As retail banks gradually digitalize their activities, they’ve focused largely on the most frequent customer transactions, such as checking a balance or remote deposit. Much of the lending arena, with the exception of credit cards, has taken a back seat. Recent analysis by Bain & Company and SAP Value Management Center finds that most banks have digitalized fragments of the process for marketing, selling and servicing loans. For instance, banks can handle only 7% of products digitally from end to end. That sluggish pace of modernization leaves banks vulnerable as lending comprises more than one-third of retail bank revenue.
New digital entrants, ranging from financial technology start-ups to incumbent retailers and telecommunication providers, have spotted the opportunity, and are attacking thin slices of the lending profit pool. Many of these financial technology insurgents, or fintechs, provide a better experience by focusing on the needs of specific customers—often an underserved segment. CommonBond, for instance, started with loans to low-risk students, and OnDeck offers loans to small businesses without a long track record. These insurgents often can offer a lower price through a combination of a lower cost base to originate and service loans and better targeting and adjudication of specific risk profiles.
The fintechs also are creating new models to make lending decisions, source capital and service loans. Often, they can offset at least some of the scale benefits of large banks with simpler digitalized processes. In some instances, they enjoy a regulatory arbitrage; Prosper and LendingClub source funding in a way that requires less capital to be held on their own balance sheets. Others, including WeChat, PayPal and Square, offer digital messaging or payment platforms onto which they have added short-term finance. And many of the fintechs such as ZestFinance have moved beyond traditional risk assessment to use new sources of data in underwriting, such as whether an applicant keeps a consistent phone number or has been late paying phone bills.
Banks need to accelerate investments in digital lending if they are to avoid a material decline in profits and loss in market share. Leading banks have already started to invest in creating better customer experiences, making it easier to apply for their offers, removing bad and avoidable interactions (generated by complex internal processes, employee or customer errors, or better routed to lower-cost and more convenient digital channels) from the branch and contact centers, and devising a more agile operating model. These investments generally have paid off with faster, better and cheaper lending processes.
Banks report slow progress in digitalizing the lending process
To help banks better understand the digital lending landscape and inform their next moves, Bain and SAP Value Management Center recently surveyed two dozen banks in 10 countries. We assessed how well these banks reported they were performing along seven lending capabilities and four dozen operational metrics that were segmented by loan classes and maturity levels. The capability areas include:
- relevant, simple and easily bought offers;
- better decisions that are informed by customer, risk and marketing data;
- consistent cross-channel execution;
- technology that enables a smart view of the customer;
- efficient, digitalized processes;
- migration of customers to anywhere, anytime self-service; and
- rapid innovation and business reinvention.