By Neel Juriasingani
Loan defaults pose a substantial challenge for lenders. It not only leads to considerable financial losses but also deteriorates the general stability of the lending industry. However, with the emergence of technologies and digital platforms, lenders today have access to effective tools that allow them to build strategies that help them drive more on-time payments, identify frauds early, recognize potential default risks, and digital workflows to manage such scenarios.
Here are some of the potent ways in which technology can enable lenders to minimize loan defaults and garner a competitive edge in the industry-:
Engage with the customer
This is not going to be a one-off, you want that customer for life, you want them to access more products and services that you can offer, fostering an effective relationship with your customers is key, and what’s more, it also drives higher on-time payments. The relationship need not begin post-default, there are a slew of communication channels that you can choose from, to consistently engage with the customer. However, it’s important to know your customer’s preferences, when would they like to hear from you? What language are they comfortable in? Do they need help with their payments? Are they unclear about the loan? Do they prefer a timely payment reminder?
Now richer and more interactive digital channels are available that Inform the customer regarding payment plans, approaching due dates, or other crucial loan-related milestones. Lenders can also utilize artificial intelligence (AI) chatbots to furnish borrowers with prompt assistance and resolution of their queries. These personalized approaches not only enhance customer experience but also nurtures trust among customers, the key is to identify and build your customer micro-segments.
Elevate the financial literacy of customers
Based on your risk strategy, some of your new customers may also be new to the whole business of loans on EMIs, technology can play a critical role in enhancing the financial literacy of borrowers. Lenders can utilize digital platforms and other resources to deliver valuable knowledge about credit management, budgeting, and loan repayments.
Leveraging user-friendly interfaces and interactive tools, borrowers can garner a comprehensive understanding of their financial health, like updates on their credit scores, perhaps start by explaining what this score is all about. For a few customers, this may be enough motivation for them to keep payments on time, for others you may have to identify the right motivation.
Make Repayment Methods Simple
For recurring payments, Financial institutions push customers to sign-up for Auto-payments or Standing instructions, the success rate however for such payments is not more than 50%. In addition to payment apps and banking apps, cash-based payments also play a significant role, making it crucial for lenders to offer flexibility in their options. It is essential to understand each customer’s preferences. For instance, if a customer is comfortable with cash transactions instead of digital methods, are you providing them with such options? If you are sending them payment reminders, do you send a link, which on clicking, opens a prefilled page with loan details? Can such payments be made with fewer clicks?
Detect Fraud Early
Loan defaults can also occur via fraudulent activities, such as identity theft or fake loan applications. Technological tools can recognize and avert such fraudulent activities, lowering default risks, what’s critical is how early or at what stage this can be caught.
Machine Learning(ML) algorithms can assess enormous datasets and pinpoint patterns denotative of deceitful behavior. These algorithms can flag dubious loan applications, ascertain the authenticity of borrower details, and catch possible instances of identity theft. By utilizing state-of-the-art fraud detection technologies, lenders can greatly improve their ability to prevent default induced by fraudulent activities.
Foster a habit of timely repayments, It’s going to be a journey, these are not standalone strategies, engage, educate, empathize and motivate, customers will fall into a habit and you will have a customer for life.
(The author is Neel Juriasingani, CEO and Co-Founder, Datacultr, and the views expressed in this article are his own)
