Today, the cost of funding is a major pain point for many non-bank digital lenders – an overwhelming theme recently highlighted in research issued by Deloitte – with liquidity and the inability to diversify as challenges two and three respectively.
Scale is the single most important factor in shifting to a strategic funding capability, as institutional investors seek out companies with a level of predictability, historical profits and sufficient annual funding demand (i.e. 100M+ EUR). This mix creates an attractive value proposition for institutional investors and impacts the costs of funding significantly for lenders. Companies like CrossLend in Europe are helping to lower the barrier to entry for lenders to tap into institutional investors.
Looking ahead, some voices in the industry question whether the non-bank lenders can weather a potential down-cycle, are prepared for increased regulatory oversight or are ready to address the challenges of scale e.g. risk management, fraud and platform scalability. I doubt that that the market can ever develop a truly perfect scoring model, but we have certainly seen significant improvement in the quality of scoring as the industry shifts away from score-card based models to the use of algorithmic underwriting and machine learning (e.g. logistical regression algorithms etc.). As the market matures, we are seeing some phenomenal companies emerge, such as US-based Data Robot (datarobot.com), that have drastically lowered the barrier to entry for integrating these capabilities into internal processes.
Looking forward, a key driver will be the use of alternative data sources, such as the use of bank account transaction history, which has been made available as a result of PSD2 to calculate a unique and specific customer score. As programmatic access to data and de-novo data sources accelerates (as well as therefore the ability to identify linear and non-linear correlations) I suspect underwriting will evolve into a real competitive advantage for those players able to capitalise on insight at scale.
The most critical component to win and retain market share is the customer experience – from loan application through to collection; this is an area to really differentiate and win. Additionally, advantaged modes of customer acquisition (how do you acquire a customer and at what cost) and a robust risk management and collections process are key, yet often overlooked, when trying to develop a sustainable business.
If you agree with Mark on the importance of the customer experience, then perhaps you should read; Enhance Your Customer’s In-Store Experience With These Tips