Digital Lending: What It Is, How It Works & Platforms

Digital lending or fintech lending refers to obtaining loans online through digital platforms. It is technology to simplify borrowing money. Instead of visiting a bank, you can apply for loans online. The process is streamlined, bypasses traditional intermediaries like banks, and often eliminates excessive paperwork.

Key Takeaways

Digital lending offers advantages such as convenience, speed, and accessibility for borrowers.
Lending-based crowdfunding and resale marketplace lending have both emerged as popular digital business models.
The borrowing experience is more flexible for borrowers and opens up new investment avenues for lenders. For investors it can provide asset diversification and potential high returns.
Digital lending uses technologies like AI and big data to make borrowing and lending money effective, fast and easy.

What is Digital Lending?

This process involves digital tools to help lenders decide who gets loans faster based on a simple application. It makes borrowing quicker and easier, revolutionizing the lending industry. It also aims to reach people who might struggle to get loans from traditional financial institutions.

Simply put, digital lending is borrowing money through online platforms instead of from banks. It's fast, convenient, and available 24/7. Digital or fintech lending platforms use advanced tech like AI and big data to make borrowing and lending smoother for everyone. This approach has rapidly grown, changing how people borrow and lend money. Thus, the fintech lending market is projected to surge to over $400 billion by 2028. This growth rate is expected to be 18%, which is three times faster than that of traditional banking that grows at a rate of 6%.^[1]

How Digital Lending Works

For borrowers, digital lending has significantly simplified the loan application process for both businesses and individuals. Rather than navigating cumbersome paperwork and bank visits, applicants can now conveniently apply for loans online, submitting their financial information digitally from the comfort of their homes. One advantage is that computers swiftly assess borrowers’ likelihood of repayment, expediting the approval process. Once approved, funds are promptly disbursed, providing borrowers with timely financial assistance. Repayment is equally straightforward and facilitated online.

For lenders or debt investors, the digital lending platforms open to investors offer diverse investment opportunities, allowing them to tailor their portfolios according to preferences and risk tolerance. After setting up a profile, the lender can browse through available loans and conduct research before making investment decisions. Investors transfer money securely through the platform and receive interest payments in return. Although fees are involved, tools are available to manage lending risks. Overall, digital lending streamlines the borrowing and investment processes, benefiting all parties involved.^[2]

Traditional Lending vs. Digital Lending

Traditional lending usually means lots of paperwork. In contrast, digital lending streamlines the process by leveraging data from various channels to swiftly assess borrower creditworthiness. Enhanced customer service in digital lending, facilitated by technologies surpasses traditional methods that often require physical visits or phone calls. Digital lenders cater to a broader customer base, prioritizing quicker financing, with loan approvals in hours rather than weeks.

Characteristics	Traditional Lending	Digital Lending
Process and Application	The application process includes filling out paper forms, meeting people in person, and doing things manually. Borrowers usually go to bank branches or financial institutions to request loans, hand in documents, and have their credit checked.	The entire application process is online, usually through websites or apps. Applicants don't need to visit in person; they just fill out forms and submit documents. The lending platform provides fast decisions.
Accessibility	Access to traditional lending may be limited by the geographic location and operating hours of physical branches. Borrowers may need to travel to a bank or lender's location during business hours.	Digital lending platforms enhance accessibility, enabling borrowers to request loans from any location with internet access, 24/7.
Speed and Efficiency	Approval and disbursement of loans through traditional channels can take days to weeks due to manual processing and paperwork.	Digital lending platforms leverage automation and algorithms to streamline the lending process, resulting in faster approvals and disbursements, sometimes within minutes or hours.
Verification Process	Traditional lending requires paperwork and meetings in person to confirm information, which can take a lot of time.	Online applications, digital document submission, and automated verification processes reduce paperwork and expedite the process.
Credit Assessment	Banks and traditional financial institutions typically assess applicants' credit, assets, and financial metrics to determine their eligibility for lending, which often results in a slow process.	Digital lending platforms use advanced algorithms to assess creditworthiness, incorporating traditional metrics and alternative data like digital footprints and social media activity. As an automatic process, this speeds up the process compared to traditional lending.
Customer Experience	Traditional lending involves face-to-face interactions with bank representatives or loan officers, which may vary in quality and personalization.	Digital lending offers a seamless and convenient user experience, with self-service options, personalized loan offers, and 24/7 access to customer support.
Risk Management	Traditional lending relies on established risk assessment models and may be more conservative in its lending practices, making it difficult for some applicants to secure a loan.	Digital lending platforms often offer easier loan approval with less strict criteria.

Digital Lending Platforms

In the 2010s, digital lending experienced a surge in popularity, spearheaded by platforms such as SoFi, which became the world’s most-backed lender by 2023, raising $3 billion across 19 rounds.^[3] Other prominent fintech lenders, including Prosper, Affirm, and Lending Club, also rank among the most popular platforms. Peer-to-Peer lending platforms like Estateguru, Kuflink, Mintos and PeerBerry also thrive.

SoFi

SoFi, also known as Social Finance, was founded by Stanford University students. The platform offers various products such as student loan refinancing, personal loans, home loans, investments, and credit cards. Notably, its SoFi at Work program assists with student loan contributions. The platform's diverse offerings encompass loans, investment services, banking services, insurance, and retirement accounts. These products cater to different financial needs, making SoFi a comprehensive financial hub.^[4]

Estateguru

Estateguru is a leading European real estate crowdfunding platform based in Estonia. It is a lending-based crowdfunding platform offering fractional investments in property-backed loans across Europe. Regulated by the Bank of Lithuania, with branches in Germany and Finland, it provides short and mid-term loans to SMEs and developers. Three loan categories: development, bridge, and business are available, mostly structured as bullet loans. Investments are secured by first-rank mortgages on various properties, with maturity typically in 12-18 months. The default rate is 14.07%, with only 0.01% written off. Supported by Series A funding, investors on the platform enjoy an average return of over 8.5%.^[5]

Kuflink

Another lending-based platform, Kuflink, based in the UK, specializes in real estate crowdfunding, connecting investors and real estate developers. Founded in 2013 as Alpha Bridging Solutions, the business was rebranded as Kuflink in 2017, specializing in peer-to-peer lending for short-term loans secured by UK property. With an FCA license, Kuflink has garnered over £304.51 million in funding, averaging £5.57 million monthly.^[6] Investors can access secured property loans starting at £1,000 with interest rates up to 9.83%, various loan durations, and monthly payments. Kuflink co-invests up to 5% in every deal.^[7]

Mintos

Mintos offers both alternative and traditional investments. The platform focuses on passive portfolio management and operates under EU standards (MiFID II). Assets are held separately, and investors are protected under the compensation scheme. Since its launch in 2015, Mintos has amassed 539,000 registered participants and €613 million in assets under administration. The platform recently started offering traditional assets such as ETFs and bonds. Originally, Mintos provided a resale marketplace for loans, now offering it as an alternative investment solution alongside its traditional assets.^[8]

PeerBerry

PeerBerry, founded in 2017 by Aventus Group, operates as a Croatian platform within one of Europe's major non-banking lending groups based in Vilnius, Lithuania. As a resale marketplace lending platform, PeerBerry offers a variety of real estate and business loans sourced from Aventus Group's originators across Europe, CIS countries, and Asia. Since its launch, PeerBerry has raised over €2.23 billion, with a monthly volume averaging €65.75 million and boasting a community of 77,132 investors.^[9] Investment amounts range from €10,000 to €20,000, with a minimum investment requirement of €10 and interest rates ranging from 9% to 9.5%.

Digital Lending Advantages

For borrowers, digital lending offers convenience via online applications and document submissions, accessible 24/7 from any location. Speedy approvals and fund disbursements, often within minutes, are facilitated by automated processes and advanced credit assessment algorithms. These algorithms incorporate alternative data sources, reducing paperwork and enhancing the borrowing experience. Additionally, user-friendly interfaces offer personalized loan offers. Moreover, digital lenders may have less stringent eligibility criteria, widening access to loans for a broader range of borrowers.

For lenders and investors, a crowdfunding investment, particularly, digital lending offers diversification, income streams, and the potential for higher returns compared to traditional fixed-income investments. Digital lending also provides control over risk exposure, and access to diverse markets, and can enhance the overall investment portfolio yield. Loans can serve as an inflation hedge, offering protection against diminishing purchasing power. Investing in loans via crowdfunding can be attractive for investors seeking income, portfolio diversification, and potentially higher returns, provided they conduct thorough due diligence and manage risks effectively.

Digital Lending Business Models

Digital lending and fintech lending platforms employ various business models. The five most common ones are Peer-to-Peer lending, Resale Marketplace Lending, Balance Sheet Lending, Digital Banks and Neobanks, Invoice Financing and Supply Chain Finance.

Peer-to-Peer Lending: P2P lending connects people who want to borrow money directly with individuals willing to lend, skipping traditional banks. A website or app acts as a middleman, helping with the loan process. Investors can pick which loans to fund based on risk and potential returns.
Resale Marketplace Lending: Similar to P2P lending, these platforms also offer loans as investments but rarely offer direct borrowing on the site. These platforms resell loans that have already been obtained by borrowers from a loan originator. The loan originators use technology to decide who gets loans and at what interest rates they are sold to investors.
Balance Sheet Lending: Some lending companies use their own money to give out loans, either from large investors or the owner’s funds. They take on the risk of borrowers not paying back but can earn higher profits. They use tech to make loan decisions and manage risk better.
Digital Banks and Neobanks: These are banks that operate entirely online or through mobile apps. They use technology to offer faster loans, lower fees, and a more technologically streamlined customer experience than traditional banks.
Invoice Financing and Supply Chain Finance: These are specialized loans for businesses. Invoice financing lets businesses get money by using unpaid invoices as collateral. Supply chain finance helps businesses manage payments along their supply chain using tech platforms.

How do lending platforms make money?

The most common ways that digital lending platforms make money are through interest rates, origination fees, service fees, late payment fees and transaction fees.

Interest Rates: These platforms earn money by charging borrowers interest on the loans they provide. The interest rates they charge are typically higher than what they pay to get the money, allowing them to make a profit.
Origination Fees: These are one-time charges for processing loan applications. Borrowers pay these fees, which can vary depending on the loan amount and type.
Service Fees: Lending platforms earn revenue by charging fees for different parts of the loan process, like checking credit, approving loans, and managing them.
Late Payment Fees: If borrowers don't pay on time, they get charged extra fees. These fees add to the platform's income.
Transaction Fees: In peer-to-peer lending, there are fees for moving money between borrowers and investors. These fees can change based on how the platform sets them up.

What is the future of digital lending?

The global digital lending market is predicted to expand significantly. It is estimated to be valued at $11.5 billion in 2023, $71.8 billion by 2032. This growth is expected to happen at compound annual growth rates (CAGR) of around 19.4% from 2023 to 2032.^[10] This growth is driven by the convenience and profitability of digital lending for banks and borrowers, facilitated by automation. North America sees significant adoption, especially in peer-to-peer lending, due to tech use and regulatory changes. In Asia Pacific, government support and internet access fuel growth, addressing the unbanked. Europe benefits from fintech-friendly regulations, fostering diverse online lending models. Latin America is in the early stages but growing, meeting the demand for alternative borrowing. The Middle East and Africa present a vast opportunity with increasing technology use and efforts to include the unbanked.^[11]

Article Sources

McKinsey & Company: “Fintechs: A new paradigm of growth”
McKinsey & Company: “The Power of Digital Lending”
FinTech Magazine: “Top 10 fintech lenders by total funding”
SoFi: “Financial Products”
Estateguru: “Statistics and Reports”
P2PMarketdata: “Kuflink Statistics”
Kuflink: “Statistics”
Mintos: “Homepage”
P2PMarketdata: “PeerBerry Statistics”
Allied Market Research: “Digital Lending Market Research, 2032”
Imarc Impactful Insights: “Peer to Peer (P2P) Lending Industry Segmentation”