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From BNPL to mortgages, the entire household credit sector is going through major developments thanks to digital.
Data from Cetif shows how digital has recently enabled a range of financial innovations and services to offer new ways to access credit.
Among new credit solutions, we can confirm that the most developed forms of credit are those inherent in ESG credit, both for individuals and businesses, and especially that of Digital Personal Credit.
The offering of other new forms of digital loans such as pre-authorized credit, and shopping cart financing, are in a more embryonic state. BNPL is offered by a minimal number of financial institutions and is now mainly provided by fintech and traditional payment institutions.
In the next two years, financial institutions plan to implement digital personal credit, which, compared with other credit solutions, will be the most offered in the market.
In addition, there will also be major advancements in the implementation of digital mortgage and pre-authorized credit solutions.
With regard to the implementation of new technologies in the area of credit, financial institutions have decided to implement and target for the near future only some of the technologies considered to be disruptive to the financial sector in general.
Currently, digital identity, remote digital signature, and data analytics are the most widely used technologies in the credit area.
In contrast, institutions would not seem interested in the use of Blockchain technology, and the Open API in this area probably also related to the need to wait for more regulatory clarification from the European regulator.
By 2025, in addition to increasing the use of the technologies most implemented today, financial institutions will also place a strong emphasis on using chatbots for the credit area while Artificial Intelligence will be used more for credit scoring and credit monitoring (data Cetif, 2023).
The research Cetif shows how 2023 and the first part of 2024 portray a differentiated trend between household credit in the long run and in the short run. Mortgages, as known, have had some signs of distress, due to rising rates, inflation and the uncertain economic scenario.
Short-term products, on the other hand, show an opposite trend, with personal and special purpose loans also being used to meet current expenses, such as health care.
"Rising rates and new consumption habits open up a lot of room for improvement in lending," explains Chiara Frigerio, Professor of Business Organization and Secretary General of Cetif ofUniversità Cattolica in Milan. Large banks and players specialized in consumer credit have already invested in innovation, while now medium and small entities are also launching interesting initiatives. In general, at this stage we see a certain focus on simple products and the persistence of a certain separation between the physical and digital channels."
Specifically, data from Cetif Research show that in Q1 2023, the average personal loan ticket contracted slightly by -5% while the number of transactions and the amount deliberated increased.
Through analysis of the age distribution of customers, it is shown that personal loans are mainly requested by the 35-49 year olds (for a 33 percent) and 50-65 year olds (for a 35 percent).
Instead, making a focus on finalized financing we see how in Q1 2023 the number of retail customers decreased by -6% but average tickets increased by +23%.
Looking at the age distribution of customers, it can be seen that finalized financing is mainly requested by the 25-34 year olds (for a 28 percent) and 35-49 year olds (for a 30 percent). (Cetif, 2023)
Again, taking into consideration the assignment of one-fifth, the research Cetif shows that in Q1 2023 there was a growth in the number of transactions and the total amount deliberated, although there was a 7% contraction in the average ticket.
Turning to an analysis of the age distribution of customers, it can be seen that the loan of one-fifth is mainly requested by the 50-65 age group (for a 36 percent) and over 60 (for a 36 percent).
A first area of investment is e-commerce. An area in which traditional players historically had little presence and which has thrown the doors wide open to fintech.
"The new competition from solutions such as Buy Now Pay Later," comments Frigerio, "has given a general impetus to digitization for personal and special purpose loans as well. This is leading to a reduction in operating costs throughout the industry and an improvement in the quality of the disbursement process, including in terms of approval times."
In the industry as a whole, the average "time to yes" has been reduced by 20% (Cetif, 2023).
However, the figure summarizes overall performance, while there are realities, especially banking, that have streamlined approval time a great deal.
"Banks know their customer well and have access, for example, to data on current account movements," Frigerio confirms, "so they are able to reduce the time to yes, sometimes down to seconds, as in the case of preapproved credit.
Access to the treasure trove of current account data has enabled banks both to initiate a revamp of consumer credit toward more digital processes and simplicity of disbursement, and to "return the favor" to fintechs by launching deferred payment solutions, including through acquisitions.
"However, BNPL is not an interesting niche for banks: their core business is something else," Frigerio points out. Rather, digital lending is a laboratory, which will lead in the near future to broader and more general investments to digitize credit processes, both for families and businesses. The goal is not to replicate the BNPL product, but rather its user experience: however, it is crucial that the bank not only bring innovation to the digital channel, but also to the physical channel it has always presided over, namely the point of sale."
Here, then, is where Buy Now Pay Later has been credited with moving the market, with a long wave in the coming years that could also accelerate the implementation of digital mortgage solutions (Cetif, 2023).
With all the appropriate distinctions. "Let's make it clear right away: we are talking about very different products," Frigerio premised. Mortgages are part of the calculation of risk capital: timing and controls cannot be the same as deferred payment for a pair of shoes. But banks, digital and otherwise, are also working on much more driven processes to respond to a real estate market that in some geographies requires a lot of speed."
Reducing the time to yes for a mortgage, however, requires rethinking the way the bank deals with third parties. A whole range of data sources and, most importantly, the appraiser.
"The mortgage requires an evaluation by a third party, namely the appraiser," Frigerio explains, "and as much as I can automate the mechanism for gathering information, the certifier must be a person, however supported by intelligent data and processes.
The work of the appraiser should be supported with information gathered through technologies such as satellite images, or those taken by drones, and then cadastral information, video appraisals, energy class certifications and so on. This is the big challenge in the digitization of mortgage resolution processes."