Sharing the Credit

2007-11-14 17:23:39 Source: http://www.accenture.com

A major North American bank recently took a hard look at the complex network of lending operations centers and technologies it had acquired in the course of its various mergers and acquisitions over the years, and found scores of people duplicating each other's capabilities. For example, in a lending operation that included 20 different processes, the bank had nine separate servicing systems. Headcount and labor costs were high, needless to say. But worse, the complexity of the lender's operations made it impossible to deploy technologies or standardize processes that might streamline service and support the business.

Simply put, complexity is costly. Business process and staff overlaps, systems redundancies and lack of standardization all sap efficiencies and service capabilities, devaluing the business and economies of scale gained through M&A. The often subtler but more damaging result of such complexity over the long run is the loss of customer satisfaction. For example, after a merger created one of the biggest European lending institutions, the systems complexities, paperwork and process inefficiencies that followed fed higher costs and longer lead times that led to disenchanted customers and smaller margins.

For the past few years, historically low interest rates, a boom in housing and strong deposit growth have created a near-perfect environment for lenders. But tougher times loom. The consumer response to changing economic circumstances may force credit losses up; and rising interest rates, coupled with slower home price appreciation, may spell trouble for credit portfolios. Even if the economic weather stays relatively balmy, many banks may have to bail some water to keep from sinking below the competition, given the existing inefficiencies and expense of antiquated technology and overly complex processes.

Proliferating product silos hamper the free flow of information and take a costly toll on the bottom line. Now, with competition limiting pricing power, lenders face margin erosion and obviously need to control costs. But the challenge for banks is clearly broader than cost control. Banks that think only in terms of cost control can leave significant value on the table.

Industrial Differentiation
The industrialization of credit services and supporting IT infrastructure can help lenders seize that value by breaking down silos that inhibit the flow of multi-use information across the value chain and product line. Credit scoring, for example, can go beyond its function as a decision-making tool and be reused in preliminary pricing decisions, loan adjustments and collections to manage arrears. Similarly, effective capture of customer information can enhance cross-selling opportunities based on the customer's total relationship and overall credit behavior. That same data can also enable better identification of unprofitable customer segments. As each new wave of lending products becomes commoditized, banks must find ways to keep product portfolios distinctive and customer-focused without increasing IT complexity and reinforcing silos. An industrialized approach views the product portfolio as a set of components that focuses not just on the individual products but on how they are assembled. In lending today, achieving differentiation through component innovation means focusing on pricing, collateral management, interest offsets and commission management.

Consequently, lenders need to view their product portfolios as a set of components, variously assembled. Innovation can occur when they package components in creative ways or when they construct new ones. This approach to credit can unleash the potential of enabling technologies combined with strategic outsourcing. But without industrialization, the value and organic growth promised by such new technology or outsourcing may never be realized.

Economics of Simplification
Credit processing offers attractive opportunities to cut costs and improve competitiveness through industrialization. Just as automakers rationalized their operations by standardizing chassis and engines across many brands of car, banks and other credit providers can reap both short-term cost savings and long-term strategic benefits by standardizing processing, people and technologies across various credit products.

For example, although there are differences among mortgage loans, car loans and secured business loans, there is nothing inherently distinctive about managing the information on collateral for each type of loan. Similarly, lenders are already reaping cost efficiencies and scale economies through outsourcing and white-label lending arrangements that effectively allow them to share a common technology platform. But industrialized banking may also make it possible to deploy technologies—such as imaging—that would not be economical for one product line or unit but that could deliver powerful advantages when deployed across several.

The credit industry is ready for this change now. Cross-selling is increasingly critical to growth, and shared services such as customer care are already spanning across credit product boundaries. Consumer and commercial credit relationships are more holistic than ever before. In part, this is because customers of all types are seeking not only more credit but also more kinds of credit than ever before. But this doesn't have to lead to complexity. On the contrary, it offers the perfect opportunity to simplify. Roughly 80 percent of credit processes are common across such credit categories as auto finance, home mortgages and consumer loans. For example, the basic processes of closing an auto finance loan and a mortgage application are, for the most part, the same.

Given that the processes are similar, sharing of technology and process across credit categories is a natural step. The bottom-line benefits of such sharing would depend on the size of the lender and the number of credit categories or products it offers, but might well be measured in the tens or even hundreds of millions of dollars, euros or yen. Still, it is important to note that the situation is not always the same for every bank and region. Most small, local institutions will need to find solutions via outsourcing or an alliance with another local bank, while their global counterparts look to build their own credit fulfillment factories.