Rising Customer Risks in Digital Lending, how efficient test automation can help?

The traditional lending process was time-consuming as the time for credit appraisal and disbursal used to be around three to four weeks, and the average time for account/money processing used to be approximately 60 – 70 days. In the traditional lending process, customers have complained that due to 30 days of the moratorium, the EMI would have started way ahead of the lending amount credited in their account. Often, customers used to opt for 6o days of the moratorium to avoid the inconvenience.

Soon organizations realized the need for digitalization to reform the lending process. Leading banks worldwide adopted digital lending to slash down the processing time to 24-hours. Digitalization brought a transformative change to the entire lending process. There has been a significant shift in end-to-end credit journeys, including the customer experience. Digital transformation has supported the credit processes. Digital transformation has improved revenue growth and achieved significant cost savings.

Digital lending allows customers to submit loan applications online. From applications, to documentation, verification and amount credited to your bank account, the entire process is carried out on mobile applications, and it takes less than a day to credit the principal amount to the customer’s bank account. From three weeks and 60-days, the time to cash is now reduced to 24-hours.

Rising customer risk in digital lending

Banks are enhancing the process by adopting paperless loan approval. They are automating the entire process to improve time and quality. But digital advancement has its own limitations. There is a rising concern for customer risk associated with digital lending. Customers share account details, personal information, credit history, and more on these applications. Hence, organizations must ensure that they maintain the stability, security, performance, and accessibility of these platforms.

The organizations are currently digitizing the credit and lending process. The banks are focusing more on improving customer experience by reducing the time taken for lending process. While organizations reduce the lending time, there is a major concern arising from customer risk. Let us look into the types of customer risks associated with the digital lending process.

  1. Multi-layered transaction process – The digital lending transacti0n is multi-layered as various lending services are outsourced to different entities. Multiple Fintech companies operate behind the operation to create a platform for transactions. As the customer uses these tech platforms for transactions, it becomes increasingly complicated in the cases of grievance redressal, like who will address the customer complaints, what actions should be taken and by whom to ensure that the services are more effective.

The platforms are integrated by embedded finance that forms a layer of services by different fintech modules. These platforms also work based on an algorithm that matches borrowers to lenders. While this algorithm creates efficiencies because several activities are performed simultaneously in a broader lending spectrum by outsourcing it to many Fintechs, there can also be certain drawbacks. If the borrower has appointed a defaulter as a guarantee, Fintech will address the loss. However, at the time of collection, customers will face many challenges.

  • Irregularity in information during loan origination process – The terms and conditions in the lending process are lengthy. The lending process becomes complex because not all organizations will have similar terms and conditions; some will have more than others. It increases the customer risk because customers may not have thorough knowledge and understanding of the repayment terms while signing the loan agreement. The customers may not comprehend the information like the interest rate, processing fees, overdue charges, annual percentage rate and more if not informed by the lenders. They would also not know the consequences of repayment delay, credit score impact, and implications of NPA.

Customers are also not aware of the payment recovery actions that organizations adopt. All this inadequate information makes borrowers make uninformed choices and affect their credit ratings. The loan disbursal is quick in digital lending, but without adequate information about the charges and consequences of non-repayment, the risk will increase.

  • Effects on unfavourable credit history – The previous point brings me to the current one that if the customers are not informed about the adversities of repayment delay or repayment overdue for months, it will affect their credit records. Most customers are not even aware that non-repayment or delays can affect their credit eligibility for future loans. Once the credit score is evaluated low, the customers must take multiple measures to rectify them or obtain credit approval to avail future loans. A low credit profile can lower the credit records making it difficult to apply for a new loan.
  • Lack of communication and transparency on assessment of creditworthiness – Digital lending, unlike the traditional lending process, which follows a thorough process of evaluation of customers’ credit profiles, does not engage in interaction with the customers, which is a requirement to analyse the customers’ creditworthiness. Digital lenders spend a lot of time on automated IVR, text messages, and social media advertisements to create awareness and push their services. Borrowers are not even aware of how the lenders have procured their contact details and credit history. It is not even clear how the lenders have evaluated the credit eligibility of borrowers. It creates a lot of confusion regarding whether it is spam or a genuine approach.

Like traditional lending, digital lending also considers two important aspects of the lending process; the customer’s willingness to pay and the ability to pay. While the first intention is evaluated through the customer’s previous credit history, the second intention is evaluated by the customer’s salary credited in the bank account, debit and credit history, investments, liabilities, and more. While applying for a loan, the digital lenders request access to contact details saved on customers’ phones. The lenders use this alternate data model to cross-verify borrowers’ credibility and positive intentions.

  • Lack of suitable assessment device – It is easy to avail of loans digitally as the processing is quick. But there is a lack of borrowers’ credit worthiness assessment that complicates the entire lending process. Often lenders provide top-up loans based on the timely repayment by the borrowers without a suitable assessment. This added loan sometimes may not flow well with the borrowers, and they may end up in high overdue.

The overdue reason could be the high-interest rates imposed within a short loan tenure. Several instances in the past highlighted that customers ended up being loan defaulters, and organizations had to contact them and force them to repay the loans. The collection process in digital lending happens digitally (mostly auto-debit). If customers miss one EMI, it will lead to a serious outcome, and lenders might look for alternative ways to recover the loans. Both borrowers and lenders face harassment.

  • Lack of grievance redressal – Digital lending lacks promptness in addressing customer complaints. In fact, the grievance redressal is not as quick as the loan disbursal process in digital lending. It also lacks transparency for customers, which their trust in digital lending. The digital lending ecosystem evolves multiple service layers offered by many fintech, making the customer interaction complicated and confusing and finally leading to failed redress. For most lending fintech, the only option for redressal is either through an integrated chatbot or WhatsApp chat sessions, which have certain limitations and do not always suggest adequate information. All these increase the intensity of redressal issues, and customers face problems.
  • Risk of compromised personal data – The unique selling feature of digital lending is how they gain access to customers’ personal data and use these alternate data for customer onboarding and credit appraisal processes. But it can be equally detrimental if the data points are sourced from external data agencies. Sometimes the borrowers sign two agreements in case the digital lending happens through a third-party service provider. In the above kind of agreement, the first signed agreement would be between the borrower and the lending app, where the lending app would be entitled to a different entity.  This structure allows the third party to gain access to customer data to collect all necessary information. These sourced data can be misused without the knowledge of the customers.

Why testing is an important digital lending platform?

Let us consider a scenario; you enter all your details, and suddenly the application stops responding with a notification message for you to close the application. You have to turn off the application, unaware of whether the application has recorded the details you have already entered. Or, you upload your documents and click your image, but the image does not get saved. The digital lending platform might have to contact the customer to inform about the missing information and ask them to upload all details again. Customers relate to the digital lending platform because of its seamless functionalities, easy navigation, superior performance, and security. If any of these is compromised and has errors, customers would not think twice about discontinuing using the application.

As per a report in Statista, “Digital lending is one of the fastest-growing fintech segments in India and grew exponentially from nine billion U.S. dollars in 2012 to nearly 110 billion dollars in 2019. It is expected that the digital lending market would reach a value of around 350 billion dollars by 2023”. We can imagine the growth of digital lending in the upcoming years with a 13.5% CAGR. The projected data give us an idea that the number of the digital lending platform will increase, which implies that it would need rigorous testing to ensure that the platform is top-notch without any technical errors. Each Fintech must also ensure that no organization loses their business to their competitors due to technical glitches of applications.

Let us investigate how efficient testing can improve the digital lending experience.

  1. UI/UX and integration – Customers seek platforms that are easy to use and navigate. Testing can evaluate a clean UI design and integration point to ensure that the customers enjoy a seamless experience of the lending platform.
  2. Performance – It is a massive turn off for customers if the application stops responding or if there is a performance error. Performance testing can ensure that the digital platform eliminates the possibilities of performance issues in the lending application.
  3. Accessibility and functionality – Customers relate to applications with easy accessibility and functionalities. They will not prefer using an application filled with features and functionalities. It confuses customers with the click-boxes and fields that do not allow them to navigate through the window command. Functionality testing helps detangle the application so that customers can easily access the applications and ensure that the platform performs at an acceptable standard.
  4. Security – Security is an important aspect of a digital lending platform. Customers share data with an expectation that the platform will maintain customer data confidentiality. The digital lending platform must ensure that the security of borrowers’ details is not compromised. Security testing can ensure that digital lenders maintain data security under the proper protocol.
  5. Regression – Changes, modifications, and addition to the digital platform are extremely frequent. Each change implemented in the application can harm the entire application functionality if not validated properly. Regression testing ensures that the new features are integrated adequately and correctly without disrupting the previous application features and functionalities.

Conclusion – Test automation is an effective solution to scrutinize the workflow of digital lending systems workflows. It validates the end-to-end process and saves time and effort for each implementation. Digital lending platforms have a high degree of inter-connectedness, which requires repeated testing to minimize manual efforts and achieve optimal coverage.

At Yethi, constantly upgrade and update your LOS and digital lending platforms to make them flexible and agile. The major challenge in testing these systems includes usability, performance, security, UI/UX, and Configuration. With Yethi’s robotic, 5th generation codeless test automation solution, Tenjin and deep domain expertise, the experts address the above challenges. Our team help banks and financial institutions drive their testing operation and ensure that their customers achieve their business goals within the stipulated timeline. Our intuitive solution – Tenjin, reduces 60-70% testing turnaround time.

Is India’s digital lending market equipped to manage the QA risk for appropriate digital experience?

Technology has made Indian banking systems move from physical to digital platforms. Amidst the rising concern of the global pandemic, when the entire world moved within home confinement and physical touch and interaction was restricted, banking needed a massive transformation. Since banks and financial institutions started digital transformation journeys, banks have elevated to internet banking and digital means of payments, digital account opening, digital lending, wealth-tech, and invest-tech solutions. Banks have moved further and adapted neo-banking models and became ‘Banking-as-a-Service’ (BaaS) platform providers.

Like all other channels in banking, the lending market is highly influenced by digitalization. With deep penetration of internet facilities, growth of services available on the digital platform, advanced technologies, regulatory changes, and more have triggered the growth of digitalization. Customer expectations have increased as the demand for virtual banking has increased like never before. It becomes a priority for banks to meet customer needs without compromising on superior customer experience. With the rise of fintech, the growth of digital banking has become inevitable.

What is QA risk in lending?

With the digital expansion, lending companies are faced with challenges like unethical business practices, mis-selling, cybersecurity, and data privacy concerns. Maintaining Quality Assurance for financial applications is crucial because it ensures that customer details and money both are protected. By testing the financial applications, organizations can validate the regulatory and reliability of the applications. However, there are some potential QA risks in the lending market.

Some of the common risks in software testing and QA of financial applications are,

  • There is a lack of communication and interaction between the lender and the borrower. An inadequate regulatory framework for digital loans like consumer loans, instant loans, etc., makes the matter more grave. It may lead to delinquency and potential fraud, which require safeguarding mechanisms against fraud in the lending platforms. Possible interaction, adequate regulatory framework, and applicable verification are necessary to prevent undesirable outcomes. Organizations must formulate an apt quality framework to save valuable resources and meet deadlines.
  • There are frequent changes in applications that may arise due to customer requirements. The request for changes is so frequent that it leads to resource gaps or exhaustion. Organizations must ensure product quality while meeting the launch deadlines. It creates immense pressure on the team to manage the risk while handling the project deadlines.
  • Sometimes, a lack of prioritization may shift the focus to insignificant aspects. The situation can be more critical if there is a lack of monitoring mechanisms for lending service providers and digital lending applications. The team pays more attention to the insignificant features ignoring the primary ones. Hence, it is critical to prioritize the main functionality and product highlights and build a monitoring mechanism to define and monitor the core functionality.

From loan origination to collections, the lending lifecycle has become digital. To render lending services, banks are collaborating with several third parties like fintech, distributors, SaaS providers, thus exposing borrowers and lenders to new and heightened levels of risk.

Importance of QA in lending service for outstanding lending experience

The importance of QA increases to ensure that the customers have an outstanding digital lending experience. The innovative operating models and structures evolved around digital lending demand the need to evaluate the risks and protect the customers and lending organization data. QA in lending services is critical as it helps in monitoring the system performance and functionality to manage the risk.

The risk management frameworks of banks and NBFCs have started utilizing digital touchpoints for a proactive risk assessment of client profiles. Without an adequate QA service validating the connectivity and performance of the digital touchpoints will be an impossible task for an organization, thus increasing the probability of risks. It will also hinder the organization from insightful decision-making. QA prepares your systems to perform without errors in identifying potential anomalous transactions.

An adequate QA service helps organizations regulate and formulate better standards for cybersecurity, privacy, customer servicing, dispute management, system availability and performance, and fraud. RBI frequently changes its guidelines, which requires organizations to incorporate the changes in the systems. A good QA practice will help organizations validate the changes in the systems without an error and remain compliant with frequently changing RBI guidelines.

Also, with these RBI guidelines changes, the organizations must assess the systems’ worthiness of the apps. Validating the systems against cyber threats is a critical exercise that lenders must follow. An adequate QA practice in lending ensures that the system is perfectly sustainable, accessible, and reliable even with these changes. QA practices also see that the apps can adapt to the contractual terms and conditions, customer rights and awareness, dispute resolution, manage fraud, and more.

How to manage QA risk for appropriate Digital experience?

To address the QA risks associated with testing of financial applications, the QA testers intensely scrutinize the following key aspects of the financial applications.

  • Security – Ensuring application security is a pivotal exercise for lending institutions. The Cyber-criminal makes financial applications and data (customer and organization) centre a soft target. Cybercriminals can gain control over customer accounts and misuse the data. The QA team tests the platform security to ensure that the applications and the data are protected and secured from all possible data manipulation.
  • Reliability – Financial applications have the extreme responsibility of assessing, processing, and storing sensitive customer data. This exercise ensures the application reliability of how accurate the applications can process and store data. A good QA practice ensures that the financial applications have a high level of data availability. It also confirms that even if the application performance fails, the applications can still protect the data.
  • Performance – It is critical to evaluate the performance of financial applications concerning the transaction time and transaction frequency. The banking, trading, and lending applications process many transactions in a short time. The apps cannot delay the response as each transaction request is critical. Any delay in application response can impact business operations. QA services validate the application performance during high traffic and heavy transaction volume. It identifies the performance bottleneck and prepares the systems to perform without disruption.
  • Regulatory Compliance – Every organization must comply with all regulations and government guidelines. The financial institution must prepare the operation to adapt to the frequent changes in system regulations so that the organizations meet the requirements of regional or national governments or various international regulatory bodies. A good QA practice prevents system failure by meeting the system’s compliance against civil, financial, or even criminal consequences.

Is India equipped to manage the QA risk for appropriate digital experience in lending market?

India has witnessed extreme growth in innovation and technologies in the past couple of decades. The country has been so proactive in embracing the digital transformation that even in a grave situation like the global pandemic, Indian financial institutions could pull it through. Today technologies drive Indian banks and fintech NBFCs. India’s digital lending consists of services like unsecured loans to secured loans, personal loans to business loans to vehicle loans, and loans for individuals and MSMEs in various age groups and segments.

Since the Indian banks are steadily adapting to innovative digital approaches across all channels, the fintech NBFCs could have been far behind. They are adopting digital lending like all other channels. Banks and NBFCs have collaborated with the e-commerce firms to finance the products to the buyers and encourage the suppliers and businesses to do business without any disruptions. Financial institutions also partner with marketplaces, aggregators, wallet companies, payment facilitators, etc., to cater to digital sourcing models. Financial institutions are now leveraging advanced technology and partnering with various fintech to offer products like Buy Now Pay Later, a point-of-sale credit, and others.

There are several technologies like data analytics, alternate data models, and data-based underwriting models that financial institutions use to create a digital database and reduce turnaround time and operational costs. Financial institutions have partnered with account aggregators to decide on the credit eligibility of the customers. Technology allows companies to undertake income assessment, loan monitoring, KYC data assessment, and create a single view of the customer across their liabilities and assets by leveraging data from other financial sources. The process will allow the lenders to onboard new customers with ease.

Financial institutions also utilize emerging technologies like open banking or video KYC, which requires them to coordinate with fintech for an array of financial services like lead acquisition, KYC verification, income verification, e-signing and e-stamping, and processing fee payments and collections. The Reserve Bank of India has formed a Working Group on digital lending, which addresses the risk posed by digital evolution in financial services. This group also ensures that organizations reap the benefits of digital innovation.

If organizations encourage the covert digital or neo banks, digital-only NBFCs or banks, they must ensure that their QA is top-notch. Organizations are testing their systems and platform. Organizations have adopted an agile testing methodology to include QA practice early at the development stage to highlight the errors so that the team can identify and resolve those issues. Testing has become an integral part of the development stage. QA practice gives the banks and financial institutions that level of confidence and liberty to innovate and introduce new technologies without any restrictions. 

Conclusion

The growth of digital lending had a tremendous impact on organizational setup, technology, compliance, and operational costs for digital lenders. The entire structure of the financial organization is changed. Organizations use AI/ML-based underwriting algorithms to offer better monitoring and governance in the segment. Digital lending is building customer trust by providing more transparency providing a comprehensive framework and a progressive regulatory environment for the fast-growing digital lending segment.

Banks and NBFCs successfully offer robust and seamless digital lending infrastructure to existing and potential borrowers. They effectively address and mitigate issues concerning cybersecurity, data privacy, operational risk, third-party risk, and fraud risk. The financial institutions and their partners are reaping the benefits of digital innovation while mitigating potential QA risks to offer an outstanding digital experience to the borrowers.