“I have nothing new to teach the world.”
P2P … AltScoring… CMS… Comparison Sites … Platforms… There is too much confusing terminology and business model “drift” surrounding the digital lending domain these days. Thus, I’ve decided to put together a series of articles to demystify the Digital Lending vertical of the Fintech industry. I hope these pieces help you make some sense of this exciting evolving industry, and also help us all see beyond the hype and down to the core of what the industry really is – good old lending to individual consumers, albeit using a bunch of new fancy digital “bells and whistles.” And thus subject to inertia, gravity, and all other laws of good old Newtonian physics applicable to inanimate objects, both stationary and in motion.
I seem to have learned fairly early in my childhood that the best way to understand a complex mechanism is to take it apart. My experience of more mature years continued to support this hypothesis, and as a result, I continue to stubbornly apply this rule to many of my daily endeavors, often to the chagrin of my immediate friends and family. Even the occasional inability to put things back together after taking them apart hasn’t stopped me. Why? Because, most of the time, it really helps.
The idea of a Value Chain is central to being able to break down consumer lending activity into manageable pieces, so we can then examine them one by one. So, I suggest that before we can understand consumer lending in general, and how it is evolving as a result of the digital revolution in particular, we need to get well-grounded in the premise of the Consumer Lending Value Chain.
The dictionary definition of a value chain is “the process or activities by which a company adds value to an article”. In the context of lending activity, there are four activities that we should focus on:
- Origination – finding the customer and causing him to apply for a loan.
- Underwriting – evaluating the customer’s credit risk profile and either accepting or declining his application.
- Servicing– a multitude of activities performed while the customer remains on the books. This includes including processing the payments, informing him of his balances, addressing his inquiries, as well as dealing with non-performing loan (NPL) customers.
- Financing – the money lenders of our era have access to a bewildering array of potential financing sources, ranging from deposits and current account balances (what’s referred to as “organic resource”) to various types of “wholesale” financing, such as bank and non-bank commercial loans, bonds, securitizations, and a variety of so-called “P2P” mechanisms.
Digital technology is increasingly changing the way we interact with each other and the world. And the consumer lending domain is no exception. Each of the elements of the value chain is currently undergoing a revolutionary change.
For example, lenders of the ancient past had to set up counters at the city markets, where they could find their customers and interact with them. Lenders of the 20th century evolved this into putting sales reps with flyers on well-traveled streets and intersections of major urban centers. Today, most of the potential loan customers start their journey online, by googling and comparison-shopping loan proposals from various lenders. Therefore, the online “eyeball aggregators” are becoming the most sought after origination channel for the lenders.
In another example, in the old days, customers would receive his loan by taking physical cash from the lender. In the more recent past, the disbursement would take the form of a check or deposit into the customer’s bank account. But as the digital revolution is creating a proliferation of mechanisms for storing and transferring value, consumer lenders also have to adjust by integrating a multitude of e-wallet and partner cash-out networks into their disbursement patterns.
In the subsequent articles, we will examine each of the pieces of the value chain, and how technology is changing them. And more importantly – what we can learn from thousands of years of lending history, i.e. which parts of the business are not changing. We will start with Origination. Stay tuned!
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