The banking sector is becoming increasingly competitive and over the next few years several players will be forced to exit from the market. Threats to established banks are coming from regulators, the expectations of investors, and the emergence of new competitors (many of whom are start-ups); as well as from the expectations of banking customers, who expect to access funds and make loan requests through a multitude of digital channels. The response that established players in the banking world need to consider is the faster adoption of digital technology, especially in the area of credit loans. This is the headline recommendation from a new report by business analysts McKinsey and Company.
The analysis suggests that banks urgently need to digitize their credit processes. This comes down to economics since lending continues to be a major source of bank revenue, especially with retail banking. It is the retail banking sector that is facing the greatest threat from new digital services, such as credit lenders. An example of such a lender is Kuliza, which is on-line only and deploys artificial intelligence to assess customer loan requests. A different approach is provided by Fusion Bank which uses ‘crowdlending’ to secure loans. A crowdlending platform brings investors (the crowd) together with borrowers and allows the investors (or lenders) to lend small sums of money directly to hundreds or thousands or borrowers, in anticipated of a return on the loan.
There are lessons for established banks reliant upon legacy technology. To remain competitive banks need to compete in the same portion of cyberspace. This is supported by separate analysis by financiers Piteny Bowes who call out the decline of the traditional banking model and the emergence of competitive on-line only banks and credit lending companies.
The advantages to banks are not only from taking on the precocious startups head-on; the use of digital technology brings other advantages, such as bringing greater transparency to risk profiles, allowing banks to make rapid assessments of the credit worthiness of applicants speedily. Through such assessments banks are better placed to integrate new data sources and make them available for risk modeling.
Digital technology should also allow banks to expand business scope. This can be achieved through using big data analytics to target clients and to develop competitive, risk-based pricing. Furthermore, the service offered to clients will be quicker. This also fits with more people expecting banks to offer digital services and this extends to credit applications as well as other banking services.
An example of how a major bank can embrace what is happening in the market is provided by Premium Credit, which is owned by Cinven, a leading international private equity firm. To take on the challenge, Premium Credit worked with specialist technology company Arrk Group to create a digital customer acquisition platform. The success of this, for both bank and customer, was to reduce the time taken to process a loan from weeks to a matter of just minutes.