Introduction
As the banking and financial services industry is evolving in the next normal, it’s apparent that we are entering a new era of customer-centric digital sophistication. The pandemic forced banks and financial institutes to transform their lending landscape by digitizing and automating core processes like deposits and lending.
In the process of lending specifically, all the way from loan origination, credit assessment, fulfillment, disbursement, servicing, to collections, no process is left behind. In fact, advanced technologies such as cloud, AI/ML, biometrics, AR/VR, blockchain, and metaverse are being integral enablers of a future-ready lending platform. The adoption of technology and developing a resilient lending platform has become ‘must have’ from a ‘good to have.’ The pandemic was the catalyst that influenced banks and financial institutions in thinking differently - not just in terms of automating manual workflows or digitizing processes, but reimagining the customer experience and empowering employees. Remote loan origination, lightning speed in credit underwriting, efficient loan processing and disbursal in shortest cycle time have become the need of the hour. With the spurt in the number of startups and small businesses, there is a significant rise in demand for funds along with an increase in deal size. There is a clear shift in the mindset of banks and lenders from the traditional practice of granting loans based on strict terms into a more flexible lending practice of attractive and personalized loans in this growing competitive market. . This also calls for superior fraud and risk management that adheres to the changing regulatory environment.
As customers’ expectations evolve, there is an increasing demand to deliver financial services through non-financial products or interactions, popularly known as embedded financing. Home, medical, travel, fashion, entertainment and other types of financing options have started providing integrated experiences to the end consumers. For instance, ‘Buy Now Pay Later’ is a lending capability which has become popular in consumer retail in recent times. Similarly, in the gaming world or real estate industry, metaverse is converging with credit and loan facilities. The span of lending as a platform is growing wider and at the same time, the line between industries is overlapping. Innovation has become so fast-paced that it certainly needs a flexible, composable core and infrastructure. To ensure banks and financial institutes keep up with this momentum in lending transformation and the sheer volume of loans, it is evident that the adoption of cloud in the lending space is the way forward.
Costs incurred on legacy applications
Even with several challenges plaguing them, banks are reluctant to modernize or replace their legacy lending applications as they occupy a central position in the overall operations - and any change will have a widespread impact. Hence, they are only investing in the maintenance of these applications. However, is it worth it? The questions that the senior management normally pose can be addressed with the below statistics –
- The big four banks – Wells Fargo, Bank of America, JP Morgan and Citibank – spend anywhere between $8 billion to $11 billion on their IT every year. i
- Overall, banks & FIs in the US are spending around $86 billion every year on IT. Although big banks spend 0.44% of their total assets size on IT, regional banks spend around 0.51%. Credit unions spend 0.42% and community banks spend 0.22%. Out of which on an average, 70% to 80% of this IT budget is being spent on the maintenance of these legacy applications. ii iii iv
- A typical tier-1 bank spends more than $300 million a year on the maintenance of legacy applications and a mid-sized bank spends more than $100 million a year for the same purpose.
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