One of the impacts of COVID-19 was a decline in the business strategies formerly adopted by banks, lenders, microfinance banks, credit unions, etc…

Until early 2020, the lending industry operated traditionally with institutions set up for daily walk-ins, paper and pen origination, manual documentation, etc. The pandemic, however, brought a demand for a new-age approach. And as compact as the world is with global inflation and war, the demand for loans and credit remains high.

With technology, niche fintech startups have saturated the lending industry with innovative and reassuring loan management systems. These systems ensure that lending, disbursement, repayment, and collection can be done electronically, eliminating outdated legacy systems, human errors, and saving costs. Digital loan management systems (LMS) are now a must-have for lenders and when combined with the right strategies, the business growth is limitless. But do you know the effective lending business strategies to adopt as a digital lender?

In this article, we will discuss some effective business strategies for digital lending and how they can transform your lending business.

Why You Need Effective Business Strategies

This decade has ushered in new developments in the financial services sector using technology. In 2019, Google partnered with Citigroup to offer checking accounts through the Google Pay App. Recently, Facebook also launched its digital currency (Diem). The use of technology in the financial sector is now so widespread that it signals a seismic shift towards a digital-first approach in lending and banking by the next decade. 

An interesting fact about brilliant business strategies is their power to improve your loan portfolio and ensure the health and profitability of your lending business. Many organizations have started investing in digital lending technology that fosters growth, and it is now only a matter of who has the best strategy to retain a competitive edge.

As true for all businesses, your lending business is also subject to some challenges that can be systemic, global, technological, and even industry-based. Some of the challenges may be out of your control; however, developing an effective lending strategy can significantly mitigate the risk associated with the above-listed difficulties. These strategies include fair pricing, strategic use of technology, improved customer service, and high use of data. 

What Are Effective Lending Business Strategies?

Fair Pricing

There is almost no win in pricing in the lending industry. Although the central bank determines the loan interest rate, depending on your region, your business may become unsustainable without a fair profit margin.

Hence, establishing a pricing model that is both competitive and equitable can significantly enhance your appeal to potential borrowers. It can also help in building trust and fostering long-term relationships with your customers, which can foster customer retention and positive word-of-mouth.

You can implement fair pricing by leveraging data analytics to better understand market dynamics, customer behavior, and risk factors. This means analyzing your competitors’ pricing strategies, understanding the cost of funds, and assessing the credit risk associated with borrowers. For example, utilizing risk-based pricing models will enable you to adjust interest rates based on the assessed risk of the loan applicant, thus balancing competitiveness with profitability.

Furthermore, understanding a business’s lifecycle and potential growth trajectory can help you proactively offer tailored financial solutions at critical junctures, such as:

1. Financing for New Equipment: When the original machinery reaches the end of its useful life, the business will likely seek a loan for a new, perhaps more advanced, replacement.
2. Upgrade Loans: As technology advances, the initial machinery may become obsolete, necessitating an upgrade to maintain efficiency and competitiveness. You can step in with financing options that cater specifically to the upgrade needs.
3. Expansion Financing: With continued growth, the business may outgrow its current facilities and require larger premises to scale up operations. If you have been tracking the company’s progress, you can offer timely financing for the purchase of commercial or industrial property.

Good Use of Data

You can enhance your decision-making processes by utilizing data and exploring personalized lending solutions. This can lead to improved customer satisfaction, higher conversion rates, and lower default rates.

You first need to invest in advanced analytics and machine learning algorithms to process and analyze vast amounts of data. This could range from credit scoring models that more accurately predict the likelihood of a borrower defaulting to personalized loan offers based on a customer’s financial history and preferences. For instance, by integrating with alternative data sources and conducting thorough creditworthiness analysis, you can gain a more holistic view of a borrower’s financial health and tailor their products accordingly.

1. Using data analytics, you can navigate through extensive datasets.
2. Subsequently, you can pinpoint what is profitable, efficient, and low-risk.
3. Ultimately, you can leverage data to elevate customer experiences.

Improved Customer Service

Improving your customers’ experience starts with understanding that each customer is unique and needs to be catered to uniquely. This is where personalizing your business to meet your customers’ specific needs comes into play. Research has shown that high-quality customer service can be a significant differentiator in your digital lending activities. It can improve your customer retention rates and boost your overall brand reputation.

You should adopt omni channel communication strategies so that your customers receive consistent and efficient service whether they engage through mobile apps, social media, or traditional channels. Additionally, implementing AI-driven chatbots for 24/7 customer support can address common inquiries and issues promptly, freeing up human agents to handle more complex cases. For example, chatbots can assist with loan application processes, provide payment reminders, or answer frequently asked questions, offering a seamless customer experience.

Strategic Use of Technology

Use technological innovation to streamline operations and also to offer new avenues for growth and competitive advantage. Technology can improve loan processing times, enhance security measures, and offer more customized financial products.

As a digital lender, you should focus on adopting cutting-edge technologies such as blockchain for transparent and secure transactions, AI for enhanced credit decisioning, and APIs for seamless integration with other financial services. For instance, blockchain technology can reduce fraud and ensure the integrity of financial transactions, while AI can personalize loan offerings and improve underwriting processes. 

Conclusion

You can adopt these lending business strategies to mitigate the challenges posed by systemic, global, technological, and industry-specific factors. The key lies in leveraging technology not just as a tool for operational efficiency but as a strategic asset that drives customer satisfaction, market differentiation, and financial health. As the digital lending landscape continues to evolve, those who adeptly navigate these strategic dimensions will likely emerge as leaders in the new era of financial services.