Digital lending has been around for years, but the global pandemic has highlighted how crucial this service is. The way we operate in the world has changed as we’re being asked to stay home, physically distance when outside and wear masks. As a result, consumers increasingly want safe access to financial products and experts say the role of digital lending for individuals and business owners has never been more critical.
Digital lending uses online technology to create and approve new loan applications and to renew existing loans with the goal of delivering loans to customers faster and more efficiently. For small- and medium-sized enterprises (SME), digital lending has been a lifeline to get their businesses up and running and to keep them afloat. In many cases, small businesses have immediate capital needs that can’t be met by traditional lending channels.
The Canadian Lenders Association (CLA) has been supporting the growth of companies that are in the business of lending or providing other means of credit, to small businesses and individuals, by non-conventional or innovative means. This includes fintechs providing digital lending options to its customers.
Tal Schwartz, head of strategy at CLA, sees digital lending playing an increasingly important role for SMEs as they seek capital for their day-to-day operational needs. SMEs have been disproportionately affected by the global pandemic, with many having to lay off staff or shut down their business entirely. With more access to capital, many may still be able to stay afloat long enough to survive the pandemic.
“Traditional banks are not really the first lender of choice for small businesses. It’s hard for large traditional financial institutions to go and adjudicate small businesses that are mostly just lending against cash. You’re not lending against an asset, which is what banks do very well,” Schwartz says.
While Schwartz says digital lending options have been around since as far back as 2008, an event like the pandemic has made customers more aware of this alternative lending.
“What COVID has done is, it has just driven consumers to be a little bit more accepting of online options, whether its fintech credit options or just fintech apps generally or things like online banking and not having to physically go into it branch,” Schwartz adds.
One of the major roadblocks digital lenders have faced is with the federal government. In April, the government announced the Canada Emergency Business Account (CEBA). It’s intended to support businesses by providing financing for expenses that cannot be avoided or deferred. It provides interest-free loans of up to $40,000 to small businesses and not-for-profits. The program, worth $55 billion program is administered by Export Development Canada, which works with Canadian financial institutions to deliver the loans to their existing business banking customers.
Unfortunately, digital lenders were left out of this plan. Recently CLA wrote an open letter to the Government of Canada highlighting how Canadian small businesses need fintech lending options during COVID-19. In the letter they wrote:
The CLA members strongly support the Government of Canada’s $10 billion capital allocation to BDC/EDC. However, tens of thousands of truly small businesses (MSMBs), such as restaurants, retail stores and auto repair shops, may not be adequately served for three reason:
1. These businesses do not meet traditional financial institutions’ credit requirements.
2. The loan amounts required by these businesses are relatively small, placing them at a lower priority by those tasked with deploying capital.
3. The volume of time-sensitive credit requests from small businesses is likely to overwhelm traditional financial institutions and underwriting processes.
As a result, Canadians may be faced with the prospect of leaving behind those truly small businesses, which are most affected by this crisis, and are most likely to fail.
CLA member Flinks is a data company that empowers businesses to connect their users with financial services they want.
According to Flinks’ head of product Adam Gibson, “Flinks aims to make data accessible to anyone that legitimately needs it.”
“First, it is democratizing data access for both consumers and businesses, so they can seamlessly and securely direct their financial data towards the services that they’re trying to access. Then empowering those financial innovators so they actually have the tools that they need to build and understand that data and actually make something meaningful,” Gibson says.
In analyzing the data, he sees these major trends emerging in digital lending over the next 18 months:
- Accelerated growth of online commerce for consumers and businesses.
- More focus on open banking and increased government partnerships with fintechs.
- Innovation of digital platforms that can better understand their customers and their needs.
- Data portability: The ability to take your data seamlessly from one financial institution to another; and the ability to share and take action on your information where when it exists, across multiple financial institutions.
Gibson says the pandemic is putting a positive focus on digital lending.
“We really see this as a market expansion opportunity. It’s not simply that fintechs are coming to take the customers from the top five banks,” Gibson says. “We see it as, if you build great services the market gets bigger for everyone and the pie gets bigger.”
This is good news for the customer, according to Gibson.
“The people who will ultimately benefit at the end of the day are the consumers, who will have additional choice and will ultimately be able to live a more enriched financial life,” Gibson says.
Traditional banks are starting to better understand their customers’ digital lending needs too. Mortgages are the banks’ biggest business and knowing how to serve their customers is key to their future success.
For example, HSBC Canada reported that their total operating expenses fell by almost 10 per cent in the second quarter. Now they are pivoting to find better ways to serve their customers. That includes strategically making investments to grow their businesses, simplify their processes and provide the digital services their customers are asking for.
Digital lending may have been around for more than a decade, but a global crisis like the pandemic is finally ensuring it commands the attention and respect it deserves.