According to the new report from Timetric’s Retail Banking Intelligence Center, banks across the world will depend on digitization in an effort to gain competitive advantage in lending business. Timetric’s Analyst Amit Verma discusses how automation of banks’ lending process will enhance productivity, reduce costs, as well as increase customer acquisition and retention for banks.
Despite noteworthy achievements in digital banking, banks’ lending procedure largely remains a document-intensive process. Strict regulatory requirements force banks to rely on manual data entry, wet-signed forms and document verification procedures which lengthen the loan application process. Moreover, banks’ old legacy systems impede technology adoption due to various incompatible systems. All these inefficiencies have a cumulative negative effect on the efficiency of banks and increase costs to serve customers.
“As digital technologies mature, there has been a shift in means by which customers’ financial needs are met. A proficient lending system enables banks to increase competence. However, traditional banks laden with legacy system coupled with regulatory pressure are lagging behind the digitization trend. Banks need an automated lending platform which integrates all processes to streamline the workflow,” says Timetric’s Analyst, Amit Verma.
Rising competition from online peer-to-peer (P2P) lenders and non-bank companies have compelled banks to enhance their digital expertise. Moreover, these P2P lenders are forming strategic partnerships with both banks and non-bank companies to gain a larger market share in the lending business.
“Building on the rapid mobile adoption, online lenders offer loans at a quicker pace with less documentation. They are prudently exploring this option to gain competitive advantage over the traditional lending institutions. Customers who are rejected by banks due to their inadequate credit scores or small businesses whose loan requirement is less than the banks’ threshold limits can avail the facility,” Verma suggests.
The online lending business model has gained significant acceptance in developed markets such as the US and the UK. For example, The P2P Finance Association data in the UK shows that the total cumulative amount lent by these platforms increased from GBP2.1 billion (US$3.2 billion) in 2014 to GBP2.6 billion (US$3.9 billion) in March 2015. Apart from P2P lenders such as Zopa, Lending Club and Funding Circle, other companies such as Google, Alibaba and PayPal have also entered the lending market.
“Customers’ expectations have risen in the last decade due to the delightful services they have experienced in other industries such as retail and hospitality. The emergence of interactive interfaces, real-time execution and customised offerings has changed their perception. Therefore, they expect their bank to respond in a similar manner,” Verma asserts.
There have been some efforts by banks to digitise the process and enhance customer experience through the use of digital channels. Banks are using third-party software to automate their back-office in order to increase turn-around time. It can be observed in the efforts of HDFC Bank through offering a 10-second loan approval or the use of electronic signature by US Bank in its loan processing operations. In addition, big data analytics and social media are utilised to design new offerings. Some banks have started using social media analytics to determine the creditworthiness of customers and disbursing loans using alternative credit scoring models. Innovative products, such as loans through mobiles and social media websites, are only a precursor of things to come in the future.
Although digitization is expected to have a positive impact on efficiency, it does come with a word of caution. Increasing instances of data breach in the banking industry compels banks to be more cautious while adopting digitization in their core processes.
“Timetric’s primary research suggests that one of the major reasons of slow digitised loan origination in developing countries is customer identification and fraud. With governments in several countries putting emphasis on biometrics-based authentication, banks can use it to enhance the scope and quality of credit underwriting. Banks need to be nimble in their approach by incorporating these features to be the preferred choice of customers,” adds Verma.
This information is taken from the Timetric report: ‘Insight Report: Digitisation in Lending’.
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