While lending technology is still its early days, digital adoption is here and we believe some of the greatest opportunities are yet to come.
The previous posts in this series covered two subsectors of fintech where LLR sees significant opportunity amid attractive market trends — payments (merchant processing, B2B payments and payments security) and wealth management. Next we’ll explore two additional subsectors where LLR is actively investing, LendingTech and BankTech.
Beginning over 10 years ago with the emergence of online and marketplace lenders, digital adoption has taken a front seat in the world of lending. Digital lenders have demonstrated an ability to acquire customers through digital channels, underwrite borrowers more effectively and, as a result, drive higher lending volume.
The introduction of digital lending has begun to bridge the gap between supply and demand whereby available credit is reaching more borrowers, both businesses and consumers. As this evolution continues across the broader lending ecosystem, traditional lenders (banks and credit unions) are trying to keep pace with their fully digital counterparts by leveraging technology solutions to digitize their own lending processes.
Technology is Bridging the Supply/Demand Imbalance
Prior to the introduction of digital lenders, traditional banks approved, on average, less than 50% of small business loans. While loan approval rates vary by asset class, small business approval rates highlight an imbalance between supply and demand. The imbalance is caused, in part, by a lack of underwriting sophistication and data that prevents lenders from fully understanding the credit worthiness of a business and its principals.
The digital lending community has introduced more sophisticated algorithms that leverage multiple data sets to underwrite borrowers. According to the research firm Autonomous Research, online origination volume is expected to reach $90 billion by 2020, up from $30 billion in 2015, highlighting the effectiveness of the new and improved underwriting capabilities.
Prior to the introduction of digital lenders, traditional banks approved less than 50% of small business loans, highlighting an imbalance between supply and demand.
Traditional Lenders are Working to Keep Pace
Approximately 50% of bankers today are not using any type of lending automation tool and those that do are far from fully digital. According to Bain & Company, approximately 7% of banks offer fully digital lending solutions. From digital origination to automated underwriting, loan and risk management, borrower communication, and loan servicing and payment, the digitization of the lending process is here to stay. Traditional banks will need to fully adopt technology to keep pace with their digital counterparts, who can process loans in less than 24 hours. (In contrast, it can take traditional lenders multiple weeks to process a loan).
Traditional banks will need to fully adopt technology to keep pace with their digital counterparts, who can process loans in less than 24 hours.
Case in point: In 2016, LLR invested in eOriginal, a SaaS platform that helped set the standard for consumer, marketplace, and mortgage lenders to more effectively manage the entire lifecycle of a digital transaction in a fully digital environment. eOriginal’s digital vault ensures authenticity of digital documents throughout the entire lifecycle of loan from origination through secondary market transactions.
While we are still in the relatively early days of lending technology, digital adoption is here, and we believe that some of the greatest opportunities are yet to come. As the lending environment digitizes, it coincides with the digitization of traditional banks and credit unions more broadly. There is a visible shift in banks and credit unions’ willingness to adopt digital solutions across the institution, including customer engagement tools, operational and workflow automation, and fraud, risk & compliance. In our next post focused on BankTech, we will explore these trends and emerging solutions.