Lending as a Service: The Emerging Future of Lending in India
5 min read
The booming Indian Fintech market (expected to be $1.5 trillion by 2025) is consistently breaking all the stereotypes associated with the traditional world of finance. With a continuous stream of innovations, from UPI to universal bill payment to embedded finance, technology has completely changed how customers and businesses access financial services.
Another exciting technology in the financial ecosystem is Lending as a Service (LaaS), which is transforming the lending process for borrowers and lenders alike. Payment gateways also play a vital role in this ecosystem by enabling seamless loan disbursements and secure repayment collections.
By integrating advanced payment solutions, LaaS ensures that lending becomes as effortless as a tap on the phone. This synergy between lending services and payment gateways is redefining convenience and efficiency in modern banking, finance, and business operations.
What is Lending as a Service?
Lending as a service is a cloud-based technology that allows businesses to offer credit and other associated services to their customers online without developing and maintaining their lending infrastructure.
Through partnerships with Lending as a Service (LaaS) providers, payment gateways, e-commerce platforms, and non-banking financial institutions can facilitate seamless loan disbursements and repayments. By integrating these services into their platforms, businesses enable users to access and manage their loans directly, without the gateways themselves offering the loans.
Lending as a service is not merely providing loans online (on websites or apps). It’s a comprehensive system that includes businesses, banks, marketplaces, and regulators. It automates and streamlines the entire lending process so borrowers can access loans conveniently and as quickly as possible (within minutes for small loans and within days for larger loans).
Example of Lending as a Service
An example of Lending as a Service (LaaS) businesses are increasingly leveraging is the “buy now, pay later” option commonly seen on e-commerce websites.
When customers choose this option, they are instantly extended a personal loan outside the traditional banking setup, a hallmark of LaaS. The typically complex loan process is simplified into a seamless, user-friendly experience. Customers select the option and begin paying monthly EMIs, often at zero interest, using their preferred mode of payment.
For a business, this simplicity translates into higher conversions and customer satisfaction. While customers experience a frictionless process, LaaS technology handles the intricate backend operations, such as coordinating between stakeholders, performing underwriting, and ensuring regulatory compliance.
Let’s take a look at how does lending as a service works.
Business Partnership
Businesses partner with LaaS service providers to integrate credit products on their website, app, or physical outlets. The LaaS service providers enable partner businesses to provide credit options to their customers without establishing and maintaining a dedicated lending infrastructure.
Customer Application
The customer applies for a loan through the business platform. The application process is streamlined, user-friendly, and requires minimal paperwork. The customer usually provides personal information, financial details, and loan purposes. The entire process can be completed within minutes.
Underwriting and Risk Assessment
The LaaS service provider receives the customer’s loan application and proceeds with the underwriting and risk assessment process to determine their creditworthiness. For this purpose, the LaaS service provider usually evaluates the customer’s credit score, income, employment, and debt-to-income ratio.
Loan Approval and Funding
Once the loan is approved, the LaaS service provider extends the loan terms and conditions to the customer, including the loan amount, interest rate, repayment schedule with monthly EMIs, and processing fees, if applicable. The loan amount is credited to the customer’s designated account upon accepting the offer.
Loan Management and Servicing
The loan is managed and serviced by the LaaS service provider, which includes collecting EMIs, managing payments, and handling customer queries. The business can receive a commission fee for every loan generated on its platform.
What are the Benefits of Lending as a Service?
Here are some standout lending as a service benefits for lenders and borrowers:
Objective Decision Making
LaaS promotes the use of data and analytics for underwriting and risk assessment. This eliminates the subjective, gut-feeling element of the traditional loan process, making the lending process more objective.
Improved Customer Experience
Customer experience is an essential consideration of LaaS service providers. With LaaS, customers can conveniently apply for a loan within minutes with minimal paperwork, usually from the comfort of their homes. This immensely improves the customer experience.
Reduced Customer Acquisition Cost
Businesses integrating loan options through LaaS can expand their customer base at a reduced acquisition cost. With LaaS, businesses don’t have to invest in developing and managing a lending infrastructure. Further, the loan process through LaaS is automated, which reduces operational costs.
Effective Decision Making
With LaaS service providers, lenders can use data analytics to make effective underwriting decisions, even for big-ticket loans, which traditionally require multiple approvals. This effective data-based decision-making reduces loan defaults.
Customised Solutions
The traditional loan processes can be rigid for many unconventional loan requirements. LaaS service providers recognise this and can provide customised loan solutions with tailored loan amounts, interest rates, repayment tenures, and loan purposes. With these tailored solutions, businesses can also enter previously untapped markets efficiently.
LaaS, through its unique focus on data-based decision-making, customer satisfaction, and fast application processes, has already started to disrupt traditional lending models. As digital adoption accelerates across the country, lending-as-a-service is set to become one of the largest fintech segments, growing to over 500 billion dollars by 2030. It is only a matter of time before more and more businesses partner with LaaS service providers to make lending more accessible and convenient for a large segment of customers.
