Revolutionizing Finance: The Role of Fintech Lending Processes and Enabling Technologies

By Jessica Huang

Cover Image Attribute: Image by moz123 from Pixabay

In an era where technology is transforming every facet of our lives, the financial sector is no exception. The rise of fintech has ushered in a new wave of innovation, reshaping traditional lending processes and making financial services more accessible than ever before. The advent of advanced digital technologies and data-driven solutions has revolutionized how loans are processed, assessed, and disbursed, paving the way for more inclusive and efficient financial systems. This article delves into the key fintech lending processes and enabling technologies that are driving this transformation, exploring how they are enhancing accessibility, improving operational efficiency, and ultimately changing the way we think about finance.

Fintech Lending Processes

In a fully digital loan process, innovations can be integrated throughout every stage of lending. This approach involves completing all loan procedures through digital platforms, utilizing digitized data and cashless transactions. With the aid of digitized data, digital lenders can make informed decisions on credit applications and improve customer interactions. Additionally, disbursement and repayment can be managed remotely using digital wallets. Machine learning algorithms and automation can further enhance the digital lending process.

Nonetheless, it is crucial to address potential gender-based biases in these algorithms, as studies have shown that such biases can result in systematic discrimination. Effective management and organizational practices are essential to mitigate these biases. Organizations should consider investing in cross-functional teams that collaborate with data scientists to develop, articulate, and implement strategies for bias reduction.[1]
A 2023 study by Centre for Impact Investing and Practices[2] identified the top three digitized or automated practices in lending: 
(i) know-your-customer compliance and onboarding, 
(ii) credit risk assessment, including underwriting, credit scoring, and loan approval, and 
(iii) direct loan disbursements. 
For underwriting, traditional methods rely heavily on past repayment behavior, cash flow analyses, and payroll or employment data. However, some fintechs are also incorporating alternative data, such as in-app behaviors, transaction histories, or telecom data, into their credit evaluations.
For instance, Modalku, a digital financing platform for MSMEs in Indonesia, uses a combination of e-commerce data, invoicing data, payments data, and mobile data to evaluate borrower creditworthiness. This approach helps overcome limitations in credit bureau data, particularly for underserved customers. Similarly, KoinWorks, a credit-focused MSME neobank in Indonesia, assesses creditworthiness by not only reviewing bank statements and credit bureau data but also analyzing a company’s digital footprint through e-commerce partnerships. These alternative credit scoring methods have improved access to capital for previously underserved MSME customers.
A new subset of fintech companies has emerged, focusing on alternative credit scoring models that utilize anonymized data from telecom operators regarding mobile usage and bill payments. For instance, FinScore, a fintech firm in the Philippines, analyzes over 400 variables from telecom data—such as data and voice usage, top-up habits, location, and device information—to assess creditworthiness. The company also offers tools for fraud detection and social media searches. Alongside telecom data, alternative credit scoring can incorporate information from tax records, utility bill payments, payment gateways, and e-commerce sites.
These alternative credit scores are typically sold to lenders, who use them to inform their digital lending decisions. This approach is particularly beneficial for women-owned MSMEs that lack traditional collateral. While it is challenging to quantify the exact impact on women due to the absence of gender information in telecom data, Trusting Social's 2020 study in Vietnam revealed that women are significantly represented in its credit-enabled database. The study also found that women had higher loan approval rates compared to men in digital-first lending scenarios, where gender was not a factor. Trusting Social's alternative credit scores have facilitated continued access to credit for reliable borrowers, with nearly 40% receiving multiple loan offers within a year. Additionally, Trusting Social has aided borrowers in transitioning from unlicensed moneylenders to regulated lenders offering lower interest rates.

Enabling Technologies

Certain features of fintech applications can significantly impact their accessibility for unbanked entrepreneurs:
1. Intuitive and User-Friendly: Fintech applications must be designed to be intuitive and user-friendly to facilitate adoption among target users, especially Women and Minority-Owned Small and Medium Enterprises (WMSMEs). For these users, convenience and simplicity are crucial, so the app’s interface should support local languages and be accessible to those with low literacy levels. In some regions, it's important that the application is compatible with feature phones, not just smartphones.
2. Lightweight and Offline Capability: To accommodate low-income users with phones that have limited memory, the application should be designed to occupy minimal space on the device. BukuWarung, an Indonesian fintech specializing in bookkeeping, digital payments, and e-commerce for MSMEs, serves as a prime example. The founders observed that many MSMEs used pay-as-you-go data plans and lower-end smartphones, prompting them to develop a lightweight app capable of offline operation. This design choice allowed users to access and update their records at any time without consuming excessive data or storage, setting BukuWarung apart from other digital ledger apps and aiding in user acquisition and retention in Indonesia.[3]
3. Affordable: Financial services must be affordable for WMSMEs. Fintechs can achieve cost-efficiency through cloud-based services, which offer scalable, on-demand access to servers, storage, networks, software, and analytics over the internet. This approach is particularly beneficial for new digital banks and fintech startups, providing flexibility to adjust capacity as needed and reducing upfront and operational costs. While cloud services offer potential cost savings and enhanced security features, such as encryption and two-factor authentication, it is crucial for financial service providers to carefully evaluate the security measures of their cloud providers before storing critical data. Cantilan Bank in the Philippines demonstrates the advantages of cloud computing by operating entirely on a cloud-based infrastructure, which has allowed the bank to pass cost savings to customers and quickly recover from disruptions, such as those caused by Typhoon Rai in December 2021.[4]

Conclusion

As we advance further into the digital age, fintech is at the forefront of transforming financial services. The integration of innovative technologies and data-driven solutions is not only reshaping traditional lending processes but also enhancing the accessibility and efficiency of financial systems. From fully digital loan procedures and alternative credit scoring models to user-centric application features and cost-effective cloud services, fintech is paving the way for a more inclusive financial landscape. By addressing the unique needs of underserved populations and leveraging cutting-edge technologies, fintech is driving progress and expanding opportunities for individuals and businesses alike. As this sector continues to evolve, its impact on the future of finance promises to be profound, making financial services more accessible, equitable, and efficient for all.
References:
[1] Kelly, S., and M. Mirpourian. 2021. Algorithmic Bias, Financial Inclusion, and Gender: A Primer on Opening Up New Credit to Women in Emerging Economies. New York: Women’s World Banking. https://www.womensworldbanking.org/wpcontent/uploads/2021/02/2021_Algorithmic_Bias_Report.pdf 
[2] Centre for Impact Investing and Practices (CIIP). 2023. Financial Inclusion in Post-COVID Southeast Asia: Accelerating Impact Beyond Access. https://ciip.com.sg/knowledge-hub/research-insights/Details/financial-inclusion-in-postcovidsoutheast-asia-accelerating-impact-beyond-access.
[3] Shu, C. 2020. Meet BukuWarung, the Book-keeping App Built for Indonesia’s 60 Million Micro Merchants. TechCrunch. 2 July. https://techcrunch.com/2020/07/02/meet-bukuwarung-the-bookkeeping-app-built-forindonesias-60-million-micro-merchants/.
[4] Schou-Zibell, L., and A. Husar. 2023. Cloud Computing Can Be a Key Enabler of Financial Inclusion. Asian Development Blog. 9 February. https://blogs.adb.org/blog/cloud-computing-can-be-key-enabler-financial-inclusion.
Infographic Source:
* Quimba, F., M. Barral, and J. Carlos. 2023. Analysis of the Fintech Landscape in the Philippines. Research Paper Series. No. 2023-01. Manila: Government of the Philippines, Philippine Institute for Development Studies. https://www.pids. gov.ph/publication/research-paper-series/analysis-of-the-fintech-landscape-in-the-philippines.
About the Author:
Jessica Huang is a Singapore-based business journalist and author, specializing in coverage of the economy, fintech, blockchain, and emerging business technologies. Her insightful reporting and analysis shed light on the latest trends and innovations driving the future of finance and business.

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