How digitalisation is changing lending

I was recently having a chat with my old friend Slava Solodkiy about the way in which digitalisation is changing lending. He then surprised me by summarising our discussion and allowing me to share it here!

Here’s his write-up:

How digitalisation is changing lending

When thinking about this my brain thought linearly - taking current practices and processes in lending, and thinking from the perspective of 'how to improve them – but then I asked my brain to fantasize more radically: what is currently falling out of the lending market, and digitalisation could not just 'improve' processes, but also change the market, adding parts (and participants) that are currently falling out.

How easy, fast, and convenient is it to find the “Cancel?” button on your website or in your app? The first and simplest thing I thought about - how many lending services have a dedicated product owner for clients who want to opt out of a loan, make it convenient to repay a loan early (and do they have KPIs and measure NPS in this direction?), or overall: if a person (or company) can’t repay a loan on time (life happens, right?), then who tries to make the process convenient, so it’s emotionally and technically easy for the person to inform the creditor (rather than hide), and get adequate support? Everyone thinks about onboarding - does anyone think about the convenience of offboarding? For example, my friend Alina works at Tesla only on the product for returning a car if you don’t like it, or you change your mind, or it has a technical issue: I believe in Tesla because they care not only about selling you a car but also about making its return convenient.

There’s still no convenient online lending service for refinancing loans, especially when you’re facing financial problems. You or your company might face the inability to repay a loan on time for 99 reasons - and this says nothing about us as borrowers wanting to be conscientious and repay the debt on time! As Mark Twain wrote, “A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain.” Without feeling ashamed or fearing retaliation - how do you tell this to the creditor? How do you get products that consolidate loans, lower the monthly rate, extend the term, and provide credit holidays for a month or two?

TWAIN PIC

Blue ocean: “Revolut for” bankrupts. Everyone prefers to tread the beaten path - and fight for the same (red ocean) audience: borrowers with a high credit score. In the United States, the number of personal and business bankruptcy filings experienced a 10% increase in the twelve-month period ending June 30, 2023, compared to the previous year. Specifically, there were 418,724 bankruptcy filings during this period, with 15,724 being business filings and 403,000 being non-business filings. For instance, in 2019, there were 777,940 filings, which is almost the combined total of filings for 2021 and 2022. The number of filings decreased by 30% in 2020, reflecting the initial impact of the COVID pandemic. In the United Kingdom, in December 2023, there were 6,584 individual insolvencies, which was 20% lower than in December 2022. This decrease was primarily due to a decline in the number of Individual Voluntary Arrangements (IVAs), while Debt Relief Orders (DROs) and bankruptcy numbers increased. Specifically, there were 2,472 DROs and 496 bankruptcies in December 2023. The bankruptcies consisted of both debtor applications and creditor petitions, with both categories showing an increase compared to December 2022. But - what about online services that help you properly file for personal (or business) bankruptcy? What about a bank for people with a poor credit history - how to help them fix it? Such people fall into the same "loop" as former prisoners - the system, instead of correcting and helping them return to normal life, repeatedly punishes them, forcing them deeper into the credit pit (most crimes are committed for the second or more times).

“Brex for founders and employees with options.” A lender for founders from founders, where clients - you are a co-founder or employee with shares or option stocks from a B+ round tech startup. In Revolut alone, there are several hundred employees with options from $100,000 - how many (tens of) thousands of such clients with pain: you want to buy a home (or a car), but banks are not able to use your stocks as part of the analysis of your wealth and collateral, and your salary isn’t enough to buy something that you really want. What about such a lending solution: we whitelist everyday B+ round startups from Crunchbase with strong traction, investors composition, funding - find your startup in our list or add it manually for our immediate analysis. You provide information about the number of shares you own - and we give you an answer with a pre-approved credit line (with some discount to your shares’ price) to be used for car or home purchases. Maybe to implement at some moment: that you pay only interest rates (from your salary), and do full repayment for the “body” of the loan, only when your shares will be realized (exit or buy out). The whole magic is in target clients: “sit on the tail and parasitize” on the growth of the tech startup industry. And - double collateral: the main problem with all online-lenders are high cost-per-acquisition and high default rate - we can provide high tickets with extremely low risk (because of double collateral - your car\home and your shares). Also, we can connect you with potential buyers: most often you are not able to sell your shares\options before the full exit (pro rata and ROFR rights), but you are able to sell the option for these stocks, - and if someone wants to buy and consolidate shares of employees, they can buy options for these stocks directly from you today .

“Brex for remote workers and digital nomads.” Due to covid and the development of remote work services a new fast-growing segment has emerged in the lending market: the audience of remote workers, employed in various companies through platforms like Deel and Papaya. Only one Deel "employs" more than 60,000 employees in some countries for more than 5,000 companies from other countries. From the perspective of traditional creditors, everything is unclear here: the borrowers themselves are from one country (for example, Poland), live in another (for example, in Indonesia’s Bali island or Thailand), are formally employed in the American-Israeli Deel, but in reality, in some fast-growing startup in the USA or the UK. Who will credit them? The average salary of "employees" at Deel starts from $5,000 per month (mainly this is outstaffing of programmers and engineers). And they face such pain: if you need a loan or credit card - for banks and online lenders, it is quite new and difficult to understand such type of employment. Especially if you hold a passport of one country, live in another one, and your employer is in a third one: no chance to be approved. How about a solution: sign up with your Deel\Papaya\etc login - and link with your profile, and we “withdraw” your work contract, size of salary, etc, and provide you pre-approved cross-border loan or credit card. Here magic is in the target audience too: “sit on the tail and parasitize” on the rapid growth of such startups like Deel and their audience. And - risk assessment not per customer only, but per Employer too (we whitelist everyday companies\startups using Deel&Co for outstaffing with strong traction, investors composition, funding - find your startup in our list or add it manually for our immediate analysis). High average check, unlike other creditors or digital banks. Then you can develop further: in lending - from consumer to cards, then to auto and mortgage, and in banking: strive to “capture” more and more money flows, become its main account.

Lending digital identity - re-usable KYC. Here simple logic - aren’t you tired of filling out the same data every time? When will users of credit services “vote” against current providers and for not being tortured with the same questions and answers! As David Birch recently wrote: “Every time I interact with a new financial institution, accountant, lawyer or business partner I find myself having to email scans of utility bills, pictures of passports and (and this continues to astonish me) PDFs of corporate letterhead in order to get anything done. This is an incredible friction in the economy, a waste of time and money for all concerned.”

From my own user experience, I would, perhaps, highlight among the latest online (and traditional) credit services that I constantly test - I would single out CapitalOnTap (for UX and quality of customer support) and YC-backed Maroo (the guys lend specifically to the wedding segment: high average check, higher than standard consumer loan or credit card, lower risks and two borrowers). Another observation - such services as Osome and Anna.money help you quickly register a new company in different countries. But - has anyone of you tried to close a company online (spoiler: it's hell)? Now there's a new breed of startups, those that help others close shop: with names like Sunset and SimpleClosure, these startup undertakers arrange fire sales of furniture, file final taxes and carry out other mundane work to wind down businesses.

A digibank for the era of negative interest rates and a CBDC-friendly bank. All business banks are built around the norm of positive rates. However, abnormal is the new normal, as Japan and other countries introduce negative rates to 'burn off' excess idle capital and not fuel inflation, has anyone thought about the business model of an online lender and digital bank in an era of negative rates? The noise around CBDC is intensifying. In my opinion, the main innovation is that central banks will be able to directly open accounts (and lend to) banks from other countries, which in turn can take and issue loans in their own country in different currencies. Is anyone thinking about a CBDC-friendly bank? The noise is intensifying – not just China, but the USA, England, even Russia, and the BRICS countries are already launching their joint bank and thinking about how to make their quasi-currency a settlement currency. You can suggest to all the states planning to pilot this that there is a bank for testing. And to all users who want to be the first to try it out – as soon as they are available, they will be the first with you.

Compliance from fraudsters, risks from bankrupts. Everyone has seen movies where the FBI or other special services get tired of chasing a hacker and eventually offer them to switch sides and help them catch other hackers and criminals. So why don't compliance departments employ those who have been convicted (or are currently in prison) for 'money laundering'? They know about compliance and will immediately identify suspicious patterns much better than any of your specialists. The same goes for risks and creating new credit products – don't ask for ideas and advice (including mine!) from pampered business school graduates sipping 18-year-old whiskey in a vintage leather chair and recommending to each other to 'step out of their comfort zone.' Ask those who are deeply and for a long time in the discomfort zone!

'Brex for retail traders'. Lending against trading positions - quick consumer, auto, and mortgage loans against the value of your trading portfolio (at any popular online broker). Imagine you have an account on Robinhood, Revolut trading, eToro, Webull, Moomoo, etc. (Coinbase, Binance, Kraken too?) - you need a quick loan for a car or mortgage, but you believe in your trading position and don't want to close it, and don't want to fill out extra paperwork for the classic loan scenario (and banks/creditors don't consider your brokerage accounts as part of your financial state/income - only salary and bank account). As a credit solution: you link your brokerage accounts through APIs/Plaid/etc. (eventually - we can do scraping and login emulation, such services are much fewer than banks) to your account with us: we immediately open an account for you and show how much we are ready to lend you instantly against stocks (with accrual to our account). The main magic for investors is: better risk management - due to double collateral, as online lenders have two problems time and again (and here they turn into two advantages!): risk management and how to reduce it (the service has double collateral for auto and mortgage) and customer acquisition cost and how to reduce it (the service 'rides the tail' of the growth of Robinhood, Revolut trading, eToro, Webull, Moomoo, etc.). And also - a high average check, unlike other creditors or digital banks, plus in lending pre-approve always works well (whatever you do and at whatever rates you sell - even if they are more expensive than the market). In the future, it might be possible to lend against the collateral of crypto and tokens, and also strive to 'capture' more and more cash flows of the retail investor, become their main account, diversify their assets (real estate, stocks, art\wine, NFTs, other assets - all in one app): to become a digital private banking app, like 'Revolut for HNWIs'. Or become a broker eventually (seeing trading positions at different brokers, lending to them, and offering the client to transfer the portfolio to yourself for some bonus when he gets used to you) - and cannibalize his assets from other platforms to yourself.

Online platform for signing and issuance (and tokenisation) of IOUs (an IOU is a document acknowledging a debt: IOU is a phonetic version of the words "I owe you"). The market for lending to each other offline in the old-fashioned way is still huge, despite the growth and penetration of banking and fintech players. There is an urgent need in the field of financial literacy: to properly (easily and quickly) issue such an IOU (from whom, to whom, when, how much, for what term, etc.). A kind of simplest ChatGPT (to draft the simplest legal contract) with PandaDoc (to legally sign it) and Notarize.me (to notarize it in the presence of an independent participant). And - tokenize it: then these assets (in the form of debts to you) you will be able to add and account for in your financial position, pay with IOUs or take loans against them, see them in the dashboard of your Revolut through integration with Plaid. Sounds simple enough - but it's a fundamental shift: we democratize the bond market - everyone is the central bank now! Bond issuance is currently the prerogative of large corporations, and we automate the issuing (and tokenization) of bond issuance - for private clients, as well as small and medium-sized companies, acting as a 'notary' or 'verifier' of issuance and a marketplace for distribution. After all, what is money? It is a debt note, a promise to provide services or produce goods in the future. Take a cue from any central bank - there's no point in paying off the debt (the US Federal Reserve is not reducing and not striving to pay off its rapidly growing debts), it makes sense only to service it (and increase it).

Person-to-state lending platform - a platform for lending to cities, regions, countries. If you learn how to issue credit notes between private individuals (offline and online), then it's a short step to issuing municipal, regional, and national bonds - a sufficiently large, old, and untapped market: transfer it online, give it more transparency, give access to private investors. Some municipalities (see examples in the USA) are ready to borrow in crypto, just in case. What if instead of helping Ukraine and Israel in the form of charity (tens or hundreds of dollars or pounds as donations), you are given the opportunity to lend them thousands or tens of thousands? They get more money, you provide more support in the end, and don't lose your money.

Who is Slava Solodkiy?

Vladislav Solodkiy is one of TOP35 the most influential fintech-investors in the world (by Institutional Investor magazine), TOP21 fintech influencers in Europe (by Fintech Magazine) and TOP100 fintech ecosystem builders in Asia (by NextBank and E&Y). Also, as an fyi, Slava wrote a fascinating insight about the Revolut Mafia the other day.