Transforming lending through cloud services

Cloud technology is helping banks rethink their business models and making core functions such as lending more efficient while delivering a more personalised experience for their customers

As pressures mount on financial institutions to accelerate their digitisation efforts, many are moving their operations to the cloud. Yet what started out as a way to improve areas such as data and analytics is now being applied to their core banking systems; enabling banks to potentially transform their core business: how they lend.

About four in five banks plan to move at least half of their mainframe technology to the cloud, according to a survey published in April by Accenture. About a quarter of those aim to do so before the end of this year.

“When we started nCino in late 2011, customers were still evaluating whether the cloud was something that the financial services industry would move towards,” says Charlie McIver, managing director for EMEA at nCino, a cloud-based banking software provider. “Today however, we see a rush to adopt. Financial institutions began to understand that if they’ve been delaying digital transformation, they can’t continue to wait.”

McIver says that even those banks that have started out on their cloud journey are now seeking to optimise and accelerate that adoption. “We are not spending a lot of time talking to the market about why banks need to move to the cloud; we’re talking to them about how to move to the cloud, at speed, and to best effect,” he adds.

This shift is helping banks streamline their business operations and make the lending process more efficient.

“The fundamentals of banking remain: lend money to create value,” says McIver. “How banks accomplish this goal productively and profitably, however, is changing. Years ago, if you were a bank and wanted to get on the cloud to do lending, you would’ve had to potentially build something in-house. Now you can get a packaged offering with nCino and go live in months, not years.”

Changing consumer habits

Customers also increasingly want to apply for loans online, a major turnaround from the pre-Covid era.

“Two months before the pandemic, borrowing money through the internet for a business was still a difficult experience,” says McIver. “Fast forward a few months and banks were scrambling to rapidly create new digital systems for loans and funding, and the applications were submitted via mobile devices from people’s living rooms.”

Customer expectations have changed in line with the broader digitisation of their lives. Not only do they expect financial institutions to provide a faster, digital banking experience, but they also expect a more personalised service. By using cloud-based core banking tech, financial institutions can start to offer customers more bespoke loans as part of a wider relationship lending strategy, says McIver.

“Relationship lending is an increasingly effective strategy because it helps institutions develop a deep personal relationship with their customers, giving them the ability to guide customers through lending decisions and options that are specifically tailored to their individual needs,” he says. “Financial institutions of all sizes are embracing relationship lending as an approach that provides the best of both worlds: customers receive personalised attention that offers better value, while bankers learn more about their customers’ needs over the course of their lives.”

That results in better lending decisions, which benefits both the customer and the bank, says McIver: “Rather than purely transactional, this approach is highly consultative, allowing financial institutions to build relationships with their customers that can last a lifetime.”

Using cloud services for core banking can also help banks unlock a vast trove of previously untapped data and new partners to learn more about their business.

“As financial institutions continue their transformation journey, they are realising that having all that data in one place gives them opportunities within their market that they didn’t know were there,” McIver says. “It’s given them a lot more transparency into how their institution is running and where they can go forward.”

Digitisation drives profitability

Using cloud services to power core banking functions can help banks become more profitable.

“By rethinking their business models and embracing the cloud and other innovative strategies of digital-only banking and financial services, traditional banks could boost revenues by nearly 4% annually,” says McIver.

That would result in more than half a trillion dollars in additional revenues by 2025, according to Accenture.

“Using automation, advanced analytics and other emerging technologies, banks have a real chance to increase business agility, reduce costs and deliver enhanced customer and employee experiences,” McIver says. “Customers want to interface with efficient systems that already have their information; they don’t have the time or desire to repeat themselves while yet another banker rekeys their information.”

Relationship lending is an increasingly effective strategy because it helps institutions develop a deep personal relationship with their customers

Financial institutions that adopt state-of-the art cloud-based tech like the nCino Bank Operating System can solve that problem by consolidating data in one secure, central location rather than being siloed across multiple systems, as well as partnering with new third parties, improving the customer experience, says McIver: “This is just one example of how technology can be leveraged to help meet the needs of customers, so they don’t have to go elsewhere to obtain specialised services and loans.”

Digital transformation on its own, however, is no longer a differentiator for financial institutions. It is how they use that technology to create new products and services that will help them stand out. “Banks need to go beyond becoming mere digital versions of themselves and shift their perspective to put innovation, agility, purpose, and sustainability at the forefront of real business model transformation,” McIver says.

Some financial institutions have been hesitant to fully embrace digital transformation, in part because they don’t want to disrupt existing practices that have been successful. He adds: “Banks are understandably reluctant to discard systems and processes that still drive their profitability in the short-term, and it’s difficult to take risks and make changes for an uncertain future.”

Yet given the backdrop of rapidly changing business and economic conditions, financial institutions need to constantly adapt to improve operational performance and service quality for customers – and the only way to do that is through technology.

“At a time when banks are facing unprecedented competitive pressures, the cloud offers a means to respond forcefully,” says McIver. “Banks are going all-in on the cloud because it gives them increased speed and agility, improved security and new capabilities that enable them to grow revenue regardless of what the future holds.”

Q&A: ESG is not as easy as ABC

Steward Redqueen’s ESG data and analytics manager Claire Nooij says that while the ESG industry is booming, banks face a major challenge to address ESG issues in their lending portfolios – and many are ill-equipped to do so

What are the main challenges banks face when trying to meet their ESG goals?

Banks face three big challenges: addressing climate change in their lending portfolios, friction between long-term goal setting in a short-term focused society and maintaining their clientele amidst rising ESG demands.

The Bank of England recently made a 10-part pledge to advance the climate agenda. Making the financial system more resilient to climate-related financial risks and to help the industry support a transition to achieving net zero emissions are just a couple of the pledges made. Climate change forces banks to reconsider activities as part of their risk framework by asking different questions than they previously would have, such as what happens to the ability of clients to pay off their loans when they are hit by extreme droughts.

Financing the green transition is great, but what about the outstanding loans in industries that are infamous for being large emitters and that society heavily depends on? A bank might not want to give out such loans, but if we are dependent, parties jump in to finance it anyway and the world will not be better off.

Banks need to track their progress on integrating ESG efforts so that they can improve their performance over time; what gets measured gets managed

Another challenge is the friction between committing to a long-term agenda in a short-term focused society. Considering the current pace of becoming net zero, 2050 is around the corner. From a bank’s perspective it is ages away: at least a couple of CEO terms. With most CEOs not looking further than four to five years ahead, clear ownership to reach the end goal is lacking. At the same time, banks’ clients and investors increasingly demand that they focus more on ESG, so it’s also about making sure banks do not lose business by inadequately addressing ESG. The commitment seems to be there, but how do they go from conversations and goal setting to realisation? This is exactly where banks struggle.

How much focus should banks be placing on ESG?

The science from the latest Intergovernmental Panel on Climate Change (IPCC) reports is clear: the costs of addressing climate change are huge. In light of that, banks will need to stop talking and start acting. This means allocating capacity to integrate ESG into policies, processes and performance reviews. Decision-making processes need to be recalibrated for meaningful change throughout the organisation.

Banks will also need to have a smart management system that tracks sustainability efforts and engagement with key stakeholders. Finally, it is important that ESG is integrated in the DNA of the bank: from procedures and policies all the way to the interaction they have with clients.

What should a good ESG strategy look like for a bank?

First, given the broad array of ESG aspects one could consider and the subjective nature of ESG, it is important that a good ESG strategy has clearly formulated measurable goals that take into account client characteristics, regulations and external commitments, like the Paris Agreement.

Second, ESG commitments need to be put into practice by allocating employees, assigning responsibility and including ESG considerations in day-to-day activities, such as loan applications and client onboarding. Finally, banks need to track their progress on integrating ESG efforts so that they can improve their performance over time: after all, what gets measured gets managed.

In what ways can digital transformation help banks improve their ESG commitments?

Banks, generally speaking, are dependent on legacy IT systems, which inhibit their ability to manage ESG across their services. Digital transformation and ESG tools enable banks to streamline processes, like loan applications, across the company. Standardised, digital processes for ESG management enable banks to track ESG performance on a client, portfolio and bank-wide level. Information from tracking ESG performance, in turn, can be used for reporting, client engagement and enhancing overall efficiency. Streamlining processes through one central system does not only help banks start small by setting an ESG standard, but it also enables banks to quickly scale up their ESG efforts and realise their ESG commitments.

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