Are Online Payday Loans the Future of Lending?

Microfinance institutions are planning to offer more and more products and services online, which meets the current needs of consumers. To do this, companies will have to accelerate the transition to new technologies, even more advanced algorithms for analyzing and processing data, biometrics, and a digital profile of a borrower. So far, this is the only effective way to stop online lending fraud.

Features of online payday loans

Payday loan providers have appeared relatively recently, and they have established and adopted all of the above measures in order to stay on the market. In general, the situation is clear: payday loans are usually for a small amount, which is the reason for a short repayment period and, accordingly, rather high interest rates if payments are delayed.

No paperwork and relaxed eligibility criteria are the main features of payday loans. However, financial risks in this situation are also not canceled, and the lenders include them in the interest rate. Thus, all the negativity related to payday lending has nothing to do with reality. And today, despite the rather difficult conditions, the payday loans market has developed and acquired the features of a convenient and simple service. Most users prefer to fill out an application form online.

You can borrow money quickly, without unnecessary calls and checks. In addition, the amounts of such loans have increased significantly, now lenders are ready to lend up to $1,000 or even up to $2,500. Moreover, it is often more profitable to take a payday loan from a microfinance institution than to borrow money from a bank, especially if the client has a bad credit history.

Online loans: current state of affairs

In 2020-2022, the demand for online loan processing has increased. For example, in 2020, up to 95% of loans were issued remotely.

The offline segment is actively moving online, companies are changing their strategies and business structure, interaction with employees and customers. Lenders quickly transform the business and switch to a remote work format. In order to speed up the decision-making process, microfinance organizations must be very technologically advanced. They offer convenient, flexible solutions on the website and in mobile apps.

It must be said that the pandemic has become an opportunity for online lenders to grow. In 2022, online payday loans are used more often than their 3 alternatives.

The future of lending is digital

After the pandemic, not all customers will be ready to return offline. Still, most lenders see an increase in the number of repeated online applications, applications through mobile apps, and an expansion in the geography of demand.

Companies do not have time for a gradual digital transformation. Changing consumer habits is a clear prerequisite for the fact that alternative lending will continue to rapidly shift online. This year, the number of microfinance organizations interested in expanding online financial services is growing, too.

The decisive argument in the competition for mass segments will be the use of artificial intelligence technologies, machine learning and predictive analytics in credit scoring. Progress in the development of technologies for remote client identification is already transforming microfinance products, making it possible to bring the characteristics and price of the product closer to bank loans and enter new categories of borrowers.

Companies can better analyze the risk profiles of borrowers with informal income and employment, and even those who have gone through bankruptcy. For example, the share of applications from individuals who are bankrupt in the total volume is negligible – only 0.35%, but is growing as the bankruptcy procedure has become easier. People with a difficult financial situation go through the bankruptcy procedure, but they still need money, so they apply for a loan. In this case, they, in fact, start from scratch. And lenders try to meet such clients halfway.

Risks of new cyber threats

There was no increase in the level of loan fraud with the transition of customers to online lending. Before that, microfinance organizations had sufficiently tightened scoring models in order to minimize credit risk. But there is no less fraud in the online segment.

Borrowers need to be careful not to compromise their personal data online. The main fraud schemes in lending are based on the use of citizens’ data. Moreover, the data of borrowers with a good credit history are used. Fraudsters seek access to confidential information (SSN, TIN, phone numbers) in various ways. They use illegally obtained databases, purchase scanned copies of documents, obtain documents using phishing sites under the pretext of getting a job or when registering for various services that require a photo ID against the background of a person’s face.

With the development of remote sales channels, microfinance organizations will have to come up with new anti-fraud rules so that interaction with the client remains automated and fast. It is possible that new opportunities for fraud and cyber risks may appear against the background of the growth of the online segment.

Conclusion: why are online payday loans the future of consumer lending?

Financial experts predict the further development of online payday loans, which means consumers may expert to get more favorable lending conditions. The government is actively working in this direction, and monitors the development of the market. Not so long ago, they adapted a law limiting the possibilities of issuing loans to unprotected and poor categories of citizens. This action is aimed at improving the activities of such lenders and protecting the rights of borrowers. Therefore, at the moment there is no doubt that in the future a person will be able to borrow money not only quickly but also safely. It is only important to understand whether you can fulfill the terms of the agreement concluded with the lender, so as not to have problems in the future and not get into a debt hole.