At the end of 2015, Timetric conducted a global survey and produced a report looking at the digitisation of lending in the banking sector.
It surveyed 110 banking professionals, mainly in the banking and non-banking finance industries, about their opinions on digitisation in the lending markets.
This month we look at the drivers for digitisation for financial service providers, including parent banks of leasing businesses in the UK, with excerpts from that report.
Digitisation – on the path to efficiency
An efficient lending process is an important factor of customer satisfaction and retention in financial services. Digitisation helps financial organisations to reduce costs by optimizing resource use and operations, and creating opportunities through developing new customised services. The digitisation of lending has opened opportunities for financial organisations to enhance customer satisfaction, particularly for those who access financial services online.
A lengthy and cumbersome loan application process often leads to customer dissatisfaction and prompts them to approach alternative providers of funding. Timetric’s 2014 survey of financial service professionals indicates that primary reasons for customer attrition in banks are time consumption and document-intensive loan application processes. Traditional banks, laden with legacy systems, have so far been slow to digitise their lending process.
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Timetric research finds that most digitisation efforts in financial services have so far been concentrated in the area of consumer payments; lending remains only partly digitised.
Based on the Timetric survey, industry insiders in financial services worldwide highlighted improved customer service and cost reduction as key reasons behind the growing prominence of digitisation. In addition, through multi-channel delivery and improved marketing capability, operational efficiency and revenue growth are also driving the industry towards digital platforms.
There are significant differences among key drivers identified in different regions. While financial service providers in North America and Europe point to cost reduction, increased operational efficiency and customer service as key factors, for indutry insiders in Asia-Pacific and the rest of the world, improved customer service was not in the top three factors.
The progress of digital lending
While there have been ongoing efforts by financial organisations to embrace digitisation, the lending process remains less digitised than transactional banking. Most financial service providers still use a combination of manual and automated processes for lending operations.
Typically, financial service providers have been able to digitise a few sub-processes of the loan origination lifecycle, such as online loan applications or loan eligibility calculators; however, the whole process remains largely manual. The emerging online banks and lenders have prompted traditional banks to gradually transform operations and technology to compete in the dynamic market.
Digitisation bolsters operational efficiency
With technologically advanced financial technology (fintech) companies bolstering competition through improved customer convenience and service, banks have invigorated their digitisation initiatives. Timetric’s survey of financial institutions across the world indicates that 61% of respondents believed digitisation would improve operational efficiency.
Financial institutions, encumbered by series of regulations and legacy systems, need an automated lending system which integrates all processes to streamline the workflow. The automated system enhances adherence to regulatory compliance through real-time data verification. Digital lending process reduces costs, increases revenues, mitigates risks and enhances the customer experience.
Traditional banks focus on the front end
Financial service providers have, in general, focused more on digitising front-end than back-end processes. Mobile banking, mobile apps, online loan applications, loan-comparison websites and loan calculators have served to provide customer convenience at the front end. Streamlining back-end processes such as documentation, underwriting and closing remains largely manual, and often involves incompatible systems that impede the overall lending process.
Credit scoring evolves with digitisation
The use of analytics has added flexibility to risk management for financial institutions by predicting loan defaults and preventing fraud. Moreover, with rising use of social media, financial institutions are using customers’ social networking trails as an additional tool to improve traditional ways of calculating credit scores. Timetric’s research has found that alternative scoring techniques are likely to evolve over the next five years, complementing traditional credit scoring methods.
Fraudulent documents and identity theft
The secure sharing of confidential information between borrowers and lending institutions remains a challenge for many financial organisations. With numerous cases of customers forging documents, creating fake proofs of identity and falsifying signatures, lenders tend to refrain from using electronic documents in the loan application process.
However, many financial organisations see available biometric solutions as unaffordable or insufficiently reliable. Increased use of biometrics for authentication is expected to diminish some of these concerns in the next decade.
Disintermediation disrupts lending
Digitisation in the banking industry has enabled emerging financial service providers to challenge the positions of traditional banks in
Online-only and mobile-only banks, peer-to-peer (P2P) lenders and other fintech start-ups have begun to disrupt the formal access to finance. The low-cost, quick and simplified loan application process has enabled new operators to fill a gap in the market, and benefit from banks’ complex and inefficient legacy systems.
Different size, same vision
Financial service providers worldwide, regardless of size, see digitisation as a key strategy for enhancing customer service; significantly more important for large companies than small operators. Similarly, large companies are more inclined to use digitisation to reduce costs than small companies.
Customers’ expectations have risen over the past decade, due to superior service experiences in other industries such as retail and hospitality. The ubiquity of products and services, interactive interfaces, real-time execution and customized offerings have changed their perceptions, and they expect financial service providers to act and behave similarly. Accordingly, financial services companies have been forced to digitise.