Digital credit: An underpenetrated and underestimated opportunity

The European market for unsecured lending remains largely underpenetrated for various reasons. Through digital innovations, lending can be made easier for credit users and credit issuers. But, how can digital shape the credit landscape for the better? What are success stories that you can learn from and are relevant to your organization? To answer these questions, we will explore the value-creation of digital innovation on three aspects and how your peers have made an impact.
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Today, unsecured lending, defined as a 'loan supported only by the borrower’s creditworthiness', is underpenetrated in most European countries, particularly outside the Nordics (see Figure 1).  

Drivers of unsecured lending differ per country and depend on cultural aversion to credit, lack of supply, difficulties to apply for credit, and revolving credit cards that are challenging to market—for instance, a negative brand perception.

Figure 1. Unsecured lending penetration in Europe. Sources: World Bank, Euromonitor.

Drivers are specific to countries, market environment and demographics. The UK market, for example, is the European market with the highest penetration of credit cards with a revolving credit line—resulting in a hard card-lending penetration. 

Simultaneously, alternative unsecured lending products are underrepresented in the very same market, due to a lack of supply and market adoption of foreign solutions. Each situation can be tackled, and technology is a key enabler.

Digital shaping the credit landscape

Technology makes lending easier for both credit users and credit issuers. Digital credit is not a singular product. You can find a variety of successful product designs and go-to-market models available in both Europe and North America.

In this article, we cover how digital innovations:

  1. Impact proposition design and business models.
  2. Impact the customer journey.
  3. Drive credit go-to-market considerations.

To show the value-creation behind digital innovations, we'll also illustrate these digital innovations with successful real-life examples.

#1. Digital impacting proposition design and business models

Digital innovation creates new business models, value propositions, and can impact the transformation of traditional products (below in figure 2). 

Figure 2. The impact of digital on proposition design and business models. Source: Accenture

We define digital credit as the application of digital user experience, process automation, and data-driven techniques and technologies to lending products.

Examples of primary digital technologies include initiation and servicing mobile apps, self-service portals for borrowers and partners, API-integrated distribution ecosystems, and machine learning credit-decisioning models. These technologies support the digital transformation of a range of traditional lending products, like personal loans, invoices and check-out, installments, and credit card features.

#2. Digital impacting the customer journey

In addition to product innovation, digital technologies can transform your customer experience across the account life-cycle (see figure 3):

Figure 3. Opportunities to enhance the customer journey along the credit value chain (Source: Accenture)

Digital enhancements across the customer journey help to improve the customer experience and the account profitability for issuers. Among others, these enhancements include:

  • Sign-up automation: Allowing interested borrowers to request and lenders to approve credit in real-time, across channels.
  • Data-driven, real-time, automated credit decisions: Using non-traditional data and artificial intelligence to continuously get smarter about approving customer lending requests.
  • Tailored product features: Digital allows issuers to tailor an offer for an individual and the borrower to change and adapt their payback terms.
  • Self-servicing: Digital platforms, such as apps and portals, allow customers to service their accounts on their own time, and without cost.
  • Smart collections: When credit goes bad, data models can help to drive smart investment in collections activities. For instance, at what time of the day to contact a defaulted lender best for payment reminders.

#3. Digital credit go-to-market considerations

Best-in-class digital credit players also exhibit distribution models that are designed to scale rapidly, using digital technologies and ecosystems as detailed below in figure 4. 

Figure 4. Distribution models designed to scale rapidly using digital and ecosystems. Source: Accenture.

Digital credit innovators often rely on partner-driven distribution models, enabled via APIs. Partners integrate credit offers to both drive incremental sales and respond to often lucrative commissions. For example, payment service providers (PSPs) in the retail sector generally work with digital invoicing suppliers to enable a pay-later or pay-by-installment option within the e-commerce checkout. 

Partner distribution is critical because success in digital credit requires positioning for spontaneous, real-time uptake by consumers. Even in markets where credit-seeking is uncommon, consumer show a willingness to accept credit if it is presented in a spontaneous and real-time fashion.

Market leaders also leverage digital technologies to support their partners. For example, through a partner dashboard, which allows partners to support and observe sign-up activities or to modify product features.

Successful case studies

The following success stories demonstrate at which point digital impacts products, business models, and customer journeys and how this impact addresses aversion to credit.

Case 1: Open invoice models

In the e/m-commerce environment,open invoice providers such as Klarna, RatePay or Payolution are succeeding based on two competitive advantages. 

Invoice payments decouple the checkout and payment process increases conversion while providing a more frictionless return process

First, these solutions decouple the checkout and payment process, resulting in higher checkout conversion rates

Second, open invoice models provide a more frictionless consumer return process, because there is no initial transaction cost or flow of funds.

Also, the label ‘invoice’ on a product effectively providing credit is attractive to consumers in markets that are traditionally credit averse, such as the DACH region.

Case 2: Installment flexibility

Installment flexibility becomes highly effective and more easily distributed within mobile banking applications.

Online banking - Digital credit opportunities - Accenture

For example, Spanish bank BBVA offers its consumers the ability to select card transactions and to convert these transactions to installments via their mobile banking app. The feature is presented using effective visual tools allowing customers to easily slide across different options before selecting the final installment program. This widely used feature is both customer and bank friendly as it enhances distribution of the credit feature. 

In comparison to the negative brand perception of revolving credit cards in Germany, in the UK, Barclays bank uses a similar approach. Consumers can either select transactions on their Barclaycard (credit card) and convert it to installments through Barclaycard’s online and mobile interface or elect a limited interest-free payback period.

Case 3: Big data and real-time capabilities

Kreditech is an example of a FinTech that is transforming credit by leveraging innovative data techniques to underwrite customers with little to no credit history. 

Big data approaches sourcing information from different origin helps to serve new markets with credit

Kreditech renders thousands of data points accumulated throughout the customer retail checkout or credit application process and then applies machine learning to hone its credit-decisioning models. 

This big data approach allowed Kreditech to expand into new geographies such as India and Russia, where traditional credit bureau data is limited, and traditional underwriting models are ineffective.

Big data and real-time data capabilities are instrumental to the design and delivery of new digital credit propositions.

Case 4: One gateway for multiple lenders

Vyze is a financing platform from the United States that lets merchants connect to multiple lenders through one gateway. With VyzePOS, customers enter their details at the POS (Point-of- Sale) terminal, where Vyze is implemented. The application is reviewed in real-time and approved. Subsequently, the consumer simply needs to accept the terms and conditions to complete the purchase on credit.

Large square overview with people linked to the netwerk - Digital credit opportunities - Accenture

This gateway-based approach helps Vyze to connect to multiple lenders, enabling multiple distribution channels, including cross-border. Scaling distributed allows Vyze to grow fast, improving the supply while tackling the difficulty to apply for credit at the same time.

Broad implications across various players

Banks have many key assets to thrive in digital lending: trusted brands, customer access, credit expertise, and low-cost balance sheets. 

However, you must innovate your proposition models for digital and must adapt the customer journey for digital enablement from end-to-end in order to compete with specialized digital credit FinTechs.

Banks have a clear strategic imperative to innovate as FinTechs are increasingly expanding from niche propositions—pay-later—to mainstream threats on core banking products like personal loans and working capital finance. Open banking will only accelerate this threat given FinTechs ability to access and use bank information to better underwrite credit.

Merchants and merchant PSPs can use digital credit to drive sales conversion and incremental revenue from payment services. If properly integrated into the merchant checkout, digital credit can improve customer satisfaction and improve uptake rates and thus optimize the sales conversion. 

When consumers are conditioned to use digital credit, their average purchase size increases. Increasing merchant sales conversion and fueling revolving credit balances for lenders creates value, which can be captured by PSPs who can effectively distribute digital credit services (e.g., revenue shares from the underlying credit provider). 

To become profitable in credit, adequate scaling is needed 

Digital credit FinTechs must continue to adapt and invest in distribution. It is evident that innovative proposition models are effective and that commercial models seem to be sustainable. But, to become profitable in credit, adequate scaling is needed. FinTechs must, therefore, continue to expand across geographies and use cases—both online and offline—to scale.

What are the lessons learned?

We hope that we've made it clear that digital technologies and transformations are the key to thriving in the market for unsecured credit. 

You can apply digital innovation in a number of ways to enhance your customer experience proposition, driving top-line growth and efficient operations for credit issuers. 

What's more, digital can transform your distribution, allowing for completely seamless credit offers and uptake within your general flows of commerce. 

These days, FinTechs are transforming the market for unsecured credit and creating significant value for shareholders. Needless to say, FinTechs are challenging traditional banks to step up from their more traditional way of doing business. Are you ready to ride the wave of digital innovation?

Author: Markus Naumer