Digital Lending: between sustainability and digitization

In the current context of high inflation and economic uncertainty, it becomes of paramount importance to support the resilience of businesses and households through the credit function of banks. In order to ensure efficient and inclusive credit, there are two strategic axes that banks have activated accomplice, also, regulation: sustainability and digitization of credit.

Sustainability is also becoming increasingly relevant in view of the growing sensitivity of various stakeholders to the ESG transition. In this regard, financial institutions can offer concrete support in promoting sustainability through innovation in their products and processes.

In the area of product innovation, with a global market of $332 mlrd (Kim et. al, 2022), ESG credit has emerged as a major tool. Through this instrument, financial institutions can take on the role of investment accelerators for ESG projects. Prominent examples include urban regeneration projects, which aim to redevelop areas with persistent social problems (in terms of employment, health, education, etc.). Such projects also serve as aggregators of services and expertise for all-round social inclusion. In process innovation, the innovation of scoring models is increasingly relevant, although they still need to be revised to include ethical principles and forward-looking components that take into account sectoral trends and sustainability indices. In this way, the concept of sustainable finance is evolving to become inherently sustainable ordinary finance.

With reference to the axis of lending digitization, projects still underway are geared toward increasing accessibility, speed in the use of credit products and new forms of credit for businesses and households. Future projections regarding the digitization of lending seem to indicate an expansion of high-tech investment in the coming years, especially for financial institutions in whose strategic plans a strong commitment to digital transformation emerges. It is leading to the cross-sector digitization of lending processes, although at the Italian level the focus is on the evolution of processes related to product pre-approval and mortgages, especially for the most loyal customers. Technological evolution in these processes is encompassing the use of Advanced Analytics tools throughout the product lifecycle to enable automatic acceptance for credit disbursement for certain customer groups. The main benefits brought by these solutions fall within a retention logic, as well as the increased ability to understand the borrow appetite of the customer. In this context, an evolution of the monitoring process framework is also required. Key factors on which more focus is needed include the establishment of appropriate reporting structures, qualitative-quantitative indicators, and EW systems that are constantly updated through continuous data collection. Refining data analysis to broaden the groups to which credit can be disbursed is one of the most critical processes on which to implement tools such as Open banking and Artificial Intelligence to speed up the credit disbursement process (using products such as instant lending). In fact, the speed factor in disbursement is central, especially for SMEs, as this is the only way to minimize the uncertainty resulting from waiting for a resolution on the credit application in order to take advantage of more business opportunities. In addition, the digitization of decision-making must take place through an incremental approach based on a progressive integration of new digital tools in order to implement streamlined, user-friendly and regulator-compliant digital processes.

In addition to implementation for scoring, AI is also a tool capable of making the origination process of all products more efficient. For example, the implementation of a customer relationship bot brings benefits in terms of instantaneous response, data collection, and h24 availability for the customer. In the area of product innovation, offering fully digital credit products needs certain conditions to prove to be a successful solution. These conditions include: a multichannel offering, simplicity of the 100% paperless inquiry process, and speed in drafting inquiry documents, checking and sending documents by the financial institution.

In Italian financial institutions, the implementation of AI technologies in the lending area is confined to certain areas, for which specific solutions have been adopted. 

New technological tools, such as APIs, also enable innovative distribution models such asEmbedded Banking in which it is possible to disseminate products with "open" logics even through channels unrelated to the core business of financial institutions. The implementation of API technologies can be translated into a true API Strategy for the creation of new business opportunities through the development of both direct and indirect models. For example, direct models include data models that are based on monetization through the sharing and use of data. While, indirect models include the new freemium models, which are based on the institution's choice to offer free access to APIs through payment for some additional functionality. In order to be POG compliant, the development and implementation of open realities presupposes the governance of the entire ecosystem, requires special attention of the partners involved, careful relationship management, attention to the data used and the products offered on the platform. Within these new ecosystems there are various types of partnerships, some data-driven, with a view to enriching the skills of resources and increasing the reliability of data, others based on technological exchange, and still others distributive, focused on collaborative product development.

In conclusion, to date resilience is synonymous with sustainability and digitization, both of which are crucial in times of uncertainty. Digitization of lending, therefore, stands not only as a process to mitigate the level of risk caused by current volatility, to create and exploit new business opportunities, but also as a central tool to support households and businesses and promote ecological and social transformation.

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