There’s a persistent myth that any borrowing is bad for low- or even middle-income households and businesses. In reality, the issue is that bad lending practices are bad for everyone, but especially harmful for lower income communities that are often either shut out of the formal lending system or disproportionately forced to borrow at higher rates and fees.
Lack of access to affordable credit is global and acute—an issue compounded by the current macroeconomic climate. In high-interest environments, like we’re in today, the cost of debt goes up, which can exclude borrowers unable to afford payment terms.
There is no silver bullet in solving the entrenched inequities or the headwinds created by the current macroeconomic environment, but we’re encouraged by the rise of tech innovations opening new possibilities for lending.
Let’s take a look at four trends that are unlocking greater access to capital for those who need it in the face of these challenges.
Harnessing AI for better credit decisions
Machine learning and Artificial Intelligence (AI) have been helping banks and fintechs make more informed decisions and better understand consumer insights and behaviors for some time. Fintechs are using these tools to create models that can help drive responsible lending and offset costs for consumers. For example, new solutions allow lenders to track a business’ performance data and financials, allowing business owners to qualify and lenders to expand access to capital. This additional information provides an alternative for lenders that have previously relied on a business owner’s personal credit score or even pledged collateral. We’ve seen that fintechs can offer lending services in a variety of ways – white-label credit cards, Buy Now, Pay Later (BNPL), growth capital, factoring, and more. These new models allow end users access to unsecured credit, leverage proprietary transaction data to improve customer experiences, and find innovative ways to create integrated credit offerings, whether it is for small or big brands alike.
Big Tech enabling big lending opportunities
Big Tech firms are focusing on small and micro businesses (SMBs) by serving up small business lending solutions. The efforts of big tech to harness their scale and offer financial services is one more example of embedded finance, a trend reshaping the financial landscape. These platforms can tap into merchant and seller data, when permissioned, to make lending decisions based on that SMBs individual performance. With this permissioned data, Big Tech players can better serve the financial needs of merchants and sellers on their platform, by providing working capital that allows them to grow and flourish without leaving their platform.
More robust data unlocks hyper-personalization
Today, when a customer consents to sharing their data, it can help lenders take a more tailored approach. Technologies like AI and machine learning and open banking platforms allow for faster and better-informed decision making and can help lenders generate offers tailored to each customer. For example, the loan terms for a small online retailer would look different for a brick-and-mortar store – the terms for each are differentiated by the profile of the business to best fit its needs. Instead of simply looking at financial statements, or the owner’s personal credit score, small business lenders are harnessing business data, like accounts receivables, annual value of subscriptions and ecommerce sales. Analyzing these types of alternative data sources is not only good for consumers and small businesses, it can also improve the health of the economy: it’s estimated that subprime lenders could save more than $13.7 million annually on losses by utilizing alternative data.*
* CB Insights Tech Market Map Report: Loan Origination for Digital Lenders
BNPL expanding into the everyday
For many consumers, BNPL can help solve the challenge of not having capital when they need it, enabling them to split purchases into smaller interest-free payments. These models can also be an entry point for many underbanked individuals, providing an onramp to credit products that may have previously been inaccessible. With the ability to reach so many, its critical for consumer safeguards like education and clear policies be in place to build trust and responsible growth. *A recent report from Juniper Research projects that BNPL spending will reach $473B globally in 2027, rising from $112B in 2022. This increase in BNPL is a result of mounting financial pressures – like cost-of-living increases, inflation and rising interest rates. Demographics also play a role – younger consumers, like Gen-Z who may lack credit history, often turn to low-to-no interest rate installment plans to choose when and how they pay for their purchases. Regardless of financial history and current circumstances, many customers like installment plans on existing cards for consumer protections and rewards. According to Visa research, nearly half of consumers say they are more likely to use a BNPL offering if it’s available through their existing card. And 70% of those surveyed were likely to use BNPL if their purchases were eligible for the same rewards and loyalty points as credit and debit card purchases. Investment in the BNPL space has not slowed either, reaching $2.6 billion by mid-2022, putting it on track to surpass the investment of $4.3 billion in 2021. **The reason for the bullishness could be continued demand from consumers and businesses for an expansion of installment lending. A 2022 PYMNTS.com report found that 70% of consumers already using BNPL services offered by fintechs and/or payment systems said they would be interested in getting BNPL-style loans from their bank or financial institution. ***Additionally, with new use cases in BNPL popping up – like healthcare, groceries, gas and rent – some financial institutions may be positioned to meet this demand by underwriting installment loans for larger amounts than what retail and ecommerce are seeing currently.
These trends underscore that the world of lending is being transformed by digital innovation and driven by consumers and business demand.
We’re optimistic about a future of lending practices that can be good for everyone – especially during periods of inflation, like right now, where demand for loans tends to increase. Many consumers need faster access to capital and are looking for flexibility. These new lending technologies can promote financial inclusion by making it possible to support more people in need of a loan, many of whom would typically be excluded in traditional underwriting models. With these advances in technology, the lending ecosystem has a fair shot of meeting consumer and business expectations.