Deposits and lending: Disruption impact scale

graFINLAB4

Deposits and lending: Key questions for consideration

How will the emergence of competitive unbundled products and resulting limits on cross-subsidization impact the  overall structure and business model of retail banks?

How best can the customer experience offered by marketplace lenders (MPLs) be replicated?

What are the best ways to maintain deposit stickiness when digital experiences are increasingly homogenized?

How can nontraditional data best be integrated into existing underwriting methodologies?

Where are partnerships most valuable across the lending lifecycle?

Operations

Banks will turn data  management and  advanced underwriting  into strategic levers.

Magnitude: 5

Timing: 3

The ability to quickly collect, access, and process  information from customers and ecosystem  partners will become a key differentiator in the  next two years.

New online mortgage offerings  integrate basic customer information  with credit reports, income, and  financial data to offer conditional  loan approval within minutes.

Automated, rules-based underwriting will  converge with greater use of digital and  nontraditional metrics in the medium term

New data sets can help  banks serve inefficient  segments of the lending  market even as traditional  underwriting metrics (such  as credit histories and  debt-to-income ratios)  remain core inputs.

Upstart uses job history,  education, and field of  study in addition to tradi-  tional metrics to estimate  future repayment ability  and underwrite loans

Call to action

Upgrade operational infrastructure with a  secondary intent to eliminate data silos.

Benchmark operating speed and efficiency against leading marketplace lenders. Explore layering in nontraditional data into  underwriting (but within regulatory bounds).

Distribution

Distribution of traditional bank  offerings will be significantly  transformed as mobile banking  ramps up and an increased use of  cognitive technologies emerges.

Magnitude: 4

Timing: 4

As mobile banking becomes the dominant mode  of interaction with customers, integration with  wearables and IoT sensors will become the key  differentiator in distribution.

differentiator in distribution.

In 2015, the number of weekly  mobile-banking customers eclipsed the number of weekly branch-banking  customers for the first time.

Cognitive technologies will expand the range of  interaction possibilities sooner than expected.

Atom Bank is already integrating off-the-shelf  machine learning technology in its banking apps to  help customers access support

Call to action

Partner with other ecosystem  participants or use off-the-shelf  technology to develop best-in-class  mobile and online distribution.

Use machine learning and natural language processing  applications to better segment customers and raise  service quality.

Industry dynamics

Banks will remain dominant, but  partnering with the extended  ecosystem will become a key  source of competitive advantage.

Magnitude: 4

Timing: 4

Distinct marketplace lending-driven business  models will emerge

  • Standalone MPLs with scaled or  niche-segment models
  • MPL divisions within traditional banks
  • MPLs as white-label "Lending as a Service" providers

Cloud-based plug n’ play technology and

third-party development via open API will boost  agility, but increased interdependency will raise  difficult questions for incumbents.

third-party development via open API will boost  agility, but increased interdependency will raise  difficult questions for incumbents.

The Open Bank Project helps  banks offer an ecosystem of  tested third-party apps and  services to their customers  without incurring the capital  investment necessary to  build proprietary solutions.

Banks that lose control of their core business risk  reduced bargaining power and diluted value proposition

Call to action

Acquire MPLs with unique technology assets, diverse  funding sources, and strong differentiation. But be wary  of diluting competitive differentiation via overuse of  white-label offerings and plug n’ play technology.

Customer experience

Empowering customers will be  central to strengthening brands  and owning relationships.

Magnitude: 4

Timing:3

Customers will continue to gain unprecedented  control over transaction experiences.

End-to-end digital  engagement,  from origination  to servicing, will become the norm.

Seamless transitions  between products and  channels (digital and  human) will enable  customers to self-customize  their banking experience.

Going forward, brand equity will be the critical  intangible in retaining ownership of the  customer relationship.

In a disaggregated  and more special-  ized ecosystem,  banks can act as stewards of  financial identity  only if they rebuild  customer trust.

Homogenized offerings  in a world of greater customer control threaten  to cause a fragmented  brand experience.

Call to action

Ensure clear product and service  differentiation in the digital experience  by reinforcing the bank’s identity and  core value proposition.

Think of the ideal banking experience  model for “Generation Z,” who are just  entering the workforce.

Business economics

Efficiency gains may be  offset by costlier funding  in the medium term.

Magnitude: 3

Timing: 2

Banks can raise efficiency and boost returns  through digital distribution and back-office  automation in the next five years.

Nordic banks have halved branches  from 2008-09 peaks and now  operate at a cost-to-income ratio of 45 percent compared to about  60 percent for US banks.

 

Deposits may get more expensive  and flee at a rapid pace during  periods of stress.

Commoditized digital  bank offerings could  lead to reduced loyalty  and deposit stickiness.  Deposit costs for banks  will escalate further if  MPLs are able to offer  higher relative returns  through the rate cycle.

Call to action

Consider alliances with fintechs or other incumbents to set  up mini-utilities that automate low-value back-office tasks  that aren’t sources of differentiation and unlock savings  across the system.

Challenge existing assumptions around deposit stickiness  and balance sheet liquidity, understanding that the past  may be not be a good guide for the future.

Offerings

Banking markets will  expand swiftly even as the  core product feature set  remains unchanged.

Magnitude:2

Timing: 4

Automated underwriting, digital distribution,  and servicing enable penetration of segments  that until now were uneconomical.

JPMorgan Chase aims to expand small-dol-  lar business lending through a partnership  with On Deck with a focus on faster  approvals and lower processing costs.

Customers are now able to create their “ideal”  product bundles, giving them more control over  their own experiences.

Personal finance  aggregators and com-  parison services are  significantly raising  price transparency.

Mint.com provides  customers tailored  recommendations from  thousands of product offers  based on a consolidated  view of their financial  situation and preferences.

Call to action

Create portfolios of highly competitive, modular, unbundled  offerings, which can be combined based on individual  customer preferences.

Invest in smart algorithms that use analytics to create  product bundles around customer goals.

Join with MPLs with complementary product sets.

Target customer segments where savings from digital  engagement can offset slightly higher credit costs to  meet return goals.