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Think of any legacy bank’s headquarters. You would be reminded of massive concrete structures with huge entrances, iron gates, and royal seals. This is so because for centuries, institutions like banks have used imposing architecture to convey trust and safety.
However, in the digital-first world where banking has moved out of the banks and into the palms of the consumers through smartphones, imposing architecture gathers dust.
Customer attrition rates among banks are reported to be as high as 15%. As a result, legacy banks are spending more and more to upgrade their technology stacks and offerings in a bid to win lost ground. For most banks, technology spending now exceeds 17% of their total operating costs.
But, is the battle already over?
If one were to look at the rise of the digital financial services industry, it seems that a large swathes of what was once the prized territory has already moved to new entrants.
While traditional banks are struggling to maintain profits and generate return on equity, technology-led challengers in the form of FinTech startups, infrastructure companies, and app-based banks continue to march forward. In 2019, the global digital lending platform market was valued at USD 5.58 bn - and it’s expected to reach USD 20.31 bn by 2027, growing at a CAGR of 16.7%.
The key difference between old institutions and new entrants is the digital-native nature of products and solutions built by people who were raised on the internet. Modern technology has evolved faster than people. As a result, the blend of technology with finance has created a new universe of services, delivery, and consumer experience.
This new paradigm not only threatens to unseat legacy institutions but is also actively accelerating the financial inclusion agenda - something that was earlier a privilege of the urban rich.
A new DNA
The modern consumer is unlike any of its predecessors. They no longer work on borrowed trust. The era of instant gratification is truly here.
Think cashless Uber payments, EMIs at check out, and business loans in a few clicks. Customers today expect simple, intelligent, and rewarding financial services experiences within their native digital platforms.
However, meeting these sky-high expectations isn’t just a matter of digitizing existing processes.
Freshly minted borrowers are constantly entering the pool, thanks to a massive growth in smartphone users and increasingly low-cost internet that’s getting faster by the day. According to a Google + CIBIL report, 49% of new-to-credit consumers are under 30 years of age, 71% are from non-Tier 1 cities, and 24% are female. This lays out the landscape - credit consumers are young and live in non-metro cities and consist of more women than ever.
Rebuilding financial systems
Within these segments, there is an increasingly varied mix of motivations behind opting for credit.
For consumers who have probably never been inside a bank branch, the digital lending experience can’t just be the same queuing brought online. It must match the ease of calling an Uber, the immersiveness of a PlayStation, and trust of Apple. This is where Embedded Finance comes in. It is a fundamentally refreshed approach to finance with consumer-centricity built in.
Embedded Finance enables organizations to leverage technology stacks to create smooth in-context experiences that prioritize every consumer’s needs and deliver customized solutions.
How does embedded finance improve the lending customer experience?
Provides access to a network of lenders
About 64% of consumers actively research the rate of interest/ EMI/ processing fee online before purchases. In addition, research shows that there has been a 44% YoY growth in ‘best loan interest rates’ searches in 2020 vs 2017.
The writing on the wall is clear - borrowers want to borrow on the best terms. FinTech innovations such as Embedded Finance make that possible. It connects digital platforms to multiple lenders, which ensures that customers can choose from a diverse lender network and benefit from lower interest rates.
Embedded Finance providers leverage data-driven algorithms to underwrite borrowers almost instantly, based on alternative data such as digital platform data, a customer’s bill payment history, social media usage, e-commerce transactions, and more.
For businesses, loans are provided on the basis of current and projected sales, improving chances of on-time repayment.
For example, merchants applying for loans through Shopify Capital can forgo traditional approval processes, since AI and ML models make almost-instant funding decisions based on sales.
Enhances user experience
Embedded Finance companies provide UI for each step of the fully digital loan lifecycle. The entire process is seamless, guided, and embedded within the customer-facing digital platform.
As a result, customers no longer need to leave the app or website to make payments or seek financing from a third-party vendor. In just a few clicks, they select their product, receive credit, and make their purchase.
Credit is no longer just for buying homes or for capital expenditure. Between 2017-2020, there has been 23x growth loans that have a ticket size of under INR 25,000. Such small loans are used for personal purchases such as phones, laptops, or appliances, or for day-to-day operational business expenses.
Embedded Finance providers leverage the deep knowledge digital platforms have of their customers to tailor customized credit products. It therefore allows for small-size, sachetized loans with flexible repayment terms suited to customer needs.
The issues with legacy lending processes such as delays in approval, poor data capturing, and excessive documentation requests cannot be addressed simply by digitization. It requires a thorough reconceptualization of the financial infrastructure, done with the customer at front and center. Embedded Finance Infrastructure can help digital lending platforms effectively leverage their data to deliver segmented communication and customized credit products to the customer at the point of demand creation. The key lies in identifying the untapped areas for personalization, customize them in the relevant contexts, and finally, scale for a tailored experience across target groups.
The next wave of FinTech will not be digitization. It will be personalization at scale.