Why Banks Need To Leverage FinTech Disruption It is time for community banks, commercial banks and credit unions to move from passive observers to active innovators in the FinTech revolution.
Contents Executive Summary
3
Industry Background
5
What is the CLS Innovation Center?
7
Evaluate Your Strategies
8
Understand Your Current Situation
9
Innovate
9
What We Can Do Together
10
Create a Small Business Flexible Lending Solution for Banks Conclusion
11 11
Why Banks Need To Leverage FinTech Disruption
Executive Summary
“
Regardless of the odds of success for individual FinTech attackers, banks must seek important signals amid the FinTech noise in order to reposition their business models and cultures for success. There is no time to lose. – Mckinsey,December 2015
”
Banks have many advantages that FinTechs lack - established customer relationships, vast capital holdings and a working knowledge of today’s complex regulatory climate. However, it has been difficult for many banks to determine how to use the latest technology to innovate new product offerings in a meaningful way. Thanks to highly accessible and versatile cloud models, those business dynamics are changing fast. What if your bank could define its strategy and deliver functional innovation in four months? Cloud Lending Solutions (CLS) is the market-leading technology platform that powers the FinTechs. We can bring meaningful, competitive innovation with measurable results to your bank in 4 months or less. For example, Wells Fargo recently launched their “FastFlex” small business lending platform to increase their marketshare in SMB loans We are sure that it took significant investments and tens of engineers worth of effort over several months to make FastFlex a reality. The CLS Innovation Center was founded to partner with banks and credit unions to utilize the latest in Fintech, new lending models and products and embrace a new wave of opportunities in months, not years. The CLS Innovation Center has established a proactive model: we help you explore what is possible by actually doing it. Remember, the greatest strength of FinTech is being able to move fast and adopt a targeted, laser-like focus. That, combined with the banks’ strength of customer relationships, low cost of capital and market experience, the CLS Innovation Center enables banks and credit unions to not just match the strengths of FinTech, but to combine with their own strengths to thrive. The Innovation Center tackles the top 3 industry challenges for banks and credit unions head on:
Omnichannel borrower experience
Profitable small business and SBA lending
Next generation underwriting
3 | Cloud Lending Solutions
Why Banks Need To Leverage FinTech Disruption
Participating in the CLS Innovation Center will deliver the following benefits to your lending line of business:
Build a superior borrowing experience via an omni-channel approach utilizing web, mobile, call center and in-branch Leverage new and innovative data for underwriting
Online channel for originating deals
Support for multiple asset types
Big data analytics for product recommendation
Frameworks for strategy and execution for immediate use
Delivery of new and innovative products in 4 months In this paper we will look more closely at the FinTech opportunity for community banks, outline a framework for evaluating options and areas of innovation, and provide a roadmap for fast execution. We conclude with details about next steps and suggest how banks can begin the journey to FinTech innovation.
Cloud Lending Solutions | 4
Why Banks Need To Leverage FinTech Disruption
Industry Background New financial services models are transforming banking and lending practices. After 2008, financial services underwent a major disruption. Banks were constrained in their ability to lend, yet borrower demand remained steady. A whole new industry sprang up of non-bank lenders who utilized the latest in technology to create superior borrower experiences, innovative underwriting models based on big data and alternative data, and efficiently delivered loans in a day. This new category of technology-enabled financial services companies filled borrower demand and grew rapidly. Banks began to experiment and evaluate the results of the early FinTech lenders. Partnerships and innovations began: Wells Fargo built an in-house lending platform, FastFlex, which delivers funded loans in a day to small business1
Morgan Stanley estimates the global marketplace lending can reach $290 billion by 2020 (base case).
JP Morgan partnered with OnDeck2 to originate, underwrite and distribute loans targeted to small businesses Santander UK has partnered with Kabbage to deliver SMB loans in hours, not weeks3 Payment processors, PayPal and Square, in addition to Lending Club, have delivered loans to small businesses in a day.
Many experiments are underway and interesting models are emerging. Some of these models will thrive and some will wither. As banks observe the FinTech disruption, astute business leaders understand that their technology investments, customer relationships, and the most profitable parts of their business are at risk. Different banks have adopted different strategies and the first generation of experiments is over. How have the various strategies fared? Strategy
Definition
Results
Fund
Established financial services providing funding to FinTech
Higher returns on capital for banks, but at the cost of losing customer relationships and reducing profit through the cross-sell of other products.
Partner
Established outsourcing lending to FinTech
While partnerships have mitigated operational risk, they have not built solidified customer experiences or loyalty.
Experiment
Established creating accelerators, investments, etc.
The result has been a lot of activity, but the prediction is “In five years, most corporate accelerators and incubators will have disappeared. They aren't focused enough on customer problems and business objectives to deliver returns on their investments.”7
Build
Established lenders building their own platforms
The results here have been slow and painful: Schwab Intelligent Portfolios was a $50 million development effort, Deutsche Bank set aside €400 to €500 million for digital bank technology and it will take two to three years to replicate what the FinTech disruptors have built.4
1
https://www.wellsfargo.com/about/press/2016/fastflex-smallbusiness-loan_0510/ http://techcrunch.com/2015/12/14/j-p-morgan-ondeck-and-the-future-of-alternative-lending/ http://www.ft.com/intl/cms/s/0/9925cc9e-f9a4-11e5-8f41-df5bda8beb40.html#axzz48s56UIAE 4 Forrester: Financial Services Firms Flirt With Startups, Digital Executives Must Choose to Build, Partner, or Buy, 2016 2 3
5 | Cloud Lending Solutions
Why Banks Need To Leverage FinTech Disruption
These engagements have not been particularly successful. They represent valiant attempts at evolution, but most of these approaches either went too shallow or too deep. What was missing was the laser focus of the FinTech disruptors with their relentless focus on the customer experience. So after Round 1, banks are left asking key questions: How can I leverage the best ideas of FinTech for my business? What are the game-changing technologies to embrace? How can I leverage these for my existing and new lending products? How much do I have to invest in new technology? And how do we launch in three to six months? At the same time, FinTech companies are transforming the lending industry in three key ways: 1
Relentless focus on the user experience: FinTechs deliver on the “mobile first”, omni-channel promise, leveraging a fully digital customer experience that ensures fast loan approvals and seamless interactions throughout the lending lifecycle. FinTechs are delivering the digital experience that customers are demanding.
2
Superior Analytics in Underwriting: They reach beyond traditional sources of credit data, leveraging “soft” data that used to be available to community banks like cash flow and payments, new data like shipping data and “big” data to develop a complete picture of each customer. This enhanced degree of insight enables more innovative underwriting and credit risk models.
3
Financial Inclusion: With innovative underwriting models, FinTechs have expanded the availability of capital to markets not served by traditional banks. Sofi is an example of a lender that opened a new market of student loan financing. Their ability to react quickly to market changes and their ability to wield a broader base of knowledge and experience from their innovative underwriting position companies like these to threaten the most profitable areas of banking for community banks.
In light of these transformative trends, banks and other established lenders need a cohesive strategy and a profitable path forward. Astute institutions study FinTechs to learn from their success and better understand the innovations that can help them protect customer relationships and outperform today’s market disruptors. The CLS Innovation Center was founded to bridge the gaps between FinTech disruption, existing banks and lenders, and big data and analytics. The goal is to help banks learn from and appropriate the best of FinTech, to successfully develop new lines of business that expand their revenues while keeping existing businesses intact.
The Economist
“They need to co-opt the challenge by selectively adopting Fintech as their own and marrying the disruptors’ innovative business models to their own strengths and considerable assets.” – The Economist Intelligence Unit, 2015
The Innovation Center makes use of FinTech’s greatest strength—the ability to move fast with laser focus—to deliver innovations that can transform the status quo. By exploring possibilities through action, banks can match the strengths of FinTech as they transform their businesses to not only compete, but to thrive.
Cloud Lending Solutions | 6
Why Banks Need To Leverage FinTech Disruption
What is the CLS Innovation Center? Banks and credit unions have many advantages that FinTechs lack, established customer relationships, vast capital holdings, and a working knowledge of today’s complex regulatory climate. However, it has been difficult for many banks to determine how to use the latest technology to innovate in a meaningful way. Thanks to highly accessible and versatile cloud models, those business dynamics are changing fast. What if your bank could define its strategy and deliver functional innovation in four months? Cloud Lending Solutions (CLS) is the market-leading technology platform that is powering the FinTech disruption. We started the CLS Innovation Center to 1 help banks and credit unions breakthrough the FinTech noise and take the best of the innovation. The CLS Innovation Center has a bias for action: we help you explore what is possible by actually doing it. If the greatest strength of FinTech is being able to move fast and adopt a targeted, laser-like focus, we have built the CLS Innovation Center to move at the speed of innovation. We believe that community banks and credit unions are ready to take the next step – to fully adopt the new ways of business and the technologies of FinTech, just as the larger banks have.
A recent study by McKinsey & Company details the imperative: “Banks are subject to a lot of noise about FinTechs today. Optimism regarding 4 technology is at a high, mobility is widely regarded as a game changer, and vast amounts of capital are being deployed in FinTechs. Banks may be tempted to dismiss the noise entirely, or they may panic and overreact. We recommend a middle ground that focuses on separating the signals that are truly important from the noise. Specifically, this means that banks should be less preoccupied with individual FinTech attackers and more focused on what these attackers represent—and build or buy the capabilities that matter for a digital future.”5 The Innovation Center comprises three key phases: 1
Evaluate your strategies to identify areas where FinTech innovation can have maximum impact.
2
Understand your current situation, strengths and weaknesses. Take an honest look at the people, processes, and technologies you need to transform your bank in a meaningful way. Innovation must be driven from the outside in, and be grounded in customer experience.
3
Adopt FinTech’s agile development cycles with the market leading FinTech platform to deliver a meaningful innovation in 4 months.
Innovation isn’t as far away as you may think.
5
McKinsey & Company: Cutting Through the FinTech Noise: Markers of Success, Imperatives for Banks, December 2015
7 | Cloud Lending Solutions
Why Banks Need To Leverage FinTech Disruption
Evaluate Your Strategies Members of the Innovation Center examine business models and utilize frameworks that can be deployed today. Unlike consulting approaches, in which strategies are discussed but never executed, the goal of the CLS Innovation Center is to apply strategy to execution in an agile, real world way. The first area of strategic focus involves how community banks can internalize FinTech strategies into highly valuable operations. How can banks beat the FinTechs at their own game while maintaining market share with the big bank competitors? For example, banks have an advantage over Fintech lenders with long-time customer relationships and a local community presence. The CLS Innovation Center can help you strengthen customer relationships across the omnichannel – from mobile and web to in-branch. The game changers aren’t just in strategy, but in their execution. Finding the most valuable path requires a combination of strategic planning and solid execution. McKinsey has provided a strategic framework of digital capabilities that banks can build on. The CLS Innovation Center helps you build these execution frameworks as we help our banking partners move from strategy to execution.
Banks should be focused on building an extensive set of distinct digital capabilities Data-driven digital insights
Integrated customer experience
Comprehensive data ecosystem, including 3rd-party API’s
Customercentric experience design
Robust analytics and data infrastructure 360-degree single customer view
Digital enabled operations
Next-gen technology
Targeted digital media
Digitized sales and service interactions
Scalable application architecture
Digital talent management
Omnichannel experience delivery
Content marketing
Streamlined and automated fulfillment process
Cybersecurity
Organization and governance
Customerdecisionjourney experience
Digital customerlife-cycle management
Operationalexcellence enablers
Agile delivery to market
Targeted product and servce decisioning
Digital marketing
Marketing operations
Digital outcomes Source: McKinsey & Company
Cloud Lending Solutions | 8
Flexible IT infrastructure
Digital enablers
+
innovative test-and-learn culture
Why Banks Need To Leverage FinTech Disruption
Understand Your Current Situation Each banking partner needs to answer key questions to focus their execution priorities:
?
Are we leveraging technology to provide a world-class omnichannel experience? Have we eliminated operational silos that fracture the customer experience?
?
Are we using data-driven analytics to drive better decisions informed by customer, credit risk, and marketing? Are we integrating big data effectively with our internal data to increase loan volumes and mitigate risk? Have we operationalized our hands-on knowledge into our technology?
?
Can we digitally market to our customers efficiently and effectively? Can we leverage digital processes to guide customers through clear and concise lending processes with easy to understand offers? Can we compete with online lenders that can sign up new borrowers in minutes?
?
In short, can we mitigate the FinTech attacks on the most profitable parts of our business? Can we make use of new technology and operational efficiencies to defend the highest margin areas of our business?
Innovate The fastest path with the highest probability of success is to partner with an industry leader that understands the business innovations that differentiate the FinTechs and the technology innovations that enable market disruption. An Innovation Center partnership will allow you to get to market fast, and maintain control over your business. Many areas of innovation are available for banks. To successfully choose an innovation area, banks should ask: Can we isolate this area so our current operations don’t subsume it? Do we have the right team to work on these agile business processes? Do we have the right skills to deliver an MVP in partnership with the CLS Innovation Center? Do we have the right executive sponsorship to complete the project? Once these questions are answered, the innovation will be clear and it is time to move to execution.
9 | Cloud Lending Solutions
Why Banks Need To Leverage FinTech Disruption
Guiding Principle – Test and Learn CLS INNOVATION CENTER The CLS Innovation Center applies the agile development process to business and technology. Minimum viable products (MVPs) include minimum viable business processes as well. Only through this method will community banks be able to think and act like their challengers, but with stronger assets and the wisdom that comes from decades of experience.
What We Can Do Together
It is clear the threat to community banks is from within the banking world and from without by FinTechs. However, with the right technology, this market sector can become as efficient and profitable for community banks and credit unions, as it is for the FinTech disruptors. And the right technology need not be an overwhelming investment. Small business lending needs to return to community banks. The intimate customer and local knowledge of community banks has been usurped by the FinTechs and their unconventional sources of data. The efficiency of AltFi technology has been usurped by the large banks through partnership and massive investment. But there is another path. Community banks can combine their local knowledge and affordable AltFi technology into a game changing strategy. The rise of commercially available, non-proprietary lending platforms has opened up new opportunities to regain the SMB lending market. The CLS Innovation Center is focused on all types of small business lending:
Commercial Real Estate (CRE) Commercial and Industrial (C&I) Unsecured Small Business (SBA) loans. Example: Innovation for Community Banks: The CLS Innovation Center’s first goal is to enable community banks to take back the small business lending market. This area is under disruption by Alternative Finance (AltFi), and community banks have witnessed steadily decreasing market share. The largest banks and AltFi lenders have stepped in to take small business lending from community banks. Wells Fargo’s latest foray into SMB lending, FastFlex will only increase WFB’s growth in the market. From January 2014 to March 2016, Wells Fargo has provided $40.7 billion in new loans to small businesses against their 5-year stated goal of $100 billion.
Cloud Lending Solutions | 10
These three areas cover a vast opportunity that has been the sweet spot of most community banks’ overall lending expertise. To deliver market innovation, the CLS Innovation Center combines people, process, and technology to transform the lending market. It starts with your bank’s industry experts and our AltFi technology. It is guided by a strategic focus so you can get to market as fast as our AltFi clients. It finishes with a complete lending system that addresses a tangible area of FinTech attack through innovation.
Why Banks Need To Leverage FinTech Disruption
Create a Small Business Flexible Lending Solution for Community Banks At the CLS Innovation Center we define from the outside in. We start with a blank slate as we build an innovation targeted to your needs. Key questions help guide the process: What is the best-in-class customer experience we want to deliver? What area of lending represents an opportunity to maximize a return or displace a competitor? What is the business model and processes that we intend to define? How do we turn concepts into live systems that deliver on the customer promise? For example, our SMB loan systems are cohesive, flexible, and include the features that define today’s winners: Fully automated online, multi-channel origination Innovative underwriting Loan approvals in minutes Defined closing process and tasks Complete compliance checklists Loan funding in a day Ongoing covenant tracking A four-month deployment
Conclusion In the past two years community banks, commercial banks and credit unions have been able to watch and learn from the disruptors as new FinTech companies and large banks tried various ideas and options to see what works and what doesn’t. But it is not wise to sit on the sidelines for too long. The CLS Innovation Center enables community banks and credit unions to seize today’s most exciting innovation opportunities:
• Next generation borrower experience • Small business lending • Marketplace lending. If partnering with like-minded institutions to create new industry standards sounds interesting, we would love to include you in our early access program and give you a chance to influence these rapidly emerging, industry-wide innovations.
Find your path to innovation.
The end result is a new solution that improves productivity, accelerates time to market, strengthen customer relationships, enables an AltFi borrower experience, reduces costs and operational risks, and provides single-click auditing capabilities.
11 | Cloud Lending Solutions
About Cloud Lending Solutions Cloud Lending Solutions is a financial services technology company offering a cloud-based, end-to-end lending platform to deliver innovation to the global lending community. Unlike legacy technology platforms that are expensive to maintain and prevent agile response to market conditions, Cloud Lending Solutions’ clients take back control of their business by quickly implementing, extending, and digitizing the entire lending lifecycle. Cloud Lending Solutions’ single system of record is the market leading cloud solution supporting both consumer and commercial lending that scales for the needs of lenders of all sizes. Clients include banks, traditional finance companies, online lenders, and marketplace platforms. +1-(650) 918-0499 |
[email protected] |
www.cloudlendinginc.com | Social Media
