Accenture Banking Retail Lending

7/28/2019 Accenture Banking Retail Lending

1/16

Retail lending origination excellenceKey capabilities for enabling sustained and profitable growth in

Asia Pacific

Banking


2/16

1

Contents

Introduction ..................................................................................................................................... 2

Strong prospects for growth in Asia Pacific lending .................................................................... 3

Growth in retail lending is driven by

consumer demand and government policy

Headwinds in the Asian retail lending market ............................................................................... 5

Rising expectations and growing appetite for risk from customers

Increasing regulatory pressures

Intense market competition and restrained profitability

Challenges to retail lending growth ............................................................................................... 7

Capabilities required to achieve retail lending origination excellence .......................................... 8

Empower people

Establish lean and automated processes

Build in flexible technologies

Conclusion ........................................................................................................................................ 12


3/16

2

Across Asia, consumer demand for

credit cards, unsecured loans andmortgages has increased substantiallyin recent years. With positivedemographic changes and favorableeconomic conditions, it is expectedthis growth will continue at pace.

However, while banks are takingadvantage of these trends, theyface a number of challenges:greater competition; an increasinglysophisticated customer base;regulatory demands. These are making

the achievement of lending portfoliogrowth, in a timely and profitablemanner, extraordinarily challenging.The evidence for this is illustrated indeclining interest margins, particularlyfor banks operating in Advanced Asiamarket. The need for focus by bankson retail lending origination excellenceis not simply an option; its a necessityif banks are to close the gap betweengrowth aspirations and executionreadiness.

To achieve retail lending originationexcellence, banks need to developand refine a number of capabilitiesacross the value chain, therebyfostering revenue growth, cost

reduction, higher credit quality

and, ultimately, profitability.

However, one size does not f it all.Due to differences in the maturitylevels of the various Asian bankingmarkets, each country faces differentchallenges. We believe the capabilitiesthat banks need to create orrecalibrate will vary depending on thematurity of markets they operate in, orplan to enter in the future.

Based on our analysis of market

maturity we have segmented Asiainto three groups and recommendeach group focuses on a core set ofcapabilities to achieve retail lendingorigination excellence in the short tomedium term.

Advanced Asia (Australia, HongKong, Japan, Singapore) - it willbe critical to focus on end-to-end process automation usingintegrated technology platforms;standardization of processes

via cross-product regionalfactories; investment in advancedsegmentation, and analyticsto support greater sales forceeffectiveness.

Maturing Asia (Malaysia, South

Korea, Taiwan, Thailand) it willbe critical to focus on creating acustomer origination mindset;empowering a skilled salesworkforce; simplifying legacybusiness processes; introducingautomated credit decision-making,and improving credit monitoring toenhance end-to-end profitability.

Emerging Asia (China, India,Indonesia, Philippines) it willbe critical to increase process

control; develop simple sales toolsand educate the sales force aboutproduct complexity and pricing; andimprove credit risk management inorder to achieve rapid and scalablegrowth.

Banks looking to expand beyond theirdomestic borders need first to ensurethey address the requirements oftheir home markets. Addressing theirdomestic challenges first will providethem with a platform - based on a

high degree of standardization andoperational discipline for geographicexpansion across Asia, not only atspeed, but also with the prospect ofhigher profitability.

Introduction


4/16

3

Retail lending1 growth is particularly

evident in Emerging Asia and inselected other markets across Asia (ieThailand, Singapore). Most notably,demand for retail lending is growingfaster in comparison with othertypes of lending in Asia (Figure 1).

Growth in retail lending isdriven by consumer demandand government policy

Markets in Asia show significantdifferences in lending growth trends

across the product portfolio. Forexample, mortgage lending is a keyfocus for banks in Advanced Asiadue to the influx of professionalmigrants, increases in the proportionof young, first-home buyers, and therise in foreign purchases. In addition,investors in these markets are moreinclined to focus on the perceived lowrisk nature of property.

Lending growth in Emerging Asia isexpected to be the fastest, driven bystrong domestic demand, a growingmiddle class and government policydesigned to boost credit availability.

For example, government investment

in telecommunications has improvedthe take up of mobile banking in ruralpopulations, particularly in India andIndonesia, where large customer basesare being served with simple retaillending products.

In Advanced Asia, increasing consumersophistication (demonstrated bythe rise in foreign purchases andinvestment in the property market) isdriving growth in retail lending, withboth unsecured debt and mortgage

debt growing at an exceptional rate in2010 (Figure 2).

In contrast, banks in Maturing Asiatend to have a more balanced retaillending portfolio, with greateremphasis on non-mortgage products(eg personal loans, auto loans). Themain challenge for banks in MaturingAsia is declining demand for creditcards (Figure 2). The reasons forthis vary from country to country,but include stricter eligibility

requirements in Malaysia, andincreased competition in Taiwan.

Finally, mortgage and other lending

products (ie personal loans, auto loansand other consumer loans) represent agreater share of the lending businessin some Emerging Asia countries(Figure 2).

For example, the Philippines risingaverage incomes and levels ofeducation have given rise to stronggrowth in the credit card business.However, the rate of consumer creditdefaults in the Philippines is almosttriple the average in Asia2, so borrower

quality remains a key issue.

Strong prospects for growth inAsia Pacific lending


5/16

9.3%

14.4%

18.5%

1.7%

10.9%

8.4%

11.0%

2.5%

18.7%

10.2%

16.2%

41.7%

14.4%

37.6%

27.5%

22.9%

14.7%

-1.8%

10.1%

4.2%

19.7%

6.8%

11.8%10.6%

22.2% 22.8%19.6%

21.5%

-10%

0%

10%

20%

30%

40%

50%

Australia

Hong Kong

Singapore

Japan

Advanced

AsiaKorea

Malaysia

Taiwan

Thailand

Maturing

Asia

India

Indonesia

Philippines

China

Emerging

Asia

2010 Retail Lending Growth (%) 2010 Total Lending Growth (%)

4.6%

70.4%74.2%

45.6%

50.7%

74.3%

54.4%

50.9%

39.9%

3.9%

7.9% 4.5%

5.8%6.8%

2.6%

25.5%

9.3%21.8% 21.3%

48.6%

42.4%23.1%

45.6% 46.3%34.7%

-10%

0%

10%

20%

30%

40%

50%

-20%

20%

60%

100%

Australia Hong Kong S ingapore Korea Malaysia Taiwan Thailand India Philippines

2.8%86.8%

Mortgage Credit Card Others Growth of credit card receivables (%)

Growth of credit card receivables (%)

Growth of mortgage credit (%)

Growth of mortgage credit (%)

4

Figure 2: Key components of retail lending and growth in mortgage and credit cards, 20104

Figure 1: Growth in retail lending (%) vs. total lending in Asia, 2009 -20103

Source: Asian Central Banks

Source: Asian Central Banks


6/16

5

While there is very strong demand

for retail lending products in Asia,other market forces will continueto challenge the momentum ofgrowth. These diverse forces acrosseach banking market will requiredistinct responses. What is certainis that an increasingly complexenvironment is making it morechallenging for banks to grow lendingrevenues and sustain profitability.

Rising expectations andgrowing appetite for risk fromcustomers

Asias banking markets are maturingalongside evolving customerexpectations and appetite for risk.The burgeoning Asian middle classis driving demand for new, moresophisticated financial products andservices. In Asia, the middle class isestimated to more than triple in sizefrom 525 million in 2009 to 1.7 billionby 2020. In less than ten years, Asia

could be home to more than half ofthe worlds middle class population.5

Nearly one-third (31%) of Asianmass affluent customers intend toincrease their overall level of risk

by borrowing more (Figure 3). This

is especially true in Maturing Asiawhere 39% of this group intendto increase their borrowing.

Changing customer demand isdriving banks to introduce innovativeproducts, launch them faster andimprove service levels to meetcustomer expectations. Banks willalso need to ensure they continuouslyupdate their understanding ofcustomers changing risk appetites,and develop their products and

services accordingly.

Increasing regulatory pressures

As governments focus on maintainingthe strength of their financial marketsamid continuing global turmoil, riskhas become a key consideration.Consequently, banks are being forcedto conserve capital through slowerloan growth, lower dividends andequity injections. This means thatretail lending origination excellence

will be critical not only for strongerrevenue growth, but also for achievinghigher credit quality and more prudentrisk management.

Intense market competition and

restrained profitabilityBanks in Asia already face challengesin deriving revenue from interestincome sources (Figure 4), as wellas maintaining strong net interestmargins. This is primarily due to alow-interest rate environment andintense market competition, mostevident in Advanced and MaturingAsia. This challenge is compoundedby inefficiencies in the credit systemsthat further test banks abilities to

fully capture existing lending demand.Overall, profitability remains belowpre-financial crisis levels, and recoveryis slow across most markets in Asia.

With these market forces in play, theability to rapidly and cost effectivelysupport retail lending growth isbecoming increasingly challenging forbanks in Asia (Figure 5).

Headwinds in the Asian retail lending market


7/16

31%

52%

17%

Total Asia

Increase Stay the same Decrease

23%

61%

16%

Emerging Asia

39%

38%

23%

Maturing Asia Advanced Asia

30%

58%

12%

-5%

5%

15%

Pre-tax

ROE

Percentage

25%

35%

45%

2007

Year

2008 2009 2010

Advanced Asia Average Maturing Asia Average

Emerging Asia Average Asia Pacific Average

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

40%

50%

60%

70%

80%

90%

2007 2008 2009 2010

Contributionof InterestIncome toRevenue (%)

Year

Net InterestMargin (%)

Advanced Asia Maturing Asia Emerging Asia

Contribution of net interest to revenue Net interest margin

6

Figure 3: Change in future borrowing risk appetite: Mass Affluent Customers

Source: Accenture Asian Banking Customer Survey, 2009

Figure 5: Evolution of return of equity (Pre-tax ROE)7

Source: Accenture Analysis, 2011

Figure 4: Interest revenue: Contribution to total revenue and margins6

Source: Accenture Analysis, 2011


8/16

Product

Management

Continuing

margin

pressures

Product

rationalization

Blurring of

definition of

consumer versus

businesscustomers

Speed to market

with new

products

Rising customer

attrition

Sales

Low sales per

FTE ratio and

low cross sales

ratio

Misalignment of

rewards to

strategic sales

objectives

Poor productknowledge

High training

costs per sales

person

Ineffective

recruitment

process

Origination

High levels of

manual processing

Excessive re-work

and manual

document

handling by bank

and 3rd parties

Inconsistent

credit decisioningand slow

turnaround

Servicing and

Monitoring

Multiple

servicing centres

are performing

duplicate

functions

Significant

overcapacity

in service

environments

Collections and

Recoveries

Inconsistent

productivity in

collection areas

Collection

strategies are not

targeted at high

risk customers

Multiple systems

are inhibitingcapabilities

around

customer-based

collections

Alliance

management and

arrangements

creating

inefficiencies

Credit Risk

Management

No consistent

view of

customers

Excessive

override of

credit policy

resulting in

sub-optimal

lending Lack of decision

tools and

technology

integration

Inconsistent

automated

scoring or

decisioning

7

To secure rapid and profitable growthin retail lending, Asian banks needto address a number of challenges:

Differentiation: A lack of focus on

customer acquisition and productand service innovation is making itincreasingly difficult for banks tomeet evolving customer demandsand grow revenue per customer.

Pace: Origination processes tend tobe slow for the customer this inturn reduces the sales forces abilityto close in a timely manner. Sloworigination processes cause highcustomer attrition and makes it hardto acquire new customers.

Scale: Banks lack scalable platformsto facilitate future growth.Inadequate technology platformsmean banks cannot achievesignificant cost efficiencies andrealize optimum economies of scale.In addition, disparate and agingsystems are expensive to maintain,

are difficult to operate competitivelyand limit regional expansion.

Regulation: Banks often do not haveinfrastructure that is compliant with

new regulatory requirements. Banksability to capture optimum revenueshare is under pressure due to thedouble hit of a higher cost of capitaland restrictions on leverage.

Across the retail lending value chain(Figure 6), banks are suffering fromreducing margins, low cross-sell ratios,high costs as a result of inefficiencyand poor credit quality.

Challenges to retail lending growth

Figure 6: Retail lending value chain: Common challenges in Asia

Source: Accenture Analysis


9/16

8

Capabilities required to achieve retail lendingorigination excellence

To address the challenges they faceand to capture the opportunities

presented by growing consumerdemand, banks in Asia need to developretail lending origination capabilitiesin three key areas: first, they needto empower their people with newtools and methods to transformtheir retail lending originationand decision-making capabilities;second, they need to establish leanand automated processes acrosstheir lending operations; and third,they need to develop flexible andagile technology platforms.

1. Empower people

Banks need to improve the way

they target and attract profitablecustomers. The key condition is a clearseparation of customer originationfrom product origination. This can beachieved by:

Creating a customer-originationmindset.

Building an accountable and skilledsales and servicing workforce.

Creating a customer-originationmindset

Banks can significantly improvecustomer acquisition and retentionif the sales and servicing workforceunderstands the profiles of customersegments, and has access to a 360degree view of customers, with realtime customer information updates.

Enabling a single view of the customerwill also facilitate more effective

cross-selling.Once customer segments are welldefined and understood, products orproduct bundles need to be developedand targeted at the specific needs ofeach segment. Risk-based pricing andapplication of discounts for goodlending customers is another pointof differentiation that will enable thesales force to improve retention ratesof customers based on their specificneeds and value.

Finally, to empower the sales force toachieve a credit decision for customersat the point of sale, banks need toreduce the manual input requiredto make credit decisions and useautomated decision-making rules.

Case StudyFacing the prospect ofincreased competitive andmargin pressures, one of theUK's largest mortgage lenders,and a leading player in savingsand insurance products,partnered with Accentureto radically overhaul theirmortgage application processacross multiple channels.

The mortgage business wasmanaged as discrete businesses,had duplicate capabilities,systems and locations, andsuffered from increasingcomplexity. This resultedin high levels of manualorigination and interventionacross pre-and post-completionprocessing. In addition, existing

systems and processes did notsupport future requirementsand growth.

A combined package / custom

solution was implemented, whichfundamentally changed the waymortgages were sold by:

Re-engineering the processfrom initial quotation tocompletion of the sale to cutinterview times.

Delivery of a single systemfor use across the multiplechannels (branch, call centre,

third party originators, estateagents) with functionality tosupport the new process.

Integrating an online frontend, built around theMicrosoft toolset.

The investment in the end-to end lending originationprogram met market demand

and achieved significant costreductions. Overall the bankimproved its cross-sell ratioby 10%, increased customer

satisfaction from 40% to 85%

and drove a 30% reduction inprocessing times.


10/16

9

Building an accountable and skilledsales and servicing workforce

Increased customer centricityrequires better data quality, not onlyto improve customer insight andengagement, but also to enhancegeneration of quality leads. Strong

sales management throughout the lifeof an opportunity is essential to ensurehigh conversion from lead to deal. Forexample, sales workforce should beable to conduct needs analysis andutilize demonstration tools during theorigination process, as well as haveend-to-end case ownership and dealstatus from all channels throughoutthe opportunity lifecycle.

To enable sales representatives to takeaccountability for customer needs

throughout the entire lifecycle, banksalso need to focus on tying targetsand remuneration mechanisms to salesforce performance.

Empowering people with new toolsand methods that can improvedecision-making closer to thecustomer will require banks to investin developing end-to-end originationcapabilities.

2. Establish lean and

automated processes

Improving the efficiency of the end-to-end origination process is achieved by:

Simplifying business rules andparameters.

Automating end-to-end processes.

Re-engineering business processesand creating operations factories.

Simplifying business rules and

parametersBanks can achieve significantimprovements in their retail lendingorigination processes by: reducingcustomer data requirements (includingsignatures); enabling customersto provide information only once;eliminating legacy and redundant

credit rules; reducing customer andinternal document requirements;shortening verification and qualitycheck overlaps, among other measures.

Automating end-to-endprocesses

A number of key capabilities havebecome standard in high performanceretail lenders, including:

Pre-population and data validationto reduce errors.

Automated application of businessand credit rules to produce highlevels of decisioning at the point ofsale (ie pre-approved limits).

Automation of key internal (egaccount history) and external

interfaces (eg valuers). Significant automation of end to

end workflows (ie early warningsystems and automatic notificationof upcoming and overdue reviews).

Automation of all customerdocuments point of sale.

A global bank sought totransform its mortgagemodel and implement a neworigination platform integratedwith existing bank core systemsto better respond to marketcompetition.

The banks mortgage businesswas facing aggressive

competition and continuingpressure on interest margins.The credit challenges it facedincluded highly manualprocesses, complex technologyacross its credit divisions anddiverse focus on credit by eachbusiness unit.

The bank invested in a newloan origination solution whichintegrated with its CRM,credit decisioning, and severalother existing bank / externalsystems.

Following the completion ofthe full rollout of the system,the bank hopes to increase

automated credit scoring fromaround 60% to 85-90% ofmortgage applications, reduceprocess handoffs from up to 12to 1-4 for a simple application,increase sales and reduce costsacross the business.

Case Study


11/16

Retail

Origination

Product& Pricing

Docs. &Fulfilment Servicing Collections RecoveriesSegments

Business

Product/Channels

Mortgage-Broker

Personal Loan-Direct

Personal Loan-Branch

Mortgage-Brand A

Mortgage-Direct

Revolving

Flexible

Term

Revolving

Trade

SpecialisedC

orporate

CreditAssessment

Retail

Mortgage Shared Service

SmallBusiness

Corporate Origination

ServicingSharedService

Specialised Lending

RecoveriesShared

Service

Corporate Collectionsand RecoveriesShared Service

Nonmortgagecollections

Origination andFulfilment SharedService

CorporateServicing

Commercial Mortgage

Retail

SmallBusiness

Retail

SmallBusiness

Country/Geography 1

Country/Geography 2

Country/Geography 3

Country/Geography 4

10

Implementation of collateralmanagement technology thatsupports complex cross-collateraldeals and maintenance.

Automated account setup,E-conveyancing and othersettlement tasks.

Re-engineering businessprocesses and creatingoperations factories

For banks targeting geographicexpansion, it is critical that they firstsimplify and automate their retaillending origination processes in theircountry of origin, or markets wherethey have a strong presence, beforestandardizing across the region.Creation of standardized credit

origination and fulfillment factoriesacross products and business lines willstrengthen banks' ability to executetheir regional growth strategies in Asia(Figure 7).

The key implications associated withthe creation of credit origination andfulfillment factories include:

The ability to create regionalcapabilities needs to be basedon an assessment of the level ofstandardization permitted by local

policy, regulation and products. Leveraging common capabilities

across the different parts of thelending business (retail, business,corporate).

Banks that invest in these capabilitieswill successfully realize economies ofscale while pursuing expansion acrossAsian banking markets.

Figure 7: Example loan factory: Originations and fulfillment

Source: Accenture Analysis


12/16

11

A multi-national Europeanbank wished to develop afuture state strategy for theircommercial lending processesand technology across allproducts or segments.

The bank faced significantbusiness challenges within theircommercial lending origination,

fulfillment, and servicingspace, including processing andmaintenance inefficiencies;regulatory pressure regardingconsistency of data captureand data reporting challengesdue to the fragmentation oftheir systems.

The bank adopted a numberof processes and tools to

overcome these challengesincluding adjusting their coreplatforms to enable futureorganic or M&A growth;

implementing Straight-through-processing (STP)and multiple loan paths;incorporating integrated toolsand processes to support thelending lifecycle, and theadoption of improved datalineage.

The program resulted in a

reduction of re-keys andcycle time along with 40+%reductions in legacy tools,and an expected return oninvestment of $30M.

Case Study

3. Build in flexible technologies

To achieve and maintain the levels ofprocess automation implied above,banks need to invest in enterprisetechnology platforms that are scalableand component-driven. This isachievable by:

Adopting SOA enabled applicationsthat can easily be integrated withlegacy systems and third parties, andthat reuse common functionalityacross lending products.

Introducing parameterized systemsthat can be maintained by thebusiness user population (ie usercontrol of credit policy and otherbusiness rules).

Introducing virtualized infrastructureand componentized architecture(ie to support multi-channelarchitectures that improve theability to create different offers bychannel).

Investing in scalable and component-

based enterprise technology platformsenables banks to reduce costs, improvescale and enhance credit quality.


13/16

Selected Credit &Lending Metrics

PoorPerformers

AveragePerformers

GoodPerformers

Category Description

Origination Rework Rates 20% - 50% 10% - 20% 5% - 10%

Average LendingTurnaround (Days)*

20 - 30+ 5 - 20 1 - 10

Average Doc PreparationTimes (Mins)*

50+ 30 - 50 5 - 30

Customer Touch Points inOrigination (#)

8+ 4 - 8 1 - 4

Data Capture (Mins)* 60+ 45-60 40-45

Auto Decisioning %


14/16


15/16

14

1 Retail lending constitutes creditrelated to credit cards, personalloans, auto loans, mortgage loans etc.Total lending includes non-consumercredit. Data for India is as of the 2011financial reporting period.

2 Source: Credit card usage in thePhilippines, Technograph, May 2011.

3 Data for India is as of the 2011

financial reporting period. Datais not available for total loans inPhilippines. Components vary subjectto availability of data per country.

4 Data on loan breakdown by categoryis not available for Japan, Indonesiaand China. Others include personalloans, auto loans and other consumerloans. Credit card data is not availablefor Japan, Thailand, Indonesia, andChina.

5 Source: OECD, The Emerging MiddleClass in Developing Countries, January2010.

6 Based values in US$, derived fromsample of 78 banks in Asia. NetInterest Margin is calculated as NetInterest income divided by earningassets.

7 Based values in US$, derived from

sample of 78 banks in Asia. Pre-TaxROE is calculated as Profit Before Tax(PBT) divided by Shareholders Equity.

References


16/16

Copyright 2011 AccentureAll rights reserved.

Accenture, its logo, andHigh Performance Deliveredare trademarks of Accenture.

Accenture Credit Services

Accenture Credit Services offersconsulting, process reengineering,systems integration and businessprocess outsourcing services forresidential mortgage, commerciallending, leasing and automotivefinance lenders looking to transformand industrialize their operations.The services are designed to deliversignificant customer service,efficiency, and quality improvementsto our clients lending business.

For further information on AccentureCredit Services, or any materialincluded in this point of view,please contact Andrew Pitcher [email protected]

About Accenture

Accenture is a global managementconsulting, technology servicesand outsourcing company, withmore than 223,000 people servingclients in more than 120 countries.Combining unparalleled experience,comprehensive capabilities across allindustries and business functions,and extensive research on the worldsmost successful companies, Accenturecollaborates with clients to help thembecome high-performance businesses

and governments. The companygenerated net revenues of US$21.6billion for the fiscal year endedAug. 31, 2010. Its home page iswww.accenture.com.

About the Authors

Andrew Pitcher

Andrew Pitcher is a Senior Executiveand Managing Director of AccenturesAsia Pacific Banking Industry program.Andrew has over 19 years experienceacross all aspects of financial services,from consumer and commercialbanking through to program delivery,technology line management andtransformation. Andrew commencedhis career as a line banker, and hasfunctional experience in across CRM,lending, loan servicing and collections.

David Levi

David Levi is a Senior Manager inAccentures Financial Services Strategypractice based in Singapore. David hasworked with banks in over 10 differentcountries (last 3 years in Malaysia,Indonesia and Singapore) andspecializes in working with corporateexecutives to develop and design newinnovative customer centric and creditlending visions, operating models andtransformation programs. As ProgramManager for major banks, he has alsohelped many global banks implementand realize their credit visions in orderto become high performance banks.

Manisha Sahni

Manisha Sahni is a Manager in theAccenture Management ConsultingInnovation Centre, where she has ledseveral thought leadership initiativesprimarily for the Banking industry. Shehas diverse range of experience acrossFinancial Services, Telecom and Oil &Gas Industries in Asia & the MiddleEast. Her management consulting andindustry experience spans across theareas of Strategy Planning, InvestmentManagement, and M&A. She is basedin Singapore.

Accenture Banking Retail Lending

Documents

Transcript of Accenture Banking Retail Lending