Challenging the challengers in retail lending
The banking and financial services sector is witnessing the growing challenge of the FinTech companies – a recent study by Frost & Sullivan indicates that banks in Australia could lose A$13 billion in revenues to the FinTech sector. The Australian FinTech Sector is predicted to grow at a CAGR of 76.36% and reach A$4.2 billion by 2020; of which A$1 billion will be completely new added value to the Australian economy. Clearly the challengers are here to stay.
Why have these FinTech companies been able to grow so fast? Why have they been able to gain popularity so quickly among bank customers? Haven’t bank customers been loyal to the traditional banks for such a long time? What has changed? The answers lie in the FinTechs’ ability to offer something which banks have not been able to provide. The differentiators of the FinTech business model in lending include much faster approvals, more targeted product offerings, customer-centric approach to service and extreme high levels of business agility.
While it is true that FinTech’s business model has its own limitations and their performance has to be observed over a much longer period to understand how they react to the inherent risks, it is undeniable that they have struck a chord with the banks’ customers. At present many of the FinTechs cater only to specialized sectors, for example with P2P lending or offering unsecured subprime loans, and they make these segments profitable by using much higher interest rates. However as the economic cycle changes, this may become a limitation.
If the rise of FinTech is being driven by fast changing customer preferences, then banks could certainly learn from the FinTechs, adapting their own practices and blending them with their own business models. So how can the banks react positively, learning from the FinTech and challenge the challengers?
- Reduce approval and processing times. Today’s customers are used to instant access, instant messaging and decisions in seconds. As part of its strategy to prove that “it’s possible to love a bank” Bank of Queensland has revamped its loan origination platform reducing the ‘Time to Yes’ and ‘Total touch time’.
- Speed does not necessarily increase risk. Speeding up lending processes does not have to mean compromising on credit quality. Today’s lending solutions offer sophisticated analytics-backed credit scoring models, which can, in fact lead to healthier credit portfolios. Through process automation, it is now a reality to ‘’digitize” a bank’s credit policy to automate the credit approval process whilst adhering to the regulatory aspects of responsible lending.
- Mobile is vital. Embracing the mobile channel, which customers demand, is a big step towards embracing customer centricity. Customers want access to financial services seamlessly; at their finger tips; anytime, anywhere. There is a need to offer end to end lending capabilities on mobile both from the customer and the bank’s perspective. FinTech companies have used these capabilities as a differentiator because banks haven’t moved as quickly or as far.
- Mobile doesn’t equal digital. Just adding a mobile solution doesn’t transform a bank into a digital enterprise. Legacy platforms, the kinds most banks have at the heart of their I.T. infrastructures come with inherent limitations which prevent the bank from transforming into a digital enterprise. For example they often prevent the bank from quickly assembling channel-agnostic products, rapidly configuring rules and policies that can be applied as pre-filter to allow only credit worthy applications to go through, and easily turning their data into actionable insight. Features such as paperless loan origination and self-servicing can be extremely difficult or impossible to implement using these legacy systems. The bottom line is that banks need to transform into digital enterprises and they need the I.T. solutions to enable that transformation.
As the FinTech model continues to evolve, banks are recognizing that ignoring them or hoping that the regulator will level the playing field are not viable strategies. Instead, banks are recognizing that they can learn from the FinTechs, and that sometimes, to beat a challenger at its own game, you need to start thinking like a challenger.