While lending is the key driver of core banking revenues, more stringent capital requirements and increased origination costs from greater regulation have led banks to reduce – or in some cases withdraw – lending to groups such as SMEs, writes Bernard Kenny
Incumbent banks face challenges to adapt while more nimble, digitally native fintech lenders are able to target underserved customers quickly and efficiently. Their market share remains small, but the rate of growth does concern legacy banks.
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These banks recognise the urgency with which they need to act to protect their most lucrative profit streams from well-funded and rapidly-growing competitors. They understand the necessity of digital transformation to enable the agility that will help them meet the new demands of customers and regulators. But, as original early-adopters of technology themselves, they have retained technology from each successive generation, leaving often complex IT landscapes that are not easily integrated.
To understand the progress incumbent banks are making to overcome these challenges, SAP undertook a joint study with strategy consultant Bain & Company to benchmark the maturity of banks’ digital capabilities and variance between different classes of retail lending.
The study, whose results are available at Retail Banks wake up to Digital Lending, found that the median level of digital adoption across all lending classes is low. Only 14% of loan applications are submitted through digital channels and fewer still (7%) are being processed digitally. The study also found that only 7% of banks were able to handle lending products digitally end-to-end, with 14% of simple loans and 36% of complex loans requiring rework.
The picture is more encouraging for card and personal lending, where some banks not only take 100% of applications on digital channels, but also handle these digitally end-to-end. In contrast, for home or business loans only 8-10% were able to do this.
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By GlobalDataWhat the study highlighted was the extent that banks are struggling to adapt to new digital realities. Where some parts of their organisations are making great strides others are lagging behind. And this lack of end-to-end integration is ultimately limiting their ability to truly realise the potential of digital models and meet the needs of customers.
Although banks are focussed on having relevant, simple and easy-to-buy products, there still have severe limitations in their ability to bundle products. Another key challenge faced by incumbent banks is the lack of a smart and singular view of the customer – for instance being able to see a customer’s personal loans alongside her savings or investment products.
While some banks have a single view of the customer, it is largely limited to internal data being used for static analysis rather than a real-time view enriched with preferences and sentiment which would enable tailored offers. And despite the investment in digital channels, most are far behind their aspirations in terms of the self-service advice, product selection and origination.
So how should banks move forward?
Based on our experience of helping banks address these challenges, we believe there are six ways banks can overcome the hurdles:
- Gather a full and smart picture of the customer and make it available in real-time across marketing, sales and service: Banks should adopt an approach that allows much of the enterprise data to be virtually combined and remain in its original place. Consumers of the data see it as though it existed centrally and can use business intelligence (BI) tools or structured query language (SQL) to access the information. Not only is this approach quicker and cheaper, the data is more accurate.
- Design around the customers’ experience rather than for internal processes: Banks should accelerate progress by adopting practices already deployed in other industries further down the digital transformation path where customer experience is often the only real differentiator. This means leveraging consumers’ interaction patterns to improve service but also mirroring the way these industries generate targeted offers.
- Execute consistently across multiple channels: To deploy new digital lending capabilities, banks should introduce a less complex omnichannel customer engagement platform. This can extend beyond needs of the lending lifecycle in advice, origination and servicing to cover all facets of a customer’s banking relationship.
- Configure tailored products from simple building blocks: Banks ought to use a product configurator that allows foundation products to be modelled on multiple dimensions and composite products to be configured from simpler base ones. The capability to isolate sales products from more functional products also allows banks to differentiate their customer proposition across multiple segments, while maintaining scale and simplicity in the back office.
- Invest in digital marketing: Banks need to move beyond project-driven analysis to a closed loop between customer insights and customer activation. Banks need a platform that combines structured and unstructured data to build a complete customer profile, including tools for text, language and relationship analysis and predictive analytics. These technologies enable more contextual and targeted marketing that’s the norm in other fields and expected by customers.
- Improve straight-through processing of loan applications: Especially in lending, banks need to think in terms of a “Digital Operating Model” where automation is king. Boundaries between systems need to be eliminated by making better use of business process management software to ensure the process spans front, mid and back office. Lending products, policies and processes must also be refined until there are no exceptions to the automated flow. This improves loan turnaround times and can help increase the capture rates and credit quality.
- A good example of a bank that has been able to deliver on the digital promise is Commonwealth Bank in Australia which decided to completely replace its channel and core banking platforms. This allowed it to lower its cost-income ratio while improving the customer experience to become the market leader in customer satisfaction. The bank’s support for the home buying process, for example, allows buyers to “point and shoot” at potential homes and display affordability details, mortgage limits and pre-approvals.
Another bank making good progress is Spanish bank BBVA. In 2014, BBVA was just below our measured median for personal loans, but recently report a doubling of the number of consumer loans made through digital channels.
So, while it’s uncertain if all banks can succeed in making this transformation, there is enough evidence that with the right combination of urgency, leadership, reskilling, partnering and technology platforms, banks can make the leap. And with Fintech companies pushing new boundaries there’s never been a greater need to innovate and build on the opportunities that digitalisation offers.
Bernard Kenny is a Vice President with SAP Financial Services Value Engineering
