Digitalization - the move towards a more digital world - is a well-established phenomenon. But the digitalization journey is not the same in every sector. Traditional practices, available skills and competitive forces are creating a new set of dynamics in the credit risk sector.
Providers are coming under significant pressure from several directions in risk management. It might almost be described as a ‘perfect storm’. Regulators are clamouring for better processes, investors and competitors are adding to the pressure, and customers want credit fast. All this adds up to the need for big changes. Incremental changes are no longer enough. Here are a few factors to consider when planning to improve innovation in credit risk management
Digitalisation offers huge potential to improve credit risk management, and ultimately, the bottom line. In particular, digitalization is likely to result in more transparency of risk assessment. This will improve understanding of risks, and enable risk-based pricing, better and faster customer response times, and more effective management of loans. All this adds up to improvements to the bottom line. In an increasingly digital world, where goods are available at the click of a mouse or tap of a finger, customers expect the same service from their banks. They want convenient application systems, including online, and fast decisions. Banks need to keep up with that demand, or find themselves overtaken by any competitors who are prepared to respond to customers in this way.
Mobile seems to be particularly hard for traditional organisations to manage. Research shows that many financial institutions have tried to move at least some parts of the account opening process to mobile devices. But the process remains difficult, and often confusing, and many customers end up abandoning the process both online and on mobile.
The bigger organisations are trying harder to compete digitally. Only 17% of banks and credit providers currently offer mobile account opening. While 35% of organisations said that they have no plans to allow account opening via mobile devices, this rises to 47% among small community banks. Larger banks and credit unions are much more likely to be trying to keep up. If smaller banks fall by the digital wayside, this may not be good news for consumers in the long term.
At the same time, however, the global credit crunch has resulted in regulators placing tighter restrictions on lending by banks and other credit providers. Regulators expect credit providers to manage risk more actively, and also have automation of processes to provide documentation. Banks are caught between a rock and a hard place.
Analytics as an enabler for a "digital" credit risk
To stay competitive, banks need to use data and analytics effectively to gain insights. There is a huge upside to digitalization as far as banks are concerned. As users adopt new digital services, massive amounts of new data become available. This new information can be fed into risk management processes, and can also provide other data on customer habits that can help banks to gain new insights and better target customers, as well as managing accounts more effectively.
New firms in the market, including financial technology companies are driving changes. Financial technology (fintech) companies and new digital-only banks have emerged as key competitors to traditional banks in the digital space. They are putting pressure on traditional firms because of their lower costs and overheads, which also mean lower prices for customers. These new firms also bring new models of business, facilitated by better analytics, which are attractive to customers.
Some traditional credit providers are choosing to form partnerships with fintechs. Fintechs may be increasing competition in the financial sector, but many traditional providers are also finding that they offer opportunities in the form of partnerships. This ‘clicks and bricks’ marriage may offer the best of all worlds to both providers: a way to leverage relationships and know-how in the sector but add new ideas and technology.
Fintechs are winning because of their willingness to make the customer journey smooth. Many banks have been slow to embrace digitalization. In fact, in most banks, it is not possible to open a new account entirely online or by mobile. And the whole multi-channel option—the idea that you can start the process on one device, save it, and resume it on another—is rather lost on most traditional providers. Organisations which focus on making the customer journey more convenient—overwhelmingly fintechs—are therefore winning.
At our recent Innovation in Credit Risk Management event, several practitioners shared their progress on this digitalization journey. We have summarized key challenges and invited our panel of experts to an online discussion on Twitter on Oct 7th, kick off at 15hrs CET. Questions we have put to our experts to kick things off include:
- Which initiatives are financial institutions taking in regards to digitalization in credit risk/scoring/evaluation?
- To what extent are Fintech companies trying to get a foothold in the credit market?
- How should Fintech credit initiatives be addressed in regulation?
- To what extent is social media info used in scorecards?
- Which examples do you have in automated decisioning in banks regarding digitalization and enhancements of the traditional credit risk processes?