September 2022

Driving customer-centricity in lending

The lending industry is being reshaped by a confluence of forces.

Concerned about potential losses due to the wayward economic conditions, traditional lenders are tightening standards. On the other hand, alternative lenders are making further inroads into the business with superior service and experience that consumers, with their preference for digital engagement and zero touch, are welcoming. Meanwhile, the forces of regulation continue to build up worldwide, aiming to safeguard customer rights and prevent loan frauds. The last force is emerging technologies, including Cloud, API (Application Programming Interface), Artificial Intelligence and machine learning, which are enabling new competitors to enter with innovative, low cost, disruptive models to threaten incumbent banks that are still on legacy technology.

Like every industry, lending business was adversely impacted by the Covid-19 pandemic. Businesses faced a severe cash crunch caused by strict lockdowns. Industrial activity came to a standstill and jobs were lost across the board. This had a cascading effect on both consumer and business loans: retail loan delinquency almost doubled, and a similar trend seen in mortgage loans. Consequently, banks’ non-performing assets rose in the subsequent quarters.

As the storm withers away, and the pandemic waves subside, to stay relevant and thrive in the lending business with new momentum, one needs to play their best and win the market share! And for this, we believe it is time for banks to go back to basics or the first principles thinking to reimagine their lending business for the digital age. Broadly, this involves the following below three considerations.

Build customer-centric propositions

A modern digital platform is indispensable to customer-centric lending. The right platform offers customers the convenience of anytime-anyplace access to loan application, approval and disbursement within minutes, configurable products and prices, and hyper-personalized offers that are well integrated into their primary journeys.

Operate at significantly higher efficiencies

Efficiency improvement is one of the key promises of a digital lending platform, which enables banks to go paperless, minimize or even eliminate human intervention, and gain visibility into lending processes. Automation across the front, middle and back office raises efficiency throughout the lending value chain. The unified platform also strengthens the blended workforce proposition where a digital workforce operates alongside humans to amplify lending outcomes, across customer segments.

Drive continuous innovation

A digitally native platform’s biggest advantage is that it elevates innovation ability to new levels. For instance, it enables banks to create lending models that transcend asset-based and other traditional models and also supports customer centric design and customer-designed products. It allows for risks assessment through a host of non-traditional data sets available publicly or through interfacing agencies. Over and above this, it facilitates collaboration with the ecosystem using APIs so the bank can practice marketplace lending, build syndicated lending products and add complementary products like insurance to home loans.

Here is how Bank BRI built a winning customer-centric proposition

At Finacle, we have been the partner of choice for both banks and other FIs across these focus areas to accelerate their journey towards a truly digital lending platform. Finacle brings rich experience in digital lending transformation having delivered more than 450+ lending deployments in over 90 countries.

Today, I will talk about our work with banks across regions in helping them build customer-centric propositions. One such example is PT Bank Rakyat Indonesia Tbk which is one of the largest banks in Indonesia. It specializes in small scale and microfinance style borrowing from and lending to its approximately 30 million retail clients. Bank BRI decided to tap into and leverage the enormous growth potential in the unbanked sector of the country with Ceria, a digital lending app, thus helping the country’s millennials grow their financial assets and build a stable credit history. Bank BRI Ceria provides:

Convenience: The card-less credit app is fully mobile, swift, simplified, enables self-service

Speed: Ceria has the fastest loan approval and disbursement process of 2 minutes (from loan origination to loan disbursement).

Price Competitiveness: Ceria offers the lowest rates for digital lending with a flat interest rate of 1.41 percent per month or 17.04 percent per year, making it a highly compelling proposition.

Integration with primary journeys: BRI’s high-tech low-interest approach through Ceria is influenced by demands brought by shifting millennial consumer behavior and the e-commerce market that is projected to grow to US$82 billion by 2025. Ceria offers fully-digital loans upto $1,500 for e-commerce purchases with buy now and pay later (BNPL) features.

Since its launch in the first quarter of 2019, Ceria has seen its loan portfolio grow by 6x year on year. In 2021, Ceria has onboarded 2,000-2,500 customers and has created 11 billion Rp (US$758,00) credit facilities per day, until the second quarter. Bank BRI is now developing Ceria API to tap into digital ecosystems across the larger ecosystem, to empower customers beyond the bank’s network.

Finacle’s Approach to Driving customer-centricity in lending

Mobile-first strategies and simplified online interfaces are fundamentally changing customer experience and digital engagement in banking, including lending, by improving access, convenience, security and speed. With companies accelerating the digitization of their lending operations, the demand for sophisticated digital lending solutions to drive deeper customer engagement, is on the rise.

Finacle’s approach to helping banks maximize customer engagement for enhanced proposition includes:

However, this is only one element of our promise. We offer an industry-leading solution suite designed to accelerate your journey towards a truly digital lending platform. Click here to know more about our proposition.

On International Youth Day, Gift the Young Better Banking

How technology can aid financial literacy and enable financial wellbeing

With the entire world talking more forcefully about the need for resilience and future readiness, there is a greater emphasis on overall wellbeing, of which financial wellbeing forms an integral part. Building financial wellbeing requires a level of financial awareness and decision-making confidence that goes beyond a superficial understanding of personal finance lingo. It requires not only financial literacy but also the tools and techniques to track financial behavior.

Drawing parallel from the business world, financial profile of an individual can be inspired from Balance sheet and Cash flow statement. The personal balance sheet can be constructed by looking at all the assets like bank balance, investments, gold, movable and immovable properties etc., all liabilities like various loans, overdrafts, credit card due etc. The personal cash flow statement captures the in and out cash flows. Financial profile thus largely influenced by credit rating, investment risk profile, insurance, life style goals, life style, sources of income etc. Each of these aspects contributes to your financial wellbeing. For example, a good credit score is a sign of financial behavior. Your credit score is extremely important as it directly impacts the rate of interest when you take a loan. Understanding how your financial behavior affects this credit score is crucial.

Similarly, every person has some predictable financial needs and expenses such as insurance payouts for self and dependents, vehicle servicing charges, house lease, house hold expenses, EMI, and so on. Other fixed or predictable expenses could include your child’s future education costs or a dream vacation on your bucket list. While it’s possible to estimate your expenses and cash flow, the ability to manage other investments, savings, and unexpected expenses diligently so that these plans do not get derailed requires an understanding of finances. This means understanding your current cash flow over the near-term and projected cash flow in the mid-term and long-term (next 5 years, next 10 years etc.) must become top priority.

Using technology to enable financial wellbeing and goal management

Technology can help enable a 360° view of your financial profile, covering every category across timespan pertaining to your finances. It can facilitate an aggregation of various aspects across various institutions and stringing all the dots together to make the picture complete.

You may have identified a certain lifestyle as desirable for yourself and a bunch of needs and goals that have to be fulfilled along the way. Whatever your goals, what you need is intentional planning, monitoring, and course corrections as required. It’s important to regularly introspect and appraise financial behavior while actively looking for improvement areas. Goal management is about making sure your financials are planned and managed so that they work collectively and cohesively towards these goals. This crucial aspect of managing your wellbeing can be simplified and improved through using technology.

There are three main considerations of goal management in the context of finance.

The first is about achieving a lifestyle goal over a defined number of years. For example, it could be, “I want to buy a house within the next 10 years” or “I’ll go on a solo trip to a new country every year.”

The second is about planning for a rainy day. If you’re employed, the thumb rule is that what you have in savings should cover at least 6 months of your expenses.

Your third consideration is about your retirement plans and laying the foundation to enjoy a peaceful retirement, and preferably, needs to start as early as you can when you are earning. If you aim to at least continue your current lifestyle after retirement, how much would you need to save now? Investment instruments are best suited to give you long-term returns. This will maximize the time you have for investments and savings that will serve you well when you’re no longer in the earning bracket.

Technology helps with visualization and visibility of these goals vis-à-vis your current financial state and the steps you can take towards them. You can choose from a combination of tools and techniques or use facilities offered by banks. For example, Personal Finance Management (PFM) solutions provide a view into your expenses across various categories, what-if analyses and assess how they may impact your goals. AI and analytical solutions are already helping banking customers with personalized recommendations to manage their finances better.

In case you’ve used your credit card excessively for a buying spree or exceeding your entertainment budget, the underlying technology will nudge you in time so you can take corrective actions, promptly. Gamification and trigger-based savings are also ways in which technology can help focus on your goals.

While financial literacy offers awareness, technology gives you the power to take over the reins of your financial wellbeing. The visibility, visualization, and personalization it enables as per your specific persona will help manage your goals better. Helping you distinguish assets and liabilities, understand cybersecurity aspects, and providing modern techniques and insights into your finances so you can take decisions confidently, technology makes sure your money works continuously for you.

The road to leadership in embedded finance

Over the past 20 years, banking transactions, half of which used to occur in-branch, have migrated predominantly to digital self-service channels. However, the bigger trend is that as we march further in this decade, many of these transactions will originate outside the bank network altogether. This is because, thanks to trends like open banking and banking as a service, bank transactions will be embedded within customers’ primary journeys for other products and services. In our view, this migration will be much faster than the first, because being more contextual and seamless, embedded finance experiences are likely to enjoy rapid adoption. As a proof point, look at India’s UPI-based open payment transactions, which are running at nearly 6 billion per month. Over 80 percent of these payments originate in two non-bank apps, PhonePe and Google Pay. This, despite there being more than 60 similar apps from incumbents, challengers and neobanks.

What’s more, embedded finance creates wins for all stakeholders: frictionless banking for customers; new business for merchants and brands who can attract customers with Buy Now Pay Later and other digital financing and payment options; and business expansion at affordable costs for banks, thanks to maturing digital infrastructures.

Thus, it’s not surprising that embedded finance is among the hottest opportunities in banking today, promising great returns to institutions that can embed their offerings across a variety of customer contexts. Also, it is not a zero-sum game by any means. There is enough room in the embedded finance ecosystem for all types of providers – incumbent, challenger, and neobanks – to coexist. This is particularly true for growing economies and underserved markets. For instance, household debt in India is less than 15 percent of GDP, compared to nearly 75 percent in the US and 55 percent in China.

That being said, banks looking to lead this opportunity should move quickly with their plans. The following three goals should be high on their agenda:

Scale initiatives to embed APIs where possible throughout the ecosystem

The starting point is to build a robust API infrastructure for exposing bank services and data to a variety of ecosystem partners. It is recommended to build APIs in standards-based formats, such as those published by BIAN, for widespread integration. An API management platform, assuring secure access to approved partners for approved purposes, is essential. Also, there needs to be a sandbox and accompanying documentation to ease the developer experience. A mature digital stack is imperative for supporting massive embedded finance transactions, at very high performance levels, and very low incidence of technical failure.

Progressive organisations are seen to approach API banking with a product management mindset, viewing APIs as a class of products for taking their services to third parties. Hence there is a dedicated product management team responsible for prioritising, developing, deploying, upgrading, and even retiring APIs; there are also teams to develop and test use cases with partners, especially for non-standard, industry-specific applications, and to support developers, partners and customers with their needs.

Embedded finance is a separate revenue stream that should be developed like any other line of business. Banks should therefore put together teams for promoting API banking and for building alliances with corporates, small businesses, large digital infrastructure providers, fintech firms, e-commerce players, and other entities. A key goal should be to evangelise APIs through the influential developer network.

Develop unique capabilities that can be embedded faster, cheaper, better

Stepping up digital transformation after the Covid-19 breakout, the majority of banks put basic APIs in place for their checking accounts, unsecured loans, payments, etc. As competition grows, APIs are commoditising further. Therefore, the question is how can one bank differentiate its API banking service from that of another.

Innovating with unique, or better, propositions is one way. Another is targeting specific niches, which may be product-based (for example, student loan APIs), segment-based (ICICI Bank has nearly 200 partners just for co-creating embedded experiences for SMEs), or service-based (for example, China’s PingAn One Connect for Identity Management as a Service ). Since many brands prefer to source embedded offerings from a one-stop-shop provider, it makes sense for banks to offer bundles that may even include others’ products, such as insurance with loans, virtual accounts with retail checking accounts and so on.

Take a marketplace/ ecosystem approach to expand the business

When the above foundation is in place, the next step is to grow the business. A considered marketplace approach can help banks consolidate their lead in embedded finance. Apart from offering their own APIs/services, they can feature both complementary and competing third-party services to become a singular destination for banking APIs. From that position of power, they may be able to influence standards driving growth and information security in embedded finance, beyond the narrow regulatory prescriptions for open banking existing at present.

A marketplace expands a bank’s ecosystem on both the supply and demand side in a natural, self-sustaining way. When a marketplace features a number of brands, it becomes a magnet for supply-side partners, and vice-versa, thereby unlocking significant network benefits for its bank. As the ecosystem expands so does the data flowing through the marketplace platform, providing rich insights that the bank can use to enhance its embedded finance proposition.

Another benefit is the ability to dictate pricing. When a bank offers many API-based services, it can price the basic (undifferentiated) capabilities very competitively to lower the entry barrier and charge a premium on unique or high-value services. Last and by no means least, a marketplace is the go-to destination of large embedders who prefer to fulfil all their requirements in one place.

For all these reasons, it is believed that the quality of a bank’s financial health will be determined by the strength of its ecosystem/marketplace.

What could be a better argument in favour of embedded finance?

This article was previously published in The Banker.