Digital Credit Transformation
Over the last decade, retail banking has seen a significant investment in building customer centric digital propositions for its clients. However, commercial and corporate banking has not experienced the same breakthroughs improving customer journeys for companies from small and medium size enterprises (SMEs) to large corporates. Unlike in retail lending, the average time to reach a decision can be a few weeks (in some cases even months), with additional weeks added for time to release cash for most commercial and corporate customers (when the funds are actually available).
Many commercial clients are no longer prepared to accept these delays to obtain funding for their businesses and consequently, client satisfaction is at an all-time low having dropped below 50% for corporate client satisfaction with main banking service providers[i]. Whilst it is clear that commercial and corporate lending should be transformed and digitised, the question remains how to achieve this …
Digital transformation sounds attractive and evokes personalised customer centric experiences, innovation, agility and efficiency. However, “if you think about digital transformation as two words, we pay too much attention to the digital and not enough to transformation.”[ii]. When helping our clients with their digital transformation programmes, we are often faced with the reality that in digital transformation the hardest part of the equation is not the digital one. Digital transformation goes way beyond technology, requiring fundamentally different business and operating models as well as cultural changes.
Why haven’t banks been faster (and more successful) in transforming their commercial and corporate business?
- Customer segments, products and geographies: Commercial and corporate lending is complex due to a vast and heterogenous range of clients covered. A sole trader has very different credit needs from a global corporation with accounts across multiple banks, currencies, geographies and which require much more complex products such as trade finance, cash, liquidity and FX management. Despite these differences, commercial and corporate banking customers might be subject to the same application and assessment process when seeking credit.
- Relationship based model: Commercial and corporate banking is primarily based on relationships cultivated over years and many in-person meetings, which in its essence is challenging to “digitise”.
- Processes and dated operating model: In most banks the existing commercial and corporate lending process involves multiple handoffs between many different functions: front-line, middle-office and back office. This often involves exchanges of paper documents (requiring wet signatures and rubber stamping (sometimes literally)), attachments, keying data in from one system to another and communications via phone and email, which result in delays, errors and high costs. Additional complexity and delays occur for new customers, who also are subject to extensive onboarding and Know Your Customer (KYC) requirements only to find out later that the internal functions do not effectively communicate internally and that similar information and documentation needs to be provided again to obtain credit.
- Legacy systems: whilst not specific to commercial and corporate lending, monolithic, disparate and non-integrated legacy systems are a major hinderance when it comes to digital transformation with significant impact on costs and complexity associated with deploying changes, integrating with internal and third-party applications and increasing difficulty in finding technical resources with legacy architecture and code expertise.
Common pitfalls in commercial and corporate lending transformation
- Lack of clear strategy and priorities: Given the diverse customer base and global scale that cannot be uncoupled from commercial and corporate lending, banks tend to fail to define a clear strategy and priorities. This often results in trying to create a “one-fits all” solution that falls short of improving outcomes for customers, driving efficiency and delivering the expected ROI.
- Digitising parts of the process: There tends to be significantly more focus on creating a new customer interface and digitising the origination side of the process rather than looking at the whole end to end journey. Attempts to improve commercial and corporate credit lending processes piece by piece often lose focus and fail to generate the desired benefits.
- Underestimating data integrity issues: credit journeys are often built around legacy systems with various teams operating manual processes built around a lack of system functionality. This results in offline workarounds and multiple layers of checking and “enhancing” data, which tends to achieve the opposite outcome – no trust in data quality, and this must be addressed before any digital transformation can succeed.
Make it happen
- Be strategic and deliberate: Never underestimate the power of establishing clear priorities and pain points that your organisation is trying to solve. This is especially relevant for the commercial and corporate lending, which tends to cover vast range of clients. It is crucial to analyse and decide up front, which customer segment is a top priority and generates best ROI for your organisation; and acknowledge that the same solution will not (and should not) cater for all customers. Some may choose to prioritise SMEs – with high volumes and lower risks, credit and lending journeys can be fully self-served and the decision processes fully automated. Others may choose to prioritise large corporates and build on improving the relationship-based model that allows relationship managers to facilitate obtaining the best available credit facility quickly.
- End to end journey: Avoid temptation to digitise and transform parts of the process and focus on the end-to-end customer journey with a set target state in mind. The best results can often be achieved by collaboration between the internal front-line, risk experts and external consultants that bring the latest technology expertise, market experience and challenge the organisation’s thought process.
- Agree target operating model: Recognise that numerous interrelated parts of the previous way of organising the value chain for commercial lending will have to change in tandem and re-configure them around the future journeys adapted to the customer segments. This may involve changes in established team boundaries, ownership of tasks and collaboration of previously separate parts of the organisation.
- Integrated technology and data: Accept, and help your key sponsors to understand, that without significant investment in the backend infrastructure and tech stack, you cannot achieve the automation, integration and application of AI that will help you transform operations and respond to customer and market needs faster. Where relevant, consider partnering with external providers, as this will allow you to develop new capabilities quicker, however, be very clear on the value expected from the partnership and do the groundwork preparation to make sure that the internal challenges and concerns related to partnerships can be overcome.
And most importantly, digital commercial and corporate transformation can never be completed. As technology continues to rapidly advance, customer expectations will continue to change, and businesses must continue to transform. Ever more reason to not only transform the lending journey, but while doing so, build an agile organisation able to adapt to the changes yet to come.