As digital lending continues to grow in size, companies are looking for ways to make their services more efficient and profitable to both lenders and borrowers. And they believe artificial intelligence and big data hold the key to the future of loans. Lenders traditionally make decisions based on a loan applicant's credit score, a three-digit number obtained from credit bureaus such as Experian and Equifax. Credit scores are calculated from data such as payment history, credit history length and credit line amounts. They're used to determine how likely applicants are to repay their debts and to calculate the interest rate of loans.
In the good old days of banking, your chances of getting a loan often depended on how well you knew the bank manager and your reputation as a trustworthy customer. Banks were reluctant to lend to those who posed a credit risk or lacked credit history, and thus being unable to repay loans. Banks, as far as possible, tried to minimise loan defaults and get into an arduous debt recovery process. Since the turn of the century, however, the banking and financial industry has evolved and innovated in ways not seen before. The emergence of fintechs -- especially digital lenders and financing startups -- has made the disbursal of all kinds of loans so easy that you can now obtain a personal or an unsecured loan at the click of a mouse.
Consider the massive size of real estate lending. The Fed's latest report shows mortgage debt topping $9 trillion. When including mortgages from businesses, it tops $15 trillion. Over 10 million homes and commercial properties sell each year. Equally staggering is how much data exists on the borrowers.
Across the world, every business sector has found its route to accelerated transformation due to the outbreak of COVID-19 and rapid technological adoption, and the financial sector is not an exception. Technological advances combined with customer expectations are altering the way lenders operate. Furthermore, the increasing internet penetration and adoption of smartphone devices are pulling traditional and new-age borrowers towards digital lending solutions. According to a survey – around 40 per cent of borrowers led by millennials are willing to move to online mode in securing loans rather than offline channels. The accelerated push towards the adoption of digital tools makes technology the key enabler of the digital lending market. Contrary to the conventional lending market, digital lending combats major challenges of the market that served as the bottleneck of growth for many enterprises and individuals in India.