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Digital in Lending: Living up to the Hype

April 19, 2023 | 5 minute read

While it might not seem obvious, there is a big difference between innovations that are revolutionary and innovations that are disruptive. Take, for instance, the invention of the automobile. Clearly, the first automobiles were innovative but their high cost prevented them from disrupting the market for horse-drawn vehicles. Ultimately, the first affordable automobile – the Ford Model T in 1908 – managed to disrupt the transportation market. So, while the invention of the automobile was a revolutionary innovation, it was actually the mass-produced, affordable automobile that became the disruptive innovation.

This is important because people often use the two terms interchangeably – consider the effect digital transformation is having on various industries. Adjusted for inflation, revenues from sales of music in the USA peaked about 1999 – at about $21.5 billion. Perhaps coincidentally, Napster – the peer-to-peer file sharing service – launched in 1999. While Napster was shut down 3 years later, and CDs were still generating 95% of the recording industry’s revenues – the writing was on the wall. Today, revenues are growing but not before falling to $6.9 billion in 2015. Today, physical format sales only account for 17% of the industry’s revenue with the rest coming from digital sales – including subscription services.

Digital has transformed other industries as well – human travel agents have been largely replaced, physical newspapers have seen steep declines in their circulation numbers and even many radio DJs are being replaced by software to automatically choose the songs to play and read the news.

So, digital is innovative. Digital is revolutionary and digital can be disruptive. But how can you tell which innovations will be disruptive and which innovations will be merely revolutionary?

Separating the Hype from the Reality

Some people believe that the threat from digitization is overblown, pointing to the rise and subsequent dramatic fall of bitcoin, as evidence. However, this misses the point – because it is the blockchain technology that offers the potential of disruptive innovation. Facial recognition is another mixed example. On one hand the headlines are full of stories of the benefits – Chinese police using it to spot criminals in the crowd at concerts, payment apps incorporating facial recognition features to appeal to millennials, Citibank introducing facial recognition for its apps, as indeed are many others. But on the other hand, there are worrying signs about how facial recognition may not be used in appropriate ways – Taylor Swift used it in secret at some of her concerts, the Orlando Police Department in Florida decided to continue its test of Amazon’s Rekognition system despite outcry from civil rights groups and Microsoft called for government regulation of the technology.

Digital in Financial Services – Revolutionary or Disruptive?

Financial services firms are totally dependent on their technology infrastructures, forecasted to spend nearly $300 billion per annum by 2021. However, it might not be enough, or perhaps it is not being spent in the right areas, because Gartner recently reported that by 2030, digitization would make 80 percent of heritage financial services irrelevant – either going out of business, or becoming commoditized or existing formally but not competing effectively.

As anyone who has ever been involved in a large project knows – transformative change is extremely difficult – it requires a split focus. Focus and attention needs to be directed to the new state but at the same time the current state, i.e. the business today, needs to keep running. Managing the conflict is tremendously difficult, but with a clear roadmap and backing from key stakeholders, it can be managed successfully.

DBS Bank has reported that its ROE on digital customers is 27 percent versus 19 percent for traditional customers; the cost to income ratio is 34 percent for digital customers versus 55 percent in the traditional segment. As per an Accenture report, in the past three years, banks that have a recognized digital growth strategy have been rewarded with a premium of 13 percent to 17 percent above the value of their core business. The Financial Times reports that the Royal Bank of Canada is offering a service for entrepreneurs to register their start-up company with the government, provide it with cloud-based accounting software, supply a branding service and send it letterheads and business cards, all before it has lent the company any money. For people looking to buy or sell a home, it offers to research neighbourhoods, move furniture, remove garbage and paint a house. Many of these services are supplied by partners integrated into RBC’s digital platform and will help the bank to nearly triple its growth rate and add 2.5m new customers over the next five years.

The pace of change of technology is so fast that it can be difficult to keep up with the concepts, let alone figure out the correct approaches to implementation. And the pace seems to be accelerating. However, taking a wider perspective may help.

It’s all about Customers

Customers expect more. They want more products and services, tailored to meet their specific needs. They want to interact with the financial services providers at a time and a place of their choosing. They want convenience and self-service, but they want more than that. They know the power of technology and they want their banks to provide the same level of “intelligent” service that they see from other aspects of their lives.

But customers also expect less. They expect products and services to cost less. They expect banks to ask fewer questions – especially about things they think the banks already know, or should know.

Essentially, customers expect banks to know more about them, to anticipate their needs and to proactively offer tailored products and services at the right time via the right channel. To achieve this, banks will need to do a number of things:

  • Radically streamline their operations – ideally removing humans except when a customer wants to talk to a real person. Technologies such as process automation, straight through processing, and self-service can help here.
  • Embed intelligence in their operations – ideally developing a sense of “intuition” but without being creepy or intrusive. Technologies such as chatbots, analytics, roboadvisors, and artificial intelligence can help here.
  • Open their operations up – to participate in the ever growing financial services ecosystem. Technologies such as platforms, open banking and APIs can help here.
Jennette Arora

Senior tech lead,

Nucleus Software