Retail banking industry risks massive revenue plunge

Facing increased competition for the lending market from a variety of new market entrants, as well as incumbents, retail banks have set high digital ambitions. According to a survey from Bain & Company and SAP Value Management Centre however, many retail banks still have a wide gap to close in order to attain their aspirations and avoid risking revenue plunges.

Competition is heating up in the banking industry as new entrants, such as FinTech players’ offerings, start to bite in the coming years, but banks are also increasingly vulnerable to the cross industry activity of large established technology industry players. Besides increases in competition, back office legacy issues continue to pose a problem for traditional retail banks, hampering their agility, while board room participation providing digital offerings remains low. 

Retail banks have in recent years been improving their digital channels, particularly for current account balances and other routine banking activity. Research by Bain & Company and SAP Value Management Centre finds that the lending arena, with the exception of credit cards, has taken a back seat to digitalisation. To find out how banks are performing in the digital lending space, and where they are headed, the researchers approached 24 banks in 10 countries, assessing how well these banks reported they are performing along seven lending capabilities and four dozen operational metrics that are segmented by loan classes and maturity levels.

One of the survey questions relates to how banks fare on key digital metrics, related to the digital loans market. The survey finds that across the whole loan range, 25% of products are sold on any channel; however, only 7% of products are handled digitally from end-to-end. Personal loans are the highest scoring in both segments, at 39% and 15% respectively. Cards come in second, at 28% and 13% respectively. Small business loans and mortgages, while available through digital channels at 10% and 24% of those surveyed, are for the most part not closable online.

In terms of the marketing budget spent on the loan products across various digital channel, small loans to businesses comes out on top at 22%, followed by mortgages at 20%. The number of applications made through digital channels however, remains low for both at 8% and 12% respectively.

Most banks have a wide gap to close in order to attain their aspirations. In terms of simple loan classes, personal loans and credit card digitalisation of services, the median digital maturity level is measured at 2.8 and 2.5 out of ten respectively. Relative to medium-term aspirations, at above 4.0, even the best in class for the two classes fall far short, at 3.7 and 3.5 respectively.

For more complex loan products, mortgages and small business loans, the median score for digital maturity comes in at 2.5 and 2.3 respectively. Both fall well below the top in class, and even further below the eventual aspiration of banks.

The research identifies that a number of areas exist in which capabilities require substantial development. For small business loans, consistent cross-channel execution remains a key issue, with current capabilities at 28% of aspirations. Having a ‘smart view’ of customers remains an issue for all loan segments, at 22% of ambition for small business loans, 28% for credit cards and 33% for personal lending.

The banks surveyed score the strongest in rapid innovation and business reinvention, with above 50% in all but the home lending digital capability. This is followed by migration of customers to anywhere, anytime self-service and better decision-making based on data, with all segments between 40% and 60%. Even so, banks across the board have some way to go to reach aspiration, as only the personal lending segment scores above 60% when it comes to efficient and digitalised processes.

The survey highlights what is at stake as it finds that banks that have improved digital loans offerings tend to also have higher performance, through a faster, better and less costly lending processes. Examples of such improvements are the automating more manual processes, using workflow management tools and underwriting algorithms for decision and approval.

The average score of banks in various categories related to the speed, better service and reduction of lending costs made available by the online channels differs significantly between those surveyed. The % of personal loans and credit cards products that can be sold on any channel averages 35%, with the top performer allowing for 75%. The % of loans (pre)approved automatically comes in at 46% across all banks and 79% for the forerunner. The % of applications submitted via digital channels remains low across the board however, at 16% on average, whereas market leaders are at 27%. The end-to-end digital product category, as a % of all products, remains relatively low at 14% on average and 25% at the top performer.