12 Minutes Read.
With the rise of technology, banks are increasingly digitizing their business models. The digital transformation of the banking system not only improves the flow of control and work efficiency, but gives banks an edge over their competitors.
According to a survey conducted by Accenture, 67% of banking executives believe that within the next five years customers will perform most banking activities like investing, borrowing, lending, and saving, on digital platforms provided by non-financial companies like Google. Other research done by Accenture shows that digital transformation offers real costs and benefits to not only well-established banks but also emerging financial institutions. Through digital transformation, these institutions can generate a return on equity of more than 5%. As a result, 87% of banks already have a formal plan for digital transformation.
The above stats indicate the importance of digital capabilities and how they affect an organization’s decision in selecting banking partners.
Many American banks have funneled resources into integrating new technological ecosystems and making banking cheaper and more convenient for their customers. Going beyond the traditional banking environment has helped banks create stronger relationships with existing customers, increase bank engagement and mine valuable data which helps them improve their customer services and lending decisions.
Let’s take a look at how traditional banks invested in a digital transformation for Digitalized Lending in 2018:
1. An end-to-end reinvention of the customer journey
By conducting an end-to-end transformation of the customer journey, banks can save costs, foster better relationships with clients, and meet the demands of the changing banking landscape. Banks must reinvent the critical points of the customer journey in order to reap these benefits. For example, Boston Consulting group stated that a large bank saved 30% costs associated with the credit lending journey and shortened the application-to-funding process time by redesigning its credit lending process. According to the study, banks can experience a 20% increase in revenue and a 25% reduction in cost if they digitalize the customer journey from end to end.
The above infographics are incredibly insightful. Over 60% of US community banks do not even have a mobile app. A smartphone app is the first step of digital transformation and a bare minimum. It is difficult to evaluate how these small banks can compete in a digital-first millennial world.
2. Complete automation
Risk managers are wary of automation even though the reliability of the data-driven model continues to increase. For this reason, most banks are not very open to the idea of complete automation when it comes to the approval process for business loans.
According to McKinsey, complete automation of retail, small and mid-sized banks, can help increase their earnings up to 40% within five years. As all the processes and functions are handled by workflow tools, customers receive self-servicing capabilities which can reduce costs by 40 to 90%. Automation also enhances the overall customer experience as it allows smooth transactions, workings, and availability of quick and efficient digital tools.
Millenium Bank is a small community bank in Hamilton County, Tennessee. It had assets of just $139 million in April 2018. But with digital lenders on one side and other larger regional banks on the other, it was critical for Millenium and its team to evaluate the best strategy to survive and grow. It decided to bet on a suite of automation technology products which focused on modernizing the bank’s lending process. The software eliminated manual documentation, automated the credit process (especially for the small loans) and minimized admin time spent on a single case.
- The bank can now sanction small loans in a matter of seconds.
- The bank was able to originate 25% more loans from the same number of loan officers.
- The loan volume growth in the last two years was off the charts at 50%.
This illustrates the power of digital transformation in general and automated lending technology in particular for the smallest of banks.
3. Building Agile Models
Agile is the process of development which involves the collaboration between a development team and customers in order to build customer-centric products. Through Agile modeling, banks focused on the customer experience with the aim of bridging the gap between clients and the bank. To do this, they studied customer behavior, changed their branch roles, and brought a change in their traditional beliefs. Furthermore, Agile models require the bank to be open to changes and innovation. Organizations’ ability to work with clients to develop Agile digital models helps them create better branches and functions for customers.
Why is agile development essential?
Cross-functional collaboration helps banks take better and more reliable decisions and control any unwanted risks. It also allows continuous testing and data integration.
Sound Community Bank is a Seattle-based bank with less than $800 million in assets. CEO Laurie Stewart explains how technology ensures a deeper relationship with the customers. This might seem a bit odd, considering a local bank is expected to have “local personal relationships” to drive banking. However, incorporating Customer Relationship Management Solutions has helped the bank understand the client on multiple parameters and opened up numerous cross-selling opportunities. The solution is based on driving efficiencies from the relationship and deepening the bank-customer relationship.
4. Partnering with Fintech
Harping on digital transformation is easy. However, software engineers are not easily sold on working for small regional banks. Digital lending and real-time support cannot be handled by legacy IT solution providers and buying new technology is too expensive for small banks to even consider. The answer: Fintech partnerships.
How will these relationships help a small bank?
- Fintechs help the organization perform end-to-end transformation by providing platform compatibility and data mining capabilities.
- Fintechs allow a plug and play model (in many cases). Thus, the bank can keep running its legacy IT systems, while the new technology builds on the existing IT to execute its offerings.
- Fintechs allow the integration of personalized analytical components into the formal bank processes.
- They are usually cost-effective models with minimal upfront investment by the bank. Instead, the bank is charged on a pay-as-you-use model. A win-win for both the bank and the fintech.
- Chicago’s Burling Bank leveraged a tech vendor’s white label digital lending platform to originate small business loans. This reduced the cost per loan, increased the loan volume, and created a better user experience.
- Delaware Valley’s WSFS Bank used LendKey’s ABA-endorsed student loan lending platform and an online marketplace to develop the bank’s own private student loan and refinancing programs, as well as to participate in the LendKey open marketplace.
Alliance: The AlloyLabs Alliance is a substantial step (albeit first) in creating a new paradigm for small banks. Announced in November 2018, twelve community and regional banks have founded the alliance to execute a consortium approach to “innovation and technology adoption.” The Alliance will be managed by FintechForge and will be structured as an innovation lab and accelerator. It will work with fintechs on customer applications and back office efficiencies. The founding members include CenterState Bank (Florida), Columbia Bank (Washington), First National Bank of Omaha (Nebraska) and others.
These banks understand that this is a point of no return. By pooling their resources, they have wisely shared the risks and rewards. With little overlap, the banks are in prime position to emerge as stronger banks in their current locations.
Rohit Aurora, CEO & Co-Founder at Biz2Credit, makes a very true point: “Those banks that have not invested in digitizing on their own should look for FinTech partners who can provide the capabilities to enable online loan applications….The banks that fail to partner with FinTech companies and keep pace with changing times risk losing out on market share and becoming irrelevant.” Read more in his Forbes article: How Banks View Competition in Small Business Lending
Digital transformation is the necessity of the hour. Small banks must not neglect the importance of technology in banking. Digitalization redefines the lending process by making it smoother, more efficient and reliable for the customers. It also enhances the customer experience and allows banks to increase customer engagement and improve the overall experience.
Investing in automation, leveraging agile methodologies and striking partnerships with fintechs is a no-brainer. The management needs to identify and understand the core strength of a regional bank. Accordingly, it needs to pivot the business model by incorporating digital transformation to survive in a new era of banking and lending.
As Jim Marous (co-publisher of The Financial Brand and publisher of the Digital Banking Report ) stated: “It’s time to let go of the past and embrace the future. As daunting as digital transformation can look, moving forward immediately is essential for any bank or credit union that wants to remain competitive, especially in a marketplace where customer experience is becoming the differentiator. There’s no excuse.” And we cannot disagree with that. Read more at Jim’s article: There’s No Excuse Why Every Financial Institution Isn’t Embracing Digital Transformation
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