Keeping it Simple – it’s harder than it seems?
This blog originally posted on Nov 7 was updated on Dec 9 to reflect bob Finance and FinnOne winning ‘The Banking Technology Award 2016 – Highly Commended for Best Use of IT in Lending’
It seems obvious that the simplest solution is the best solution, after all, which would you prefer – a complex, difficult to understand and hard to operate smartphone or an intuitive, easy to understand smartphone? So if, as Leonardo da Vinci said ‘Simplicity is the ultimate sophistication’, then why are we surrounded by complex, difficult to use solutions?
Steve Jobs said, ‘Simple can be harder than complex. You have to work hard to get your thinking clean to make it simple’ and it seems that many banks and financial institutions have their work cut out for them. Take for example, the customer experience associated with a retail loan. Potential customers are often expected to visit the bank’s branch, try to understand the details of complex loan products, wade through a maze of lengthy, paper-based forms, submit a list of supporting documents in physical form, wait an indeterminate period for status updates, re-visit the branch for service requests and so on. In short, it is quite an ordeal to put potential customers through.
However, even as other industries were transforming their customers’ experience, the financial services industry seemed content to make small changes, slowly, if at all. Then, along came the FinTech companies, and once they started getting wide acceptance with their disruptive business models and innovative use of technology, the banks started to take serious notice. The FinTechs addressed the lack of focus on customer expectations in banking, eradicated manual processes, eliminated limitations created by legacy technologies and more importantly, brought a customer centric, digital mindset. The banks are now moving swiftly to catch up and there is a sustained focus on re-modeling lending services to make them more aligned with customer needs.
How did this change happen? With rising customer expectations, increasing pressure on profit margins, intensifying competition, evolving technology and the rising popularity of digitization, it became evident that the financial services industry was ripe for disruption. Due to the inertia of the established institutions in bridging the gap, FinTech companies capitalized on the opportunity and started building their processes keeping the customer at the center. Devoid of any baggage of legacy systems, they could afford to start afresh, from a completely different perspective and innovate in process design. Not only have these companies simplified the processes, but they also use sophisticated analytics for comprehensive credit decision making, identifying target segments for cross selling, and improving collection rates.
The European retailer Valora set up a FinTech arm called bob Finance to leverage new technologies and disrupt the Swiss personal loans market. Prior to bob Finance’s arrival, customers with small loans had to physically visit bank branches even for digital financial transactions. bob Finance decided to change this by providing convenient and efficient online access to loan products. The company automated their processes completely and became the first Swiss company to offer “on-the-go” loan products and short duration loans below $3,000 while maintaining regulatory compliance. Customers can now submit credit applications online using a variety of channels, without visiting the branch. With instant credit decisions, it takes only few minutes from application to payout which is a dramatic improvement on the 5 days, which the traditional process takes. This innovative business application by bob Finance using FinnOne has won The Banking Technology Award 2016 – Highly Commended for Best Use of IT in Lending. Refer to the case study for details. There is a long list of challenger banks /neo banks set to make their mark with unique, digital and targeted offerings. A few innovative banks have also been quick to act. HDFC Bank in India has been working on harnessing the power of digitization for customer focused service. Dubai’s biggest bank Emirates NBD is launching a digital bank focused on customer expectations.
However, when it comes to the established banks as a group, the reality is best explained by a report from Bain & Company which says that globally, banks can handle only 7% of the loan products digitally from end to end. The slow pace of modernization is quite surprising as lending comprises more than one-third of retail bank revenue. It is clear that there is a huge gap between customer expectations and what banks can actually deliver. The report also shows that while digital leaders spend more on IT, they are more effective in directing the investment towards changing the bank’s lending model as compared to the digital laggards who instead spend on running the existing model. They realize that a digitization based model translates into higher automation, reduced operational cost, higher efficiency and sets the stage for higher revenue through digital conversions. More banks need to start working on the new model. As per a McKinsey report, setting up a digital model may result in 75% lower capex and 55% lower opex when compared to a traditional operating model.
As per a PwC study, apart from the interest rate, the key features that make up a lender’s overall experience – such as speed, transparency, channels, and customer service – contribute more than 50% to the consumer’s decision-making criteria, i.e. customer experience accounts for 50% of the decision. Many banks have realized the urgent need to adopt a customer centric approach backed by digitization. However, they need to understand that cosmetic or incremental changes in the existing capabilities may not yield the desired results. Processes need to be completely re-designed from an outside-in perspective rather than an inside-out perspective. The processes in turn have to be powered by seamlessly integrated technology systems capable of facilitating end to end digitization. As per BCG, banks that have embraced a customer centric, digital journey mindset have increased their revenues by 25% and their productivity by 20% to 40%.
My previous blog touched upon another key aspect – speed, a prerequisite for customer centric transformation in lending. Speed, convenience and personalization in banking can have a huge impact on customer satisfaction, loyalty and peer group recommendations. The transformation is an ongoing journey, as the customer expectations will keep evolving and the service providers will be required to follow suit. Those that do not change, face the risk of being left behind and losing their relevance. However, those that do make the change will achieve what they have been striving for – delivering a complex product in a simple way, something that customers are increasingly demanding.