Accenture Credit Services Survey Adopting Digital Innovation throughout the Credit Value Chain

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1 Accenture Credit Services Survey 2015 Adopting Digital Innovation throughout the Credit Value Chain

2 Multiple trends are reshaping the credit industry everything from scarce funding and rising unemployment to tighter regulation. To gain greater insight on how lenders are reacting to the market pressure and the resulting more volatile business dynamics, Accenture conducted a survey of executives at top retail banks, consumer finance companies and commercial banks from Spain, France, Italy and Sweden about their consumer finance, mortgage and small and medium enterprise (SME) lending practices. Survey findings point to three main priority focuses for European lenders: credit analytics, non-performing loans (NPL) management and core credit re-platforming. This report highlights the findings from the fourth annual Accenture Credit Services Survey 2015, and offers some directions for how lenders can incorporate innovative digital capabilities into running a more competitive business. Table of contents Lending trends in Europe Emerging forces impacting the credit business The digital lender Analytics first The Recovery Factory Core credit re-platform Conclusion: The art of digital lending possibilities Adopting Digital Innovation throughout the Credit Value Chain

3 Lending trends in Europe The post-crisis lending environment in Europe is growing increasingly tough. The challenges lenders face are numerous and achieving sustainable profitability is, for the foreseeable future, difficult. Since the banking and government debt crises in 2009, growth rates have fallen across Europe (figure 1). Bank bailouts, austerity measures and lower growth have led to post-crisis drivers of scarce funding, rising unemployment and increased regulatory pressure on banks, which have adversely affected business dynamics. Market response to the crisis has produced various results across countries and business segments in Europe. Lending volumes in Southern Europe are still below precrisis levels, instead of at segment level. Consumer finance and corporate lending have suffered more than mortgages as customers have deleveraged their assets, driven by the growing economic uncertainty. Also, banks have tightened their credit standards for corporates in an attempt to reduce their risk profile. The decrease in lending volumes has had a pronounced effect on net interest income which has been stagnate growing only 0.1 percent compounded annually from 2009 through The lack of growth is despite the support from the European Central Bank which has injected a vast amount of money that banks could use as collateral in money market operations. In addition to lower demand, lenders had to manage the increase of NPLs and related loan losses generated by a weaker economic environment. Particularly for some banks, the incidence of loan losses is higher than staff costs, eroding more than 20 percent of net interest income. Despite these negative trends, revenue generation from lending activities constitutes still half of the banking revenue pool across its three major segments (retail, small business and corporate); however, it does not necessary imply that this trend will continue in the future. Figure 1. Credit growth in Europe Lending growth (Cagr 03-08) crisis Lending growth (Cagr 09-13) Southern EU Eastern EU 14.0% 12.5% Lower Growth Banking Industry Southern EU Eastern EU -2.3% 1.9% Western EU 4.8% Western EU 1.5% Northern EU 4.8% Northern EU 1.8% Corporate Lending 9.9% Bank Bailouts Govt Support Corporate Lending -1.5% Mortgage 6.0% Mortgage 2.7% Consumer Finance 4.4% Austerity Lower Measures Growth Government Consumer Finance -1.9% Source: Accenture Research analysis of ECB data 3

4 Emerging forces impacting the credit business Multiple forces, both from inside and outside the credit industry, are creating an increasingly complex and highly dynamic future environment for lenders. The five most impactful are around: Loyalty Customers are less loyal and more eager to compare credit offers using portal aggregators, switch to a new bank or establish relationships with multiple banks. This is particularly true for the SME segment which has shifted away from a traditional single-bank model. Banks will have to work harder to restore trust and close on valuable cross-sale opportunities that have historically been possible, especially with SME customers. Digital technologies Four main technologies are having a profound impact on business and consumers: Big Data: lenders already manage vast amounts of data, but many struggle to make sense of the growing volume and velocity of information. The key challenge is getting the right nuggets of information from an escalating volume of noise. Cloud: Cloud technology is maturing and service offerings move up the technology stack from data storage and infrastructure to software, platforms, and business processes. More businesses are adopting cloud to increase flexibility, gain new capabilities and reduce costs. Social Media: most banks have built a social presence and some of them have started to drive business through social engagement. Social and digital marketing will play an increasingly important role to engage customers, both retail and corporates, as online peer recommendation becomes a key influencer in purchase decisions especially for young consumers who are, typically, always connected to social platforms. Mobility: smartphones are driving uptake of mobile banking, opening up a new way to interact with and serve customers; for example, enabling quick loan applications or offering assess to remote advisors. New competitors Veteran and new players are coming up with innovations in the digital banking space that are free from the constraints of traditional bank legacy systems that continue to eat away at parts of the credit value chain. New peer to peer or crowdfunding lending that draws on social networks are eroding banks lending function for specific borrowers such as SMEs and entrepreneurs. Regulation New capital requirements and consumer protection are a high priority in the new regulatory agenda. These new regulations are intended to help restore public confidence in banking, which has been severely damaged by the economic crisis. Figure 2. NPL ration in Europe Non-performing loan ratio (gross NPLs on total loans, %) Source: Accenture Research analysis of Bloomberg data In particular, household indebtedness and responsible credit are key topics for European lenders. Given the severe consequences for consumers arising from over-indebtedness (foreclosures, arrears and so forth), many countries have already taken steps to address this issue, regulating the conditions under which a mortgage can be granted (maximum debt to income or to wealth, for example) and developing codes of conduct that lenders must follow. Dismal economic outlook Despite record-low interest rates, the credit sector remains vulnerable as the dismal credit cycle is far from over (see figure 2). Lenders are still exposed to the risk of re-provisioning and to new NPL formation. Also, credit quality dynamics will diverge across countries. Southern European countries are suffering more than other European countries due to the impact of the recession they face, which includes falling asset prices and increasing defaults. 6 UK 4 FR DE 2 SE IT ES EU Avg. 4 Adopting Digital Innovation throughout the Credit Value Chain

5 The Accenture Credit Services Survey 2015 at a glance: Polled financial services executives in late 2014 on their response to key credit trends Included 40 executives from top retail banks, consumer finance companies and commercial banks Covered four markets in Europe: Spain, Italy, France and Sweden 5

6 The digital lender It s clear that digital technology, changing consumer preferences, more stringent regulation and emerging new players are putting at risk the market share of large traditional lenders. Operating in a low-growth market, lenders well know they need to improve their margin to stay competitive, preserve their revenue pool and restore profitability. As such, it is not surprising that respondents in the Accenture Credit Services Survey 2015 list cost reduction at the top of their agenda together with a renewed focus on services quality (figure 3). Despite the huge efforts undertaken to improve customer experience and reduce operational complexity, several issues still persist along the credit value chain that penalize efficiency and service quality: Origination: manual data entry in sales and poor management of information. Fulfilment: high level of manual processing, long processing times and excessive re-work. For instance, more than ten handoffs between banks and third-parties is common, and processing time is usually twenty or more days. Such metrics make the fulfilment process not only time consuming but also highly inefficient which negatively impacts the overall customer experience particularly for SME customers. Servicing: multiple servicing centers performing duplicate functions, multiple lending back-books services by different teams on different platforms in different locations, limited access to customer and transaction information resulting in increased customer queries and persistent overcapacity in services environments. Digital technologies (mobile, social, cloud, analytics) can help lenders simplify and strengthen the end-to-end credit process, enabling an agile operating model to compete effectively against lending disruptors and seize market opportunities to increase loan origination volumes, despite a negative market outlook. As demonstrated by the growing momentum of alternative lending providers (think innovative start ups, technology companies and online retailers), digital technologies can play a role as key differentiators in credit services. Figure 3. Strategic priorities for lenders What are your strategic priorities for the year ahead? (ranking by average respondents score) Regulatory compliance 1. Cost reduction 1. Cost reduction 1. Service quality 2. Credit risk management 2. Revenue growth 2. Service quality 2. Cost reduction 3. Cost reduction 3. Credit risk management 3. Revenue growth 3. Revenue growth 4. Revenue growth 4. Service quality 4. Credit risk management 4. Credit risk management 5. NPL management 5. NPL management 5. Regulator compliance 5. NPL management 6. Service quality 6. Regulator compliance 6. NPL management 6. Regulator compliance Primary focus on regulation Need to integrate profitability with customer relationship and service quality Source: Accenture Credit Services Survey Adopting Digital Innovation throughout the Credit Value Chain

7 Top lenders are already taking early steps to get closer to digital consumers and meet their borrowing needs. For example, some lenders now enable consumers to initiate mortgage applications online and through mobile. Nevertheless, very few lenders can call themselves totally digital: 75 percent of survey respondents say that only 30 percent of their lending processes are currently supported by digital technologies (figure 4). This is why digital transformation in lending means thinking holistically about key components, including the business architecture, product systems, business processes and data/analytics architectures and making corresponding changes in how people work and how enterprise services are provided. A complete digital transformation will greatly increase overall efficiency, reduce cost and provide a fully integrated and seamless customer experience throughout the loan lifecycle. Achieving it, however, is challenging since it may involve replacing existing legacy technology and/or infusing mobile capabilities in customers everyday life. Despite senior management sponsorship, the main challenges to digital technology adoption for lenders are internal collaboration, staff skills and funding (figure 5). Figure 4. Digital technology penetration in the credit value chain What percentage of your company s major business processes is currently supported by digital technologies (such as cloud computing, data analytics, social and mobile)? % 51-80% 0.0% 31-50% 8.3% 11-30% 16.7% 33.3% Source: Accenture Credit Services Survey % Up to 10% Figure 5. Barriers to digital transformation What are the most significant challenges you face when implementing investments into digital business initiatives (such as cloud computing, data analytics, social and mobile)? Poor cross-functional collaboration Insufficient funding 70% 80% Skills shortage 70% Difficulties managing change 50% Lack of senior executive support 30% Insufficient customer demand for digital solutions 10% Source: Accenture Credit Services Survey

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9 Analytics first The news that former chairman of the US Federal Reserve Bank Ben Bernanke was recently unable to refinance his mortgage 1 is ironic. Apparently, banks are unable to tell whether the high-earning, former head of the world s most powerful central bank is a good or bad borrower a value-based assessment that should be straightforward for banks. As lending is an information-driven business, better data means better risk taking. Still, traditional lenders do very little of the information gathering. When a customer applies for a credit product, their characteristics are put into a scoring system with a score produced by a credit bureau, and the system produces a decision. Banks rely heavily on credit scoring, completing the application process with few face-to-face meetings and little additional information. Innovators are finding new ways to create value, using data as the platform for new business models both improving on existing models and creating new ones. They are also taking advantage of new data sources (both internal and external, social and public) and new techniques to mine data (from unconventional and unstructured sources). Both approaches use unconventional data and behavioural insights to help provision financial services to customers who were previously viewed as unmeasurable risks. In fact, data analytics is considered by our survey respondents as the first digital technology for lenders to adopt (figure 6). Integrating traditional credit scoring model with broader types of data extracted by the right analytics tools can help lenders better identify high- and low-risk borrowers and thus improve net interest income, anticipate NPLs formation and monitor riskier exposures. For example, leading banks have opened up major new business opportunities by applying Big Data solutions to improve credit referencing using non-traditional sources of data such as social media to gain a better understanding of customer credit behaviour. Figure 6. Relevance of digital technologies How important will the following digital technologies be for your company in the next 12 months? (Average rate, 5 extremely important; 4 moderately important; 3 somewhat important; 2 slightly important; 1 not at all important ) Data analytics Mobile For example, in the US, ZestFinance is pioneering a Big Data approach to improve credit scoring models in the payday lending market. ZestFinance s approach combines many traditional credit metrics with a wider set of public and behavioural data and Google-like algorithms. In Brazil, Cignifi is drawing on mobile phone call records and pre-paid airtime purchase data to credit score customers in the absence of credit reference data. Social media Cloud computing Source: Accenture Credit Services Survey Bernanke s failed mortgage application exposes the flaw in banking, Amir Sufi, Financial Times, October 1,

10 The Recovery Factory NPLs are expected to grow in the next two years as a consequence of economic uncertainty. The impact on lenders profitability is twofold: a net loss on loans not recovered, and an increase in costs as managing NPLs is extremely time consuming due to its paperintensive workflow and abundance of manual tasks. Historically, banks use third-party vendors to manage peaks of activity. Our survey shows that collection and litigation are the most outsourced processes along the credit value chain (figure 7) which is likely to continue in the future. However, a more industrialized approach will be required in the future to manage higher volumes of NPLs. Discovering the strategic relevance of high-value recovery, banks are moving from a service-unit toward a business unit approach with specific profit and recovery targets. One such approach is a Recovery Factory. The Recovery Factory should focus on maximizing the recovery rate according to the unexploited value of the NPL portfolio. Success of the Recovery Factory rests on three main pillars: Advanced portfolio governance models to identify clusters of files based on the strategic value they have for the lender. This is accomplished by using ad hoc strategies and processes to monitor evolution of the NPL portfolio and key performance indicators (such as collection rate and litigation rate) using different levels of industrialization (from simple actions tracking to fully automated processes). Figure 7. Outsourcing in Europe Which of the following areas have you already outsourced and which do you plan to outsource in the future? (Percent of respondents) Value chain Origination Partner management Prospecting Sales Fulfillment Document management Contracts implementation Contract servicing Admin. management Installment processing Contract servicing Post sale Delinquency and recovery Collection Litigation Penetration 2012 Penetration 2013 % of outsourced activities on total Next two years trend Source: Accenture Credit Survey 2015 Specialized units to manage various clusters of NPLs, balancing a high level of industrialization within a pre-defined set of actions for low-value files and a bespoken approach for high-value files. Process digitalization through end-toend NPL tools and technology enablers, integrated with web-enabled platforms. This helps to reduce manual tasks in facilitating access to self-services and client data for all resources involved in the value chain. Penetration 2014 Trend Adopting Digital Innovation throughout the Credit Value Chain

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12 Core credit re-platform Many lenders today have grown to have multiple systems to manage different channels and credit product requirements. These different systems have been built organically over years, through mergers and acquisitions, and to meet evolving customer needs. The result has been a complex web of different offers, processes, data stores, systems and infrastructure, which affect the overall customer experience. This complexity has also resulted in business and systems architectures that are costly to run and difficult to change. Over the last years, lenders have been engaged in wide rationalization programmes to renew legacy systems and consolidate IT platforms to connect branches, middleoffice and back-office through an endto-end automated process that eliminates manual tasks and redundancies. For lenders, technology has been a means to standardize business processes, integrate new business and operate the business. Keeping in mind that high IT expenses do not guarantee increased satisfaction from business and operations, over the last two years IT investments by lenders have produced positive effects in the day-to-day credit services activity, but not yet in supporting innovation and achieving competitive advantage (figure 8). Digital technologies offer the opportunity to fill these gaps through the adoption of new core credit platforms. Many banks are working on a new generation of core systems to develop lean, agile, smart and customer-focused operating models. This involves taking advantage of new architectures that allow for the industrialization of common business processes to be shared across the value chain, the virtualization of infrastructure and the adoption of software and business processes as a service. Together with the latest software solutions to integrate channels, business processes and data while simplifying and automating processes, banks can: Figure 8. IT effectiveness level of satisfaction per type of objective (Percent of respondents, average rate 1-5) Does not reach objectives Partially reaches objectives Reaches objectives Exceeds objectives Help us standardize business processes - 0% 17% 75% 8% + Help us integrate new businesses, geographies Help us operate the business - 18% 18% 55% 9% + - 0% 0% 82% 18% + Help us innovate - 17% 33% 33% 17% + Help us collaborate with clients, partners and suppliers Help us obtain a competitive advantage - 0% 20% 70% 10% + - 0% 60% 30% 104% Source: Accenture Credit Survey Adopting Digital Innovation throughout the Credit Value Chain

13 Reduce the duplication of services. Improve agility to compete effectively against lending disruptors. Seize market opportunities to increase loan origination volumes and business revenues. As our survey findings show, lenders use of third party provider solutions in renewing their core credit platforms generates a higher satisfaction rate than using inhouse solutions (figure 9). This is true, even as the lending business evolves fast requiring continuous innovation to better distinguish products and services, deliver a loyalty building customer experience and proactively stay ahead of the market. Best IT platforms are able to provide new and competitive capabilities for several key business functions: Sales: zero IT adjustments when launching a new product, minimal data entry, next-best action advice, loan status and tracking capabilities. Origination: straight-through processing, automated document production, credit scoring, e-conveyance, account set-up, automated workflow configurable by business users, automated imaging, automated instructions to third parties (such as solicitors), direct integration with accounting systems, ability to handle multi-collateral loans and lifecycle management with real-time customer information updates (such as /sms). Servicing: ability to undertake simple servicing in branches and online, and the ability for customers to perform permitted variations online without requiring staff assistance. Figure 9. In-house solutions vs third-party solutions IT effectiveness: level of satisfaction per type of solution (average rate from respondents) 4 Exceed objectives Reaches objectives Partially reaches objectives 1 Does not reach objectives In-house solutions Third-party solutions Source: Accenture Credit Survey

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15 Conclusion: The art of digital lending possibilities Over the next few years, lenders will increase their focus on service quality and cost reduction. Still, the lasting economic uncertainty will keep lending volumes flat and could further worsen credit quality. To mine more value from credit and begin to restore profitability, lenders can explore the art of the possible with digital capabilities, investing in process improvement capabilities that are required to compete in today s environment. These include: Analytics Broader data sets and better use of both internal and external data combined with the right analytics tools can give lenders a more complete view of a borrower and his/her home buying need. Industry leaders are using customer analytics to better understand the risk profile of nontraditional or non-qualified borrowers. With an increasingly competitive credit industry these lenders have an opportunity to address segments of underserved borrowers, driving incremental revenue opportunity without the incremental risk. Recovery Factory A Recovery Factory can help lenders maximize their recovery rates. It industrializes recovery and collections functions through advanced portfolio governance models and specialized units, using end-to-end NPL tools and establishing integration with web-enabled platforms. Banks can underestimate the strategic relevance of NPL management and the benefits of shifting from a service unit toward a business unit approach with specific profit and recovery targets. Core credit re-platform Banks can compete effectively against lending disruptors if they can take advantage of new, agile architectures that increase flexibility in supporting business requirements and enable automation of business processes to reduce time to answer and service loans. For more information, contact: Elena Mazzotti Accenture Credit Services Europe, Africa, Latin America [email protected] Luca Gagliardi Accenture Banking Research [email protected] Willoughby Werner Accenture Banking Research [email protected] 15

16 About Accenture Accenture is a global management consulting, technology services and outsourcing company, with approximately 319,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world s most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. The company generated net revenues of US$30.0 billion for the fiscal year ended Aug. 31, Its home page is Copyright 2015 Accenture All rights reserved. Accenture, its logo, and High Performance Delivered are trademarks of Accenture.