Decreasing revenues and operating margins
Banks can no longer rely only on cost optimization for profitability. They need to focus on generating new revenue. Corporate banks are increasingly realizing the revenue potential from the SME sector (particularly the middle-market clients), especially if they can simplify the lending process through extensive digitalization and automation.
A standing start
As banks look to react to the opportunities around lending, they will have to overcome some significant existing barriers in their current systems and processes:
Slow process
Some lenders continue to rely on employees to review and manually enter information from physical documents such as financial and payroll statements. This is something that could be easily automated to be faster and cheaper.
Poor user experience
Banks require a wide variety of documents, often in paper form and in different tranches, compromising the customer experience. SMEs would prefer a simpler credit process, using standardization and more user-friendly technologies.
Lack of data-driven processes
Given the unique characteristics of each SME, banks find it difficult to assess creditworthiness, depending on detailed commercial plans, profit and loss sheets, or financial forecasts. That can lead to an increase in default risk. Today, lenders can enhance credit models by using real-time data and alternative data sources.
Low understanding of SME business
Lenders are often not meeting the needs of SMEs – products are not attractive enough and lack customization. Banks can use more data from new regulations, such as Payment Services Directive Two (PSD2), and leverage open banking to obtain detailed credit data. They can then analyze and adapt their offerings as needed.
Below are some of the key steps that have been core to successful transformation to digital lending. This has been the case for EY client banks of all sizes across Europe:
Case study: How one bank revolutionized its lending offering
A large Central European bank approached EY teams to help it build a digital-first, end-to-end process for unsecured customer loans. EY teams work led to a mobile-first, AI-enabled digital platform that significantly enhanced the bank’s lending processes. The modular platform allows a full set of digital processes, including identification, innovative credit scoring, anti-fraud and an electronic-signature system.
Once implemented, the new digital process saw customers receive funds in an average of 30 minutes. Including rapid feedback loops and prototyping also helped boost customer engagement and increase the bank’s understanding of its customers, further improving its services.
Read more here.
Enhanced information
Banks can enrich the data that sits behind the credit scoring model. Lenders can integrate internal customer data with broader and more innovative information retrieved from external sources (local socio-demographic data, web data, PSD2, etc.). This allows the bank to unlock financing for creditworthy but rejected SMEs and offers predictive, tailored solutions (using AI, ML and data analytics).
Scalable and open-banking technology
Leveraging APIs and the cloud allows banks to offer more complex and targeted services and be faster and cheaper to run.
If banks really want to digitally transform their lending, they must look at changing not only the customer journey but the underlining processes. Many digital enablers, applications and systems can accelerate digitalization, all through the credit process. The challenge for banks is finding a combination that most efficiently replicates their credit life cycle, making integration easier.
Leveraging the full power of the bank
Lenders should work with all business units across their products and services and tap into distribution channels and after-sales services. This helps build an agile operating model with clear governance to operate across the bank at high speed.
Customer experience first
Ensuring customers have a seamless journey across different products and services, with a clear end-to-end journey, builds satisfaction and loyalty, as well as lower drop-out rates as banks become more relevant.
Best in class
Working with third-party solution providers ensures a wide, deep and up-to-date offering in line with the banks’ long-term vision.
Working with organizations, EY teams have also seen some common problems they have faced on this journey. For example, many SMEs want to apply for credit on their phones, so any solution needs to be designed to be mobile-friendly. Also, given that loans are often negotiations (around term length, amount borrowed and rate), any system needs to be flexible enough to adapt without forcing customers to restart the entire process.
Digital lending – a revolutionary change for SMEs and banks
The pandemic showed SMEs the advantages and potential of digital banking services. How banks respond to that demand is key. While there are many interesting non-core services they can develop, they must not lose sight of getting lending right. A fully digitalized lending offer can allow banks to make fast decisions while giving a frictionless and easy process for time-busy SMEs. Critically, it also means banks can obtain rich, real-time data that can help them better understand SMEs’ needs and design new products accordingly. It can also be a step towards hyper-personalization that can create bespoke offers for each SME.
EY teams have seen several lenders (and even digital banks) look to enhance their digital lending and run into problems. The key to success is ensuring the underlying systems and the customer journey are changed. That means using the right digital tools at the right stage of the credit cycle, such as a credit decision engine.
Banks will need to understand where they can stand alone and where they may need to partner or use white label solutions. We are already seeing several banks partner with FinTechs to accelerate their digital transformation in this space.
It is a crucial time for banks to land their SME lending proposition. Many SMEs are looking to invest post-lockdown to either digitalize further or use their enhanced digital presence to expand overseas. At the same time, rising interest rates make lending more profitable and will attract non-bank lenders to serve this sector. With branches closing, those banks that can deliver digital lending for SMEs will have a clear competitive advantage.