be the last window of opportunity for financial institutions to become digitized easily. Those who lag during these next two years will lag forever.
- A new wave of <My Brand> Pay Later. New major brands, especially those with ample treasuries and distinguished customer bases, will create their own version of Apple’s ”Pay Later” for added revenue, increased market share, and bolstered brand loyalty.
- New types of players from other industries will enter the embedded lending arena. Next year we will see a rise in non-bank lending, including in-house customer financing, and the introduction of installment payment plans from other industries. Telecoms, payment processing providers, manufacturers and others will quickly gain massive traction due to alternative borrower data, huge customer bases and the viral nature of unique offering in demand.
- Increasing competition for prime segments. As the competition for the shrinking prime borrowers’ segment keeps increasing, lenders who make it easiest to borrow by understanding borrower’s context better will win and increase their market share in prime segment.
- Start of the “AI everywhere” era in digital lending. AI will be more widely used not only for credit scoring but for borrower behavior understanding, pro-active credit products promotion, lending process automation, portfolio rebalancing, staff performance monitoring, risks appetite adjustment, real time decisioning on every stage of a loan life cycle.
- Rise to power for ESG credit (Environmental, Social, and Governance). New business models will focus on green lending, socially responsible financing, and environmentally friendly project financing. It’s an unavoidable market response to the demand from society and government for such economic transformation.
- New “normal” of high cost of capital. Cost of capital remains high with Fed Funds Rate most likely hitting 5% at the start of the year and remaining 4.25% or above till the end of 2023. 2024 will most probably see a bit lower rates but nowhere near the “free money” situation lenders experienced in 2020-21. This affects all lenders and pushes them toward business transformations, rethinking existing business models and value creating chains.
- A wave of mergers, acquisitions, and buyouts. Delinquency rates and charge offs will keep growing in 2023 with a significantly cooler demand, especially from the consumer segment. Many fintechs and lenders will be forced to look for an exit via merger or acquisition, some will go bankrupt. Inevitably, private funds will acquire a good number of high-quality but capital-limited fintechs and lenders.