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The Digital Transformation of Bank Lending

 

The Digital Transformation of Bank Lending

May 02, 2016 | Published in Australian Banking Finance

AS EVIDENT FROM the success of FinTech companies with innovative business models, new tech-savvy players are challenging the existing players and dramatically changing the ecosystem. According to Ernst and Young’s first FinTech Adoption Index based on a survey of 10,131 “digitally active” consumers in Australia, Canada, Hong Kong, Singapore, the UK and the US, 15.5% of the respondents had used at least two FinTech services – financial services products developed by nonbank, non-insurance or online companies in the past six months. More importantly they point to a potential doubling within the next 12 months. Australia is the third biggest Fin- Tech sector in Asia-Pacific after Japan and China. The annual FinTech report by KPMG and University of Sydney Business School found that Australia’s ‘alternative finance’ sector provided total funding of $US348 million (A$466 million) in 2015, just short of Japan’s $US360 million.


It is easy to understand the reason behind the quick growth of the FinTech players. Customers today are demanding; they are adopting technology, thanks to the explosion in mobile device usage as well as near ubiquitous access to the Internet. The internet and mobile have changed the way people interact with each other, travel, shop and eat. And now customers are looking for the same experience when they carry out their financial transactions as well. Many banks are struggling to deliver what their customers want. Unencumbered by the legacy infrastructures that banks need to deal with, FinTechs are seeking to disrupt the incumbents with better technology and a greater focus on customer experience. To name a few, Avoka, Equitise, Prospa, Spotcap, Metamako, Pin Payments, Promisepay, Stockspot and MoneyPlace are creating their own space in the FinTech sector in Australia.


Significant change in approach


The threat is real and significant according to Frost & Sullivan, Australian banks stand to lose up to A$13 billion in aggregated revenue to FinTech startups. Despite this, banks’ response to this threat has not been very coherent. While some banks have chosen to partner with a FinTech player or incubate their own FinTech company, few have been eager to trigger a significant change in their approach. The undisputed fact here is that customers are looking for a change. So, the banks need to fix their own technology infrastructure and deliver digital, customer centric services. Ageing, inflexible IT systems, manual processes, traditional channels are the real threat - not the FinTechs. Therefore, digital transformation across the business areas has to be the number one focus for banks.


Some banks have started adopting digitization but usually in selected areas. Examples include; ANZ recently launched mobile wallet technology, CBA overhauled its point-of-sale payments, and Westpac introduced mobile based payments for credit cards. A few cases do exist in lending, such as the Bank of Queensland’s revolutionary project to digitize their loan origination process. However, complete, end to end digitization of lending has been largely ignored. The legacy systems currently in use for lending severely inhibit customer engagement strategies, make it harder to launch new products and do not support the new channels. Information in legacy systems is present in silos that cannot interact easily and stops the banks from getting the 360-degree customer view that is needed to take customer experience to the next level. These systems do not enable setting up advanced, automated, workflow-driven processes which not only speed up processing but also reduce the cost of operations. The pace of change – in technology and customer requirements – is simply too fast for legacy systems.


Robust technology platforms


Today’s smart technology solutions are sophisticated enough to integrate well with a range of legacy solutions. For instance, if the bank wants to transform its lending operations, cutting edge lending solutions built with a modular design exist. These solutions enable the bank to deploy the components it needs when it needs them – be it loan origination, loan management or collections. Augmenting the legacy system with such technology would therefore help banks to create and launch a new loan product in a matter of minutes, simplify and shorten the loan approval cycle, thereby helping the bank to deliver a market leading, omni-channel customer experience. Robust technology platforms delivered in the cloud can facilitate the setup of a completely automated and digital loan origination process where the customer does not even need to visit a branch. Capabilities such as advanced analytics can give predictive insights on the most appropriate segments to target, while identifying patterns for ideal/delinquent customers and predicting, early, which customers are most likely to turn delinquent.


The idea of building your own customized IT solution seems appealing at first, but it is in fact fraught with risks and is often too slow in delivering value. Additionally, no matter how good your solution is, it will become legacy in the future if it can’t be easily upgraded every few years. Banks would therefore be better placed investing in proven packaged software rather than trying to build their own in-house systems. Not only is packaged software much faster to implement, it is also easy to upgrade and incorporates the best practices from the world’s leading banks.


Transformation takes many forms, and the inability for banks to change internal business processes can be a challenge to the success of these transformation programs. A mindset of not built here and resistance to change, requires strong executive leadership to adopt the systemization of the lending process; the mantra of “bend the process, not the system” needs reinforcing throughout the journey. We have seen many examples in the credit area within banks, where there is some initial resistance to change in the credit approval process. However, once the benefits of digitizing the credit approval process are known through quicker “time to yes” and shorter touch times through automation of the credit approval process, the transformation becomes more acceptable.

The most successful banks in the future will be those that understand the tremendous power of technology and use it to transform their lending businesses. Keeping in view the significant impact of the ongoing wave of digital disruption, it is evident that the time for transformation is now.

Source : http://www.australianbankingfinance.com/technology/the-digital-transformation-of-bank-lending