McKinsey&Company | By Gerald Chappell, Holger Harreis + | Aug 2018

Faster credit decisions, vastly improved customer experience, 40 percent lower costs, and a more secure risk profile. Here’s how to get there.

Today in traditional banks, the average “time to decision” for small business and corporate lending is between three and five weeks.¹ Average “time to cash” is nearly three months. In our view, these times will soon seem as antiquated and unacceptable as the three weeks it once took to cross the Atlantic. Leading banks have embraced the digital-lending revolution, bringing “time to yes” down to five minutes, and time to cash to less than 24 hours.

That’s the profound result of a top priority for banks around the world: the digital transformation of end-to-end credit journeys, including the customer experience and supporting credit processes. Credit is at the heart of most customer relationships, and digitizing it offers significant advantages to banks and customers alike. For the bank, successful transformations enhance revenue growth and achieve significant cost savings. One large European bank increased win rates by a third and average margins by over 50 percent as a result of slashing its time to yes on small- and medium-enterprise (SME) lending from 20 days to less than ten minutes, far outpacing the competition. Our analysis suggests that a bank with a balance sheet of $250 billion could capture as much as $230 million in annual profit, of which just over half derives from cost efficiencies (such as less “touch time” and lower cost of risk), and the remainder comes from revenue gains (increased applications, higher win rates, and better pricing). In this article, we will look at the six design principles that successful banks have used to build digital-lending capabilities and transform their institutions.

See:  Peer-to-peer lending will help small businesses stay afloat

The variety of digital ambition

As digitization proceeds apace, the dimensions of banks’ digital ambitions vary among segments and products. Digitization is becoming the norm for retail credit processes. Personal-loan applications can now be submitted with a few swipes on a mobile phone, and time to cash can be as short as a few minutes. Mortgage lending is more complex due to regulatory constraints, yet banks in many developed markets have managed to digitize large parts of the mortgage journey. More than one bank has set an aspiration to automate 95 percent of retail underwriting decisions.

Banks are now treating SME lending as a digital priority. The reasons are clear: costs are high, and the opportunities to improve customer experience are significant. Furthermore, both traditional banks and fintechs already offer compelling digital propositions in SME lending, featuring dramatically shorter approval and disbursement times—a key factor for customers when choosing a lender.

Digital is also advancing in corporate lending, though naturally corporate banks are moving with greater caution and less urgency (given the relatively lower transaction volumes in this segment). Rather than reworking the entire customer experience, banks are enhancing common processes—for example, digitizing credit proposal papers and automating annual reviews to improve both time to yes and “quality of yes.”

Some banks’ digital strategies let corporate-transaction approvers focus their time on those clients and deals that matter the most. Low-risk credit-line renewals, for example, can be automated, while valuable human review time is focused on more complex or riskier deals. And data aggregation can be automated so that relationship managers (RMs) have the most relevant data and risk-monitoring scores at their fingertips—including financial performance, industry performance, market and sentiment data, and pertinent news and external risk factors.

Avoiding slow starts and piecemeal results

While most banks are digitizing parts of their business and operations, many are dissatisfied with progress, especially in credit. A few familiar frustrations include legacy IT systems; a general lack of trust in automated decision making; insufficient cooperation between businesses and risk, IT, and operations functions; limited data access; and scarce digital talent. Moreover, there is no single “owner” of the credit process with the discretion to drive change at scale. A number of stakeholders need to align and remain constantly aligned over a prolonged period (two to three years in banks that have executed ambitious programs successfully).

See:  Square partners with eBay to expand lending for ‘underserved’ small businesses

These barriers have caused more than one bank to delay or sidetrack digitization efforts. Programs launched with great executive attention and focus lose momentum as the initial excitement of chief risk and lending officers evaporate. Investments needed to sustain programs are partly or wholly withheld. Incremental changes are sometimes substituted for planned end-to-end transformations.

However, numerous banks successfully digitized the credit journey. In the following pages, we offer the practical lessons that have emerged from these experiences, with special emphasis on SME lending, the area that is currently getting the most attention and investment.

Designing a successful digital lending transformation

Experience has shown that successful transformations rely on some basic principles.

An end-to-end journey but with limited scope

Many banks have found that an end-to-end view of the entire customer journey, including a target state set according to the customer experience, was crucial to success. For example, a Benelux bank redesigned its business-lending process from end to end, allowing it to eliminate numerous handovers. The result was about 30 percent greater efficiency. Without an end-to-end orientation, on the other hand, banks have seen disappointing results. Attempts to improve the credit process piece by piece tend to become incremental, lose customer focus, and miss the big-picture opportunity to deliver a fundamental step change in performance and approach. One Northern European bank found such an opportunity by shifting its focus for SME customers from selling products to fulfilling customer needs. As a result it radically rationalized its lending-product range down to just three simple products, massively reducing complexity. This would not have happened with a piecemeal approach.

While taking an end-to-end view, however, successful banks have learned that it pays to limit the scope of the first wave of the transformation and focus on a minimum viable product (MVP). The MVP is scoped to be substantial enough to drive real value, momentous enough to create excitement within the organization, and simple enough to be designed and implemented rapidly. Improvements can then be made progressively in waves of rapid subsequent releases.

See:  Technology is the ‘most profound force bearing down’ on big banks, ex-Barclays boss says

At one Scandinavian bank, as many as half of all credit decisions concerned SME customers with existing loans seeking additional credit. The bank decided to focus on improving their experience, since the cost to serve them was significant, but the decisions involved were less complex, as most of the necessary data were already available in the systems. Over an intense 20-week period, the bank designed a new end-to-end digital journey, including an online application process, a framework for making new credit decisions, a revised credit process with automated decision making and fast-track handling for simple cases, as well as radically simplified credit-paper and collateral-review processes. Certain features of the new journey were not included in the MVP but scheduled for later releases. This kind of approach avoids too much early-stage complexity so that a transformative solution can be implemented more quickly, establishing momentum for future change.

Building momentum for full automation

With good reason, risk managers can be wary of a fully automated approval process for business loans. Long-standing policies and decision processes often depend on manual reviews and cross-checks. Years of root-cause analysis of defaults and assessments of soft factors have proved reliable but would be missed in an automated approach.

At one bank in central Europe, the long-standing business-lending process features a decision checklist incorporating thousands of criteria and covenants for contracting and disbursement. While time consuming and costly, the process does achieve the desired risk outcome. In fact, risk functions at many banks successfully use experience-based subjective assessments to achieve low default rates. While the accuracy of data-driven model-based decision making continues to improve, risk managers are correct in taking a cautious approach to automation.

Leading banks express this caution in two ways when introducing automation. First, to establish accuracy, many banks test models on past decisions. A bank in Scandinavia ran its newly developed decision engine on all applications from the past five years. The tests proved that the automated engine based on data-driven assessments and a structured credit “decisioning” framework was better at predicting default risk than the subjective human assessments had been—and far more consistent, which was a key factor in approving the model for use on new cases.

Second, banks start small, at first directing only a few cases to the fully automated straight-through digital process flow (sometimes called the “swim lane”). One Northern European bank recently opened the swim lane for fewer than 15 percent of applications, mainly the less complex cases. As the engine proves itself, the bank will gradually increase the flow.

In the most sophisticated examples, about 70 to 80 percent of SME-lending decisions are fully automated, with the remainder referred for credit review, allowing valuable expert time to be focused on complex or marginal cases.

Embrace relationship managers

RMs play an important role in SME lending. Digitization doesn’t replace this. While for some segments it makes sense to steer customers into a mostly self-service approach, successful banks have typically opted for a “multichannel, single application” route for SME lending, where customers can complete digital applications on a shared screen with their RMs. This allows the RM to guide the customer through the process, explain results of automated risk assessments, and quickly ask any follow-up questions required.

See:  How Fintech Is Transforming Microfinance

A Scandinavian bank went this route, for four reasons:

• in customer testing, it was clear this is what SMEs in the region wanted
• it allowed the strengthening of RM–customer relationships, and greater cross-selling
• it allowed the new digital journey to be introduced alongside legacy processes, giving RMs the option of using the old process to give them reassurance (and manage the small number of cases that could not be treated with the new process)
• the digital solution set the right incentives to discourage discounts and lowered the pressure on RMs (by delivering offers in near real time through the digital process, RMs and the bank could gain market share and margin)

Ultimately, RMs were able to provide loan approval in five to ten minutes about three-quarters of the time; more complex cases are decided in an average of 90 minutes (and not more than 24 hours) following a manual review.

Big data—but not too big

To develop models, many banks have expressed interest in using external data (when legally permissible), including novel sources such as social media. While creative use has been made of unusual data sets, it is usually best to begin with readily available data. Transactional data have proved especially powerful. A number of banks and fintechs have developed tools to process transactions from primary operating accounts line by line, classifying them into detailed revenue and expense items. Advanced analytics can use these rich risk data to generate simplified financial statements, affordability ratios, customer- and supplier-concentration analyses, and so on, in real time. These transactional data offer substantially richer and more up-to-date insights about company performance than out-of-date annual accounts. With the second Payment Services Directive (PSD2) and other open-banking initiatives now coming into force, similar analyses can now also be performed on new customers.

Pragmatic data solutions can create real impact quickly, building momentum for subsequent, gradual data-management improvements.

Ambitious data-aggregation plans or multiyear data-lake projects are rarely good bases for digital-lending transformations. Such plans are frequently abandoned before completion. Successful transformations generally rely on existing data sources, sometimes using imperfect, robotics-based data integration (such as screen scraping) to get started. Recently, a major bank in Southern Europe successfully completed the early stages of its transformation using readily available demographic and behavioral data. That experience shows how pragmatic data solutions can create real impact quickly, building momentum for subsequent, gradual data-management improvements.

More:  Swiss watchdog to propose looser anti-money laundering rules for fintechs

By incorporating regulatory models in their new credit-decision engines, banks can satisfy regulatory requirements in less time and start reaping the benefits of digitization more quickly. A Northern European bank did just this, after applying the existing internal ratings-based system for business lending and building new automated analyses for affordability and cash flow.

The need for an agile approach

The divergent interests of business and risk management—not to mention operations and IT—will create inherent tensions for banks in redesigning credit processes. One Eastern European bank found that its months-long project to simplify the corporate-lending process had made little headway, ultimately due to legitimate but conflicting internal interests. The project became bogged down with individual silos optimizing for their own interests rather than collaborating on optimizing the customer’s experience. It lacked an agile approach.

Agile project delivery is essential for successful credit digitization. The starting point is a set of colocated, cross-functional, full-time, dedicated teams empowered with decision-making authority and tasked to deliver products on deadline in intense bursts of effort called “sprints.”

However, while most executives are actively talking about agile, not many are actually doing it. Worse, we see many firms adopting “cosmetic agile,” where traditional project-management approaches are peppered with agile lingo and walls filled with Post-it notes, but necessary fundamental changes in ways of working are not adopted and organizational commitments are not made.

A common failure is the inability to overcome organizational silos. A cross-functional team with business, risk, IT, and operations is simply essential, for several reasons:

• collaborating across all functions helps strike the balance of customer-journey and business objectives with robust credit decision making and risk control
• bringing critical-path IT-development work into the control of the agile team allows rapid iteration and testing of journeys, data integrations, and results
• maintaining agile’s customer and “time to market” focus helps quickly assess trade-offs and work-arounds for IT and process bottlenecks as well as design solutions that allow rapid value delivery to customers

The agile redesign process is sometimes referred to as a “zero-based” approach. Teams begin with a blank sheet rather than thinking about marginal improvements to the existing process and the restrictions of existing policies. They define the essential mission, often working from the customer backward. This mode of operating can initiate deep changes that exceed incremental process adjustments and see beyond the constraints of legacy systems.

See:  The forces of change are trumping banks and regulators

A further powerful aspect of agile is the iterative, sprint-based approach to developing solutions. Emerging prototypes are continually tested with RMs and usually clients as well. Teams gather their feedback early on, so that less compelling ideas can be quickly discarded and attention focused on experientially successful ideas—which are also revised as needed. The working relationships fostered in agile teams create enormous engagement among colleagues from all areas of the organization, which ultimately translates into better ideas and faster results.

In a best-practice agile example, a leading European bank built a “digital lab” to enhance its credit processes systematically. Business, IT, and risk came together to align on objectives and incentives, while a dedicated organizational unit (the “digital factory”) was empowered to make decisions with quick cross-functional escalation mechanisms. The teams developed a safe IT environment to test changes before reshaping processes on a wider scale.

Continue to the full article --> here

The National Crowdfunding & Fintech Association of Canada (NCFA Canada) is a cross-Canada non-profit actively engaged with fintech, alternative finance, blockchain, cryptocurrency, crowdfunding and online investing stakeholders globally. NCFA Canada provides education, research, industry stewardship, services, and networking opportunities to thousands of members and subscribers and works closely with industry, government, academia, community and eco-system partners and affiliates to create a strong and vibrant crowdfunding and fintech industry. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: ncfacanada.org

Why Open Banking Represents a Seismic Shift for Fintech

January 17, 2019

Wharton | University of Pennsylvania | Jan 16, 2019 Open banking, a collaborative model in which banking data is shared with third-party players, is expected to revolutionize the financial services ecosystem. For consumers, the opening up of banking data could mean better control over their finances. At the same time, the trend has also raised concerns over data privacy and security. In a conversation with Knowledge@Wharton, Jane Barratt, chief advocacy officer at MX, a Utah-based company that provides data to financial institutions and fintechs, talks about how open banking will impact  legacy institutions as well as nimble startups. Knowledge@Wharton: What is open banking? What are some of the factors that have led to the opening up of banking data to make it shareable via secure APIs [application programming interface] with third parties? Jane Barratt: Over the past decade or so, we have seen open government and other open initiatives. There’s an expectation now of increased transparency. The idea of people sharing their data — their financial data — is not a new one. It’s happening, and it’s happening with methods that aren’t necessarily private or secure or transparent. People don’t really know where their data is going. Open banking is basically accessing the ...
Read More

HSBC settles FX deals worth $250 billion on blockchain in last year

January 17, 2019

Complancex | The Compliance Exchange | Jan 15,2019 HSBC has settled $250 billion (£194.15 billion) worth of forex trades using blockchain in the last year, it said on Monday, suggesting the heavily hyped technology is gaining traction in a sector until now hesitant to embrace it. The bank has settled over three million forex trades and made over 150,000 payments since February using blockchain, it said in a statement. HSBC would not give data on forex trades settled by traditional processes, saying only that those settled by blockchain represented a “small” proportion. Still, the data marks a significant milestone in the use of blockchain by mainstream finance, which has until now been reluctant to start using the technology at any scale. Blockchain is a shared database that can process and settle transactions in minutes. Originally conceived to underpin the cryptocurrency bitcoin, the technology does not require third-parties for checks and its entries cannot be changed, making it highly secure. See:  IBM will use blockchain to prevent counterfeiting of Seagate’s hard drives Cybersecurity, Blockchain And The Industrial Internet Of Things Banks and other financial firms have invested hundreds of millions of dollars in the technology, hoping it will simplify and slash ...
Read More

Fintech firms want to shake up banking, and that worries the Fed

January 16, 2019

Reuters | Pete Schroeder | Jan 14, 2019 The Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) are exploring granting federal bank-like licenses to tech-driven firms that offer financial services, such as money transfers and lending. The plan is part of a broader push by President Donald Trump’s administration to boost small businesses and promote job growth. Federal licenses would allow fintech firms, which currently operate under a patchwork of state rules, to reduce their regulatory costs and expand into new regions and products. However, fintech firms say they are reluctant to invest heavily in nationwide expansion without access to the payment systems, settlement services, and other Fed tools and the central bank has yet to decide whether to let those lightly-regulated players in. Many Fed officials fear these firms lack robust risk-management controls and consumer protections that banks have in place. See:  MoF Consultation (Deadline Feb 11): Department of Finance Canada Launches Consultations on Open Banking “They probably do want access to the payments system, but they don’t want the regulation that would come with that access,” St. Louis Fed President James Bullard told Reuters in November. “I am concerned that fintech ...
Read More

Staff Notice 11-784: OSC establishes task force to reduce regulatory burden

January 16, 2019

Investment Executive | James Langton  | Jan 14, 2019 The regulator will look to scrap outdated rules, streamline disclosure requirements and make operational changes to enhance or speed up its dealings with the industry OSC Staff Notice Purpose Seek suggestions on ways to further reduce unnecessary regulatory burden. Announce a March 27, 2019, roundtable discussion on reducing regulatory burden. Introduction The Ontario Securities Commission (the OSC) has a statutory mandate under the Securities Act (the Act) to provide protection to investors from unfair, improper or fraudulent practices; to foster fair and efficient capital markets and confidence in capital markets; and to contribute to the stability of the financial system and the reduction of systemic risk. Under the Act, one of the fundamental principles guiding our work is that business and regulatory costs and other restrictions on the business and investment activities of market participants should be proportionate to the significance of the regulatory objective sought to be realized. See:  NCFA Submission to Ontario Ministry of Finance: Urgent Need for Regulatory Change 11-780 Statement of Priorities – Request for Comment Regarding Statement of Priorities (the “SofP”) for Financial Year to End The OSC has several ongoing projects to reduce regulatory burden ...
Read More

Toronto Foundation is investing in social and environmental change in Ontario

January 15, 2019

Toronto Foundation | January 2019 Toronto Foundation has long been dedicated to supporting positive social and environmental change to make life more equitable for everyone. Now, for the first time in our history, we are excited to offer Social Impact Investments to the public through an open call for proposals. These one-time investments, made in partnership with MaRS Centre for Impact Investing, will range from $250,000 to $1,000,000 and will go to approximately five Ontario-based organizations that are creating positive social and environmental change for people across Ontario. A total of approximately $1.6M will be invested. The 2019 Social Impact Investment call for proposals is now open and will close at 5 p.m. on Wednesday, February 20, 2019. Access the submission guidelines (here) and application form (here).  If you have questions about applying, please direct them to Jaymin Kim at jkim@marsdd.com with subject line “Question: Toronto Foundation Social Impact Investment” by 5pm on Friday, January 25, 2019. Answers to all questions received will be posted on Toronto Foundation’s website on Wednesday, January 30, 2019. See:  How Fintech Is Transforming Microfinance What is Social Impact Investing? Social impact investing, also known as social finance or impact investing, is designed to generate both a ...
Read More

Differences Between AI and Machine Learning and Why it Matters

January 15, 2019

Data Driven Investor | Roberto Iriondo | Oct 15, 2019 Why do tech companies tend to use AI and ML interchangeably? Unfortunately, some tech organizations are deceiving customers by proclaiming using AI on their technologies while not being clear about their products’ limits The term “artificial intelligence” came to inception in 1956 by a group of researchers including Allen Newell and Herbert A. Simon [9], AI’s industry has gone through many fluctuations. In the early decades, there was a lot of hype surrounding the industry, and many scientists concurred that human-level AI was just around the corner. However, undelivered assertions caused a general disenchantment with the industry along the public and led to the AI winter, a period where funding and interest in the field subsided considerably. Afterwards, organizations attempted to separate themselves with the term AI, which had become synonymous with unsubstantiated hype, and utilized different terms to refer to their work. For instance, IBM described Deep Blue as a supercomputer and explicitly stated that it did not use artificial intelligence [10], while it actually did. See:  The Age of Artificial Intelligence in Fintech How Data-driven Strategies Can Improve Impact Investing Outcomes During this period, a variety of other ...
Read More

SLT Launch New Blockchain eSports Platform

January 14, 2019

Gaming Post | By Ben Hamill  | Jan 7, 2019 In the latest industry news headlines, local Canadian company Ubique Networks has teamed up with Sri Lanka Telecom (SLT) in order to launch a brand new eSports platform powered by blockchain. The agreement was officially inked on November 14 last year at the residence of the Sri Lankan-based Canadian High Commission. SLT’s eSports Platform is set to be powered by Ubique Networks’ Swarmio technology. This is a decentralized gaming platform with competitive undertones, which will enable virtual sports fans to organize and play in competitions on latency-optimized servers. Swarmio is the very first third-party Dapp created using the firm’s Q Network, and services more than 25,000 eSports players across the world. CEO of Ubique, Vijai Karthigesu, has noted that the SLT Platform will allow gamers in Sri Lanka to ‘raise their profiles’ to global levels. According to him, SLT is using the Swarmio platform and its Q Network to supply a strong solution to local Millennials. He also added that the company has further begun a project to construct a 5G mobile IoT (Internet of Things) for Smart Cities using the very same network. 5G Mobile IoT On the Way The ...
Read More

Fineqia Signs Up Fintech Firm Nivaura for Crypto Asset Bond UK Regulatory Test

January 13, 2019

Fineqia Release | Bundeep Singh | Jan 9, 2019 LONDON, Jan. 9, 2019 /CNW/ - Fineqia International Inc. (the "Company" or "Fineqia") (CSE: FNQ) (OTC: FNQQF) (Frankfurt: FNQA) is pleased to announce its subsidiary Fineqia Limited, ("Fineqia Ltd") has partnered with Nivaura Limited ("Nivaura") to use its white-label capital markets platform to perform a fully automated tokenised bond issuance and administration, registered and cleared on a public Ethereum blockchain, to conduct its test for issuing crypto asset backed bonds. Fineqia Ltd's test is required as part of its acceptance into the U.K. Financial Conduct Authority's ('FCA') Sandbox Regulatory Program announced in July 2018. It was amongst 29 companies accepted out of 69 applicants that met the FCA Sandbox eligibility criteria. The test is set to take place in Q1 of 2019, with results also to be obtained in the first quarter. It will enable owners of crypto currencies such as Bitcoin and Ethereum to borrow fiat funds via the issuance of crypto asset backed bonds. The product has found appeal among institutional owners of crypto assets, such as miners, funds and exchanges, seeking liquidity but not keen on selling their crypto currencies. Fineqia's partnership with Nivaura allows for such institutional ...
Read More

Form Fintech & Holt Accelerator Create Map of Canadian FinTech Ecosystem

January 11, 2019

Montreal in Tech | Steve La Barbera  | Oct 29, 2019 Montreal’s newest startup accelerator isn’t afraid to try new things.  The Holt accelerator, established earlier this year, has teamed up with Form Fintech and Lab Zed to produce what they are calling the first exhaustive map of Canada’s FinTech ecosystem. “We’re pretty well connected with the Canadian fintech community and we hadn’t seen anyone build anything like this, so we decided hey, let’s do it” says Jan Arp, Managing Partner and founder at the Holt Accelerator. “It’s an ecosystem map. There’s also some analysis in there so people can start to see who’s doing what across Canada. It’s what everyone’s been talking about, but we haven’t seen anything as comprehensive as this yet”. “The idea is that the more we can add the data and metrics, then the more interactive of a platform it can become for users” added Geraldine Holliday, Head of Digital Product at Form Fintech, who was part of the team building the map. “You’ll be able to see what stage each company is at, how much money have they raised… have they been part of different accelerators or incubators and so on…”. Her partner on this ...
Read More

MoF Consultation (Deadline Feb 11): Department of Finance Canada Launches Consultations on Open Banking

January 11, 2019

Department of Finance Canada, Ottawa | Jan 11, 2019 Note from NCFA:  the department of Finance is seeking consultations on the merits and risks on the prospect of Open Banking in Canada.  The UK and Australia are already piling ahead.  We encourage key stakeholders to either submit inputs to NCFA for aggregation to info@ncfacanada.org by Jan 31, 2019 and/or submit directly to the submission details that can be found below. January 11, 2019 – Ottawa, Ontario – Department of Finance Canada Canadians deserve a financial sector that is globally competitive and promotes consumer choice, while also delivering financial stability and economic growth. They must also have confidence that it operates with the highest regard for privacy and security. To this end, the Department of Finance Canada today released a consultation paper on the merits of open banking. The release of the paper and the launch of public consultations marks the next step in the Government's review of open banking, following the appointment of the Advisory Committee on Open Banking in September 2018. Open banking has the potential to offer a secure way for Canadian consumers—including small businesses—to consent to sharing their financial transaction data with financial service providers, allowing them ...
Read More