The Rise Of Instant Payments In The Lending Industry

Lenders need to meet borrowers’ needs before any of their competitors swoop in, which means application processes must be as quick and seamless as possible.

That need for speed is also critical when it comes to loan disbursements, according to Paul Gu, co-founder and head of product for personal lending provider Upstart, as slow payouts can create frictions and frustrate customers.

“From the borrower’s perspective, they don’t care about the disbursements speed, per se,” he said. “They care about the end-to-end speed. … When [the customer is] going to spend part of [his or her] day improving financial health or taking this financial action, what’s the end-to-end time going to be from when they land on Upstart.com to when they get the funds? The time [it takes disbursements to reach] them is technically just a little slice of that.”

Gu recently spoke with PYMNTS about how same-day ACH and other digital disbursements are affecting the lending industry, as well as why lenders should focus on security and data protection as payment speeds increase.

Disbursements in the Lending World

Upstart makes the vast majority of its payouts via same-day ACH transfers rather than relying on checks, Gu explained. The company offers funding in several categories — including credit card consolidation, debt consolidation, home improvement, personal and wedding loans — and has originated approximately $4.9 billion over the past five years.

Same-day ACH deposits money into borrowers’ accounts, with funds typically appearing within the next business day. This digital disbursements model benefits both Upstart and its borrowers, assuring the latter that they will be paid and the former that it will be repaid.

“There are pretty large advantages to ACH or any digital method of disbursement over check,” Gu said. “Besides the obvious convenience and expense, it’s also much faster for the borrower. It also has the nice advantage of making setup much easier for repayment, which is a pretty critical advantage from a lender’s perspective since the bank account [in which] we deposit [funds] is usually the same one that the borrower wants to use to repay.”

Digital disbursements can help borrowers avoid potential repayment mistakes or even delinquencies, which happen more frequently with checks because they are not linked to a form of digital repayment. These borrowers would need to scramble to get checks in the mail before their repayment due dates or risk making late payments and paying more in interest.

Approximately 67 percent of Upstart’s loans are fully automated on the platform, and disbursements must be able to match the lending process’s rising speed.

“Disbursements is a key part of that,” Gu explained. “If that takes long, then the whole process takes long. I think, from the borrower’s perspective, it is just one integrated process. The time they spent waiting for the funds is not different than the time they spent waiting for approval.”

Same-day ACH transfers can help bypass many of those frustrations, but they do not qualify as instant payments. Upstart is thus experimenting with ways to allow borrowers to more quickly receive their funds. It launched a feature that enables direct credit card payoffs, as many of its customers use loan funds to make such payments.

“Today, someone would have to get the money in their bank account and use that money to pay off their credit cards, so there’s just multiple steps required, and of course [there’s] a real possibility that not everything makes it to its final destination,” he stated. “We’ve made it really easy for people to pay off between one and 10 credit cards directly, so instead of next-day funds moving to [customers’] bank accounts, it would be next-day funds moving into all of [their] different credit card issuing banks.”

Instant Payments, Lending and New Technologies

Instant disbursements are a crucial and growing part of the online lending industry, but lenders must do their due diligence regardless of how fast loan processes become.

“We’ve seen a pretty strong adverse selection component to the lending business when speed is the only thing that someone is solving for, so with every increase in speed, you need a commensurate increase in your ability to detect and prevent fraud,” Gu noted.

Upstart will continue using artificial intelligence and machine learning for lending security while simultaneously examining how to make disbursements faster. The need for robust fraud prevention tools will prevent Upstart from automating all of its lending processes, but such methods will only become more common.