Commentaries and insightful analyses on the world of finance, technology and IT.

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March 11, 2013

Bridging the gap between credit takers and credit givers

 
Credit is a prime financial domain that is always in the spotlight and often characterized by an uneasy relationship between the credit taker (borrower) and credit giver (lender). In the blog, let's discuss and share our thoughts on a niche credit segment - vehicle financing. In addition to auto, recreational and marine vehicles, this segment includes big ticket transportation enablers, like aircraft.

Currently, credit givers in this segment rely broadly on two categorized channels - direct and indirect. For long, banks and credit unions have been significantly dependent on indirect channels, which are primarily dealer-based. This lending strategy not only greatly reduced the costs and effort involved in marketing products but also ensured a steady inflow of business. A critical imperative in indirect lending is the establishment of a long-term relationship between the dealers and members.

The critical question, however, is this: Is the assured quantity of business inherent in indirect lending more important than quality?

With the financial industry in turmoil over the past few years, it's no surprise that the vehicle financing business has suffered. Banks and credit unions are continuously experiencing large defaults by charged-off dealers, resulting in the souring and termination of many business relationships.

What are the root causes?

  1. Unsurprisingly, dealers almost always aggressively pursued high growth volumes. Once they gained the requisite bargaining power, they frequently misused it by lowering the bar required to approve loans. To maintain a long-term relationship, credit givers often agreed to relax the approval requirements. As a consequence, credit givers suffered large-scale delinquency, charge-offs and losses.
  2. In indirect lending, business credit givers have little or no idea about the customer's behavior and lack the direct relationships necessary to explore more repayment options.
  3. A lot of the applications that came through the indirect channel had fraudulent or incorrect information. Some of those cases were overlooked due to the credit giver's negligence - by placing underwriters under tremendous pressure to pass applications to meet business margins. Financial institutions too, turned a blind eye, either due to a high level of trust on the dealers or due to the need to meet their own volume-based targets.

With these factors resulting in the indirect lending channel being blamed for causing major losses, credit givers shifted their focus on building direct channels. The primary motto of a direct channel is to gain an in-depth understanding of the end customer's borrowing patterns by connecting directly with them.

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Use case: Direct lending is an area where Infosys was able to provide a large US banks with the significant expertise required to develop in-house analytics tools and techniques for faster decision making. We also provided solutions designed to promote and establish direct lending as a major business channel, a prime requirement for credit givers. Moreover, predictive risk detection and mitigation models were proposed and implemented in different scenarios. These tools and solutions were leveraged by borrowers and lenders - all entities participated in the business process directly or indirectly to:

  • Develop user-friendly web interfaces for loan origination, status tracking and decision display through direct channels
  • Build an interactive online interface with 24x7 assistance available through chat or call
  • Cross-sell vehicle financing products with other retail banking products through retail banking channels
  • Establish a multi-channel platform for direct lending through online and mobile banking, social networking, etc.
  • Automate tele-calling services to reach out to potential customers in order to process applications faster and enhance customer experience
  • Build a data warehouse that contained all of a customer's details, including their transaction history for analytics and business intelligence

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Future trend and risk mitigation:

While indirect lending continues to be popular and account for a large market share, particularly among captive finance companies, direct lending is growing at a very fast pace. Building and efficiently managing them will provide credit givers with an undeniable edge in developing a sustainable business. A number of credit givers are leveraging Infosys capabilities to build integrated lending platforms that support end-to-end loan processing for loans that originate through direct channels. Additionally, it is crucial to develop risk-based credit scoring models to identify--and mitigate--risk at an early stage. If managed efficiently, credit givers who use direct lending channels will be able to analyze and predict their customer's needs to identify the gap between what is provided and what is expected. This, in turn, will result in the bridging of the gap between credit takers and credit givers.

March 8, 2013

The importance of post-go-live communication in core banking

The decision for banks today to change to a new core banking product is a very long-drawn, tough and strategic decision. Business growth, market competition and changing regulations are some of the external factors driving core replacements. There are hard-pressing internal drivers like channel penetration, adaptation to modern technology, systems consolidation and the presence of legacy systems, etc. which influence banks to push and go for this change.


Core vendors work very closely with their clients, right from the day when the final selection of the vendor for core replacement is made. Core vendors and banks work relentlessly all through--from the requirements, design, solution, testing till the final implementation and go-live date. Both parties, core banking product vendors and banks, stake a lot on this journey. Consequently, they leave no stone unturned in overcoming hurdles along this core transformation journey.

 

The issue, however, is that most core vendors scale down their communications with the bank post the project going live. Continuing this relationship, once the implementation is successful and the dust settles, is equally important for both--the vendor as well as the bank.

 

Most banks go for a license-plus-maintenance contract for an initial period. During the initial period, banks typically do not perform major customization and enhancement activities. These are initiated once they reach a steady-state period, which normally takes months to a year depending on the size of the bank. Whether the banks sign up for long-term maintenance or decide to have custom development done in-house, it is in the interest of both the parties that they keep their communication channels open and build strong relationships irrespective of whether it is backed by a contract or not.


Listed below are some reasons why this continuous communication and bonding is needed between the vendors and banks post-go-live:

1. Banks have bought a core banking solution and not just a product. As banks grow, they tend to make significant IT architectural changes to their technology landscape, which frequently impacts their core banking solution or integration with it. As a result, these changes need critical evaluation by the core banking vendor's advisory/architecture boards.

2. Core banking vendors, on the other hand, keep developing their product and roll out newer versions to keep abreast of changing needs, regulations and competition. They make these decisions based on their product architectural board's directives and strategy recommendations. It is imperative that they, too, evaluate their existing client solutions regularly to confirm that the bank's core banking enhancements are in alignment with the product strategy and direction.

Although core banking vendors keep rolling out newer versions at periodic intervals, these may not be adopted by banks due to non-alignment with the bank's strategic focus. As a result, the client banks may / may not opt for version upgrades in future. Constant evaluation and communication with banks is crucial to ensuring that their IT architectural changes are in tune with their vendor's product strategy. Let us assume, a bank (client) chose to embark on customization and enhancement activities in-house, without an alignment with the product vendor. There is a possibility that it may create issues and impediments from an architecture/feasibility standpoint when attempting to retrofit the bank's custom changes to the newer product versions.

3. Core vendors should ensure their consultation and advisory architecture boards help the banks with their solutions and direction. This will provide banks with confidence in their relationship and help create great business value for core vendors.

4. After go-live, it's necessary for core vendors to elevate their clients to the status of partners. This partnership will not only help forge strong bonds with customers and retain their business but will also enable vendors to gain more credibility - a sure differentiator against other competitors.

5. This will also be a win-win for core product vendors since it can be the perfect channel to implement feedback and suggestions from existing customers into the product for continuous improvement.

 

Finacle has, for some time now, operated a Finacle Client Advisory Board. Finacle customers, who participate voluntarily, can put forth their plans before this board. The board can validate their plan, present suggestions and offer feedback. Such partnerships will help banks forge stronger bonds with their vendors, improve credibility and act as a value-added service that deliver an edge over the competition.