safety measures for risky times: not at the cost of CX!

“We live on shifting sands in a time that moves far too quickly” - C. Streetlights, Author

Economic certainties, wars in different areas of the world, and massive technological shifts have ensured that the sands beneath the world are indeed shifting into unknown terrain. In such a climate, the lending industry faces a range of challenges—interconnected ones that could impact not just their profitability and stability but also hit compliance. An often underestimated challenge is the hit on customer experience (CX).

Some of the core risks include credit risk, where borrowers default on loans due to economic slowdowns, inflation or declining profitability. Non-performing loans can be a huge burden on lenders. Interest rate risk may also creep up when rates are fluctuating, affecting loan values as well as borrower affordability. Liquidity risk is another key problem when even borrowers with the best profiles face challenges in meeting their short-term obligations amidst market contractions.

Besides these, operational risks that stem from internal failures, risks due to cyber threats such as phishing and ransomware, fraud risks and AI-powered scams stalk the industry.

Finally, regulatory and compliance risks could potentially balloon, particularly for businesses that operate across multiple geographies. Non-compliance could heighten scrutiny and penalties.

Technology to mitigate risk

Risk mitigation in the lending industry is done in a variety of ways. They begin with the systematic identification and assessment of the particular risks for any lending enterprise, followed by putting in place control measures that protect the organisation and its stakeholders against defaults, fraud and operational disruptions. These strategies may integrate technology and regulations, as well as embed proactive monitoring for resilience.

Here are some key mitigation measures:

• Ensuring credit risk mitigation via models such as the "Five Cs"—character, capacity, capital, collateral, conditions—as well as  financial analysis and continuous monitoring to predict defaults.
• Diversifying across loan types and borrowers, setting credit limits, requiring collateral, and stress testing portfolios to reduce exposure.
• Implementing operational and fraud mitigation measures comprising robust internal controls, and compliance with regulations and guidelines of the governing bodies in the country(ies) of operation.
• Deploying real-time fraud detection systems through behavioural analytics and AI tools that combat cyber threats and unauthorised apps.
• Running awareness campaigns, reporting portals, and vetting by intermediaries to prevent fraudulent loan activities.
• Advanced techniques may include implementation of portfolio tools like loan sales, credit derivatives, guarantees, and synthetic securitisations to transfer risk while releasing capital. These may also include sensitivity analysis, risk segmentation, and adaptive systems that enable proactive adjustments.

Compliance management services to the fore

Compliance management services help businesses to systematically adhere to laws, regulations and internal standards in order to avoid any compliance penalties and avert associated risks. Such services become especially relevant in regulated sectors like lending, where they address compliance risks such as fair lending and anti-money laundering (AML) requirements.

The core components of these services typically include:

1. Risk assessments to identify obligations
2. Policy development for adherence
3. Employee training programs, and
4. Ongoing audits to ensure compliance.

Automated compliance management platforms may help enterprises centralise compliance-related documentation, monitor deadlines, and generate reports required for transparency. Such platforms include features such as centralised tracking of regulatory filings, renewals, and audits using dashboards and heatmaps, proactive alerts for upcoming deadlines and high-risk areas, as well as integration with governance, risk, and compliance (GRC) tools for litigation or contract management.

In the lending industry, these services help businesses mitigate regulatory scrutiny by handling fair lending compliance, data privacy, and fraud reporting, thereby reducing reputational damage and fines. Compliance partners may also offer end-to-end support tailored to statutory labour, vendor, and financial regulations.

Playing a balancing act

The enterprise may take a hit on their CX while deploying a slew of risk mitigation and compliance measures. Balancing customer experience (CX) with risk mitigation in lending is a key strategy that may help in a variety of customer-facing processes. For example, well-designed user flows may help businesses streamline their borrower verification processes without any compromise on the necessary due diligence. The right technology may help reduce friction whilst still maintaining security. Lenders must also navigate trade-offs like quick approvals versus running thorough checks to retain their customer base, amid rising defaults and regulations.

The strategy is not without challenges. Rigorous risk assessments, such as detailed credit checks and income verifications, often create delays. The perceived intrusiveness of such processes may lead to drop-offs during the borrower verification process. Such potential borrowers may leave poor reviews on social media platforms, hurting the brand’s reputation and credibility. Overly strict controls may also deter users who expect instant digital experiences, while lax ones may heighten defaults and compliance violations like failing to comply with Know Your Customer (KYC) requirements.

Here are some key ways lending companies can perform the delicate balancing act between mitigating risk and ensuring superior CX:

• Leveraging AI-driven automation for real-time fraud detection
• Deploying personalised assessments to help speed approvals without manual hurdles.
• Ensuring communication with customers is transparent with periodic progress updates.
• Educating customers on due diligence processes and setting expectations on typical times required to move to the next step may help build trust and manage expectations from the get-go.
• Implementing advanced analytics and outsourced operations to enable proactive risk engagement. These could include flexible repayment offers, cutting defaults and boosting loyalty.
• Deploying user-friendly tools for KYB/KYC to help reduce onboarding friction, thereby ensuring compliance in digital lending.

How Infosys BPM can help

Infosys  BPM’s Finance Compliance Management Practice helps financial institutions including banks and lending companies transform their end-to-end KYC and fraud detection and prevention operations, while balancing CX goals. Lending companies can partner with Infosys BPM and use our comprehensive services, process consulting, and next-generation technology-enabled solutions to ensure compliance and risk management.