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Contents
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
Introduction
Across Asia, consumer demand for credit cards, unsecured loans and mortgages has increased substantially in recent years. With positive demographic changes and favorable economic conditions, it is expected this growth will continue at pace. However, while banks are taking advantage of these trends, they face a number of challenges: greater competition; an increasingly sophisticated customer base; regulatory demands. These are making the achievement of lending portfolio growth, in a timely and profitable manner, extraordinarily challenging. The evidence for this is illustrated in declining interest margins, particularly for banks operating in Advanced Asia market. The need for focus by banks on retail lending origination excellence is not simply an option; its a necessity if banks are to close the gap between growth aspirations and execution readiness. To achieve retail lending origination excellence, banks need to develop and refine a number of capabilities across the value chain, thereby fostering revenue growth, cost
reduction, higher credit quality and, ultimately, profitability. However, one size does not fit all. Due to differences in the maturity levels of the various Asian banking markets, each country faces different challenges. We believe the capabilities that banks need to create or recalibrate will vary depending on the maturity of markets they operate in, or plan to enter in the future. Based on our analysis of market maturity we have segmented Asia into three groups and recommend each group focuses on a core set of capabilities to achieve retail lending origination excellence in the short to medium term. Advanced Asia (Australia, Hong Kong, Japan, Singapore) - it will be critical to focus on end-toend process automation using integrated technology platforms; standardization of processes via cross-product regional factories; investment in advanced segmentation, and analytics to support greater sales force effectiveness.
Maturing Asia (Malaysia, South Korea, Taiwan, Thailand) it will be critical to focus on creating a customer origination mindset; empowering a skilled sales workforce; simplifying legacy business processes; introducing automated credit decision-making, and improving credit monitoring to enhance end-to-end profitability. Emerging Asia (China, India, Indonesia, Philippines) it will be critical to increase process control; develop simple sales tools and educate the sales force about product complexity and pricing; and improve credit risk management in order to achieve rapid and scalable growth. Banks looking to expand beyond their domestic borders need first to ensure they address the requirements of their home markets. Addressing their domestic challenges first will provide them with a platform - based on a high degree of standardization and operational discipline for geographic expansion across Asia, not only at speed, but also with the prospect of higher profitability.
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Retail lending1 growth is particularly evident in Emerging Asia and in selected other markets across Asia (ie Thailand, Singapore). Most notably, demand for retail lending is growing faster in comparison with other types of lending in Asia (Figure 1).
For example, government investment in telecommunications has improved the take up of mobile banking in rural populations, particularly in India and Indonesia, where large customer bases are being served with simple retail lending products. In Advanced Asia, increasing consumer sophistication (demonstrated by the rise in foreign purchases and investment in the property market) is driving growth in retail lending, with both unsecured debt and mortgage debt growing at an exceptional rate in 2010 (Figure 2). In contrast, banks in Maturing Asia tend to have a more balanced retail lending portfolio, with greater emphasis on non-mortgage products (eg personal loans, auto loans). The main challenge for banks in Maturing Asia is declining demand for credit cards (Figure 2). The reasons for this vary from country to country, but include stricter eligibility requirements in Malaysia, and increased competition in Taiwan.
Finally, mortgage and other lending products (ie personal loans, auto loans and other consumer loans) represent a greater share of the lending business in some Emerging Asia countries (Figure 2). For example, the Philippines rising average incomes and levels of education have given rise to strong growth in the credit card business. However, the rate of consumer credit defaults in the Philippines is almost triple the average in Asia2, so borrower quality remains a key issue.
Figure 1: Growth in retail lending (%) vs. total lending in Asia, 2009 -20103
50% 41.7% 40% 37.6% 27.5% 21.5%
30%
22.9%
20%
14.4%
10%
18.5% 14.7%
9.3% 4.6%
2.5% Thailand Taiwan Maturing Asia India Philippines Indonesia China Emerging Asia
Figure 2: Key components of retail lending and growth in mortgage and credit cards, 20104
100% 9.3% 3.9% 50% 21.8% 7.9% 60% 86.8% 70.4% 20% 74.2% 45.6% 5.8% 21.3% 4.5% 48.6% 6.8% 74.3% 50.7% 54.4% 50.9% 39.9% 42.4% 23.1% 2.6% 45.6% 46.3% 2.8% 34.7% 40% 30% 20% 10% 0% -20% Australia Hong Kong Singapore Korea Malaysia Taiwan Thailand India Philippines -10%
25.5%
While there is very strong demand for retail lending products in Asia, other market forces will continue to challenge the momentum of growth. These diverse forces across each banking market will require distinct responses. What is certain is that an increasingly complex environment is making it more challenging for banks to grow lending revenues and sustain profitability.
by borrowing more (Figure 3). This is especially true in Maturing Asia where 39% of this group intend to increase their borrowing. Changing customer demand is driving banks to introduce innovative products, launch them faster and improve service levels to meet customer expectations. Banks will also need to ensure they continuously update their understanding of customers changing risk appetites, and develop their products and services accordingly.
17%
31%
16%
23%
23% 39%
52%
61%
38%
Increase
Decrease
2007
2008 Year
2009
2010
Contribution of net interest to revenue Advanced Asia Source: Accenture Analysis, 2011 Maturing Asia
2009
2010
Figure 6: Retail lending value chain: Common challenges in Asia Product Management
Continuing margin pressures Product rationalization Blurring of definition of consumer versus business customers 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 product knowledge 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 decisioning and slow turnaround
1. Empower people
Banks need to improve the way they target and attract profitable customers. The key condition is a clear separation of customer origination from product origination. This can be achieved by: Creating a customer-origination mindset. Building an accountable and skilled sales and servicing workforce. Creating a customer-origination mindset Banks can significantly improve customer acquisition and retention if the sales and servicing workforce understands the profiles of customer segments, and has access to a 360 degree view of customers, with real time customer information updates.
Enabling a single view of the customer will also facilitate more effective cross-selling. Once customer segments are well defined and understood, products or product bundles need to be developed and targeted at the specific needs of each segment. Risk-based pricing and application of discounts for good lending customers is another point of differentiation that will enable the sales force to improve retention rates of customers based on their specific needs and value. Finally, to empower the sales force to achieve a credit decision for customers at the point of sale, banks need to reduce the manual input required to make credit decisions and use automated decision-making rules.
Case Study
Facing the prospect of increased competitive and margin pressures, one of the UK's largest mortgage lenders, and a leading player in savings and insurance products, partnered with Accenture to radically overhaul their mortgage application process across multiple channels. The mortgage business was managed as discrete businesses, had duplicate capabilities, systems and locations, and suffered from increasing complexity. This resulted in high levels of manual origination and intervention across pre-and post-completion processing. In addition, existing systems and processes did not support future requirements and growth.
A combined package / custom solution was implemented, which fundamentally changed the way mortgages were sold by: Re-engineering the process from initial quotation to completion of the sale to cut interview times. Delivery of a single system for use across the multiple channels (branch, call centre, third party originators, estate agents) with functionality to support the new process. Integrating an online front end, built around the Microsoft toolset. The investment in the endto end lending origination program met market demand and achieved significant cost reductions. Overall the bank improved its cross-sell ratio by 10%, increased customer
satisfaction from 40% to 85% and drove a 30% reduction in processing times.
Building an accountable and skilled sales and servicing workforce Increased customer centricity requires better data quality, not only to improve customer insight and engagement, but also to enhance generation of quality leads. Strong sales management throughout the life of an opportunity is essential to ensure high conversion from lead to deal. For example, sales workforce should be able to conduct needs analysis and utilize demonstration tools during the origination process, as well as have end-to-end case ownership and deal status from all channels throughout the opportunity lifecycle. To enable sales representatives to take accountability for customer needs throughout the entire lifecycle, banks also need to focus on tying targets and remuneration mechanisms to sales force performance.
Empowering people with new tools and methods that can improve decision-making closer to the customer will require banks to invest in developing end-to-end origination capabilities.
credit rules; reducing customer and internal document requirements; shortening verification and quality check overlaps, among other measures.
Case Study
A global bank sought to transform its mortgage model and implement a new origination platform integrated with existing bank core systems to better respond to market competition. The banks mortgage business was facing aggressive competition and continuing pressure on interest margins. The credit challenges it faced included highly manual processes, complex technology across its credit divisions and diverse focus on credit by each business unit. The bank invested in a new loan origination solution which integrated with its CRM, credit decisioning, and several other existing bank / external systems. Following the completion of the full rollout of the system, the bank hopes to increase automated credit scoring from around 60% to 85-90% of mortgage applications, reduce process handoffs from up to 12 to 1-4 for a simple application, increase sales and reduce costs across the business.
Implementation of collateral management technology that supports complex cross-collateral deals and maintenance. Automated account setup, E-conveyancing and other settlement tasks.
The key implications associated with the creation of credit origination and fulfillment factories include: The ability to create regional capabilities needs to be based on an assessment of the level of standardization permitted by local policy, regulation and products. Leveraging common capabilities across the different parts of the lending business (retail, business, corporate). Banks that invest in these capabilities will successfully realize economies of scale while pursuing expansion across Asian banking markets.
Origination Segments Product/Channels Mortgage-Brand A Mortgage-Direct Retail Country/ Geography 1 Mortgage-Broker Personal Loan-Direct Country/ Geography 2 Personal Loan-Branch Revolving Business Flexible Term Small Business Retail Retail Origination and Fulfilment Shared Service Small Business Servicing Shared Service Retail Non mortgage collections Small Business Mortgage Shared Service Product & Pricing Docs. & Credit Assessment Fulfilment Servicing Collections Recoveries
Country/ Geography 3
Country/ Geography 4 Revolving Corporate Trade Commercial Mortgage Specialised Specialised Lending Corporate Origination Corporate Servicing
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Introducing virtualized infrastructure and componentized architecture (ie to support multi-channel architectures that improve the ability to create different offers by channel). Investing in scalable and componentbased enterprise technology platforms enables banks to reduce costs, improve scale and enhance credit quality.
Case Study
A multi-national European bank wished to develop a future state strategy for their commercial lending processes and technology across all products or segments. The bank faced significant business challenges within their commercial lending origination, fulfillment, and servicing space, including processing and maintenance inefficiencies; regulatory pressure regarding consistency of data capture and data reporting challenges due to the fragmentation of their systems. The bank adopted a number of processes and tools to overcome these challenges including adjusting their core platforms to enable future organic or M&A growth;
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implementing Straightthrough-processing (STP) and multiple loan paths; incorporating integrated tools and processes to support the lending lifecycle, and the adoption of improved data lineage. The program resulted in a reduction of re-keys and cycle time along with 40+% reductions in legacy tools, and an expected return on investment of $30M.
Conclusion
The most important issues facing banks in Advanced Asia include low retail lending rates, an overemphasis on mortgages, high rates of customer attrition, net interest margin pressure, and the need to accelerate product rationalization. To manage these challenges, banks in Advanced Asia need to focus on growing revenue through a more balanced portfolio of lending products while taking a disciplined approach to cost reduction. In contrast, banks in Maturing Asia are facing the lowest growth rate in retail lending across the region, thereby increasing the pressure on profitability exacerbated by an increasingly sophisticated customer base. In response, banks based in this region will need to focus on improving profitability and credit quality. Profitability will depend on banks ability to introduce new products and services faster (e.g., to increase volume and rate of growth in credit cards), understand and acquire new customers outside of their home markets, while simplifying business and process complexity. Finally, as banks in this market seek to grow new product segments (e.g. credit cards) credit risk management will be critical to ensure asset quality. Finally, banks in Emerging Asia are facing increasing non-performing loans and limited ability to scale efficiently in a high growth economic environment. In response, they need to focus on operational mastery and credit quality. Pricing optimization, operational efficiency aimed at reducing cost to serve, and scale will be critical as banks aspire to expand revenue, particularly in mortgages and credit cards. Better mastery of credit risk, collections and recovery processes will be essential to improve credit quality. Investment in key retail lending capabilities will therefore be a cornerstone for future revenue growth, cost containment and effective risk management the three pillars of rapid and profitable lending business growth in Asia. Banks can achieve significant performance improvements by focusing on core capabilities across the retail lending value chain through an integrated lending program (Figure 8).
Figure 8. Target outcomes of mortgage re-engineering Selected Credit & Lending Metrics
Origination Rework Rates
Poor Performers
20% - 50%
Average Performers
10% - 20%
Good Performers
5% - 10%
Category Description
Proportion of lending applications that are handled more than once by sales / credit to correct errors or clarify customer data prior to disbursement Average time taken to process an application from start to finish, including idle time but excluding time waiting for customer response Average time taken to generate loan documents and proceed to disbursement activities Number of unique customer touch points / enquiries for a customer applying for business loan Time taken to capture and document all relevant application-specific information for a business loan directly into the originations system Proportion of loans acceptances undergone assessment of qualification, pricing and underwriting, using automated decisioning tools
20 - 30+
5 - 20
1 - 10
Average Doc Preparation Times (Mins)* Customer Touch Points in Origination (#) Data Capture (Mins)*
50+
30 - 50
5 - 30
8+
4-8
1-4
60+
45-60
40-45
Auto Decisioning %
<30%
60-70%
85-95%
Note: (*) Range represents the difference in types/complexity of deals Source: Accenture experience
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The extent to which banks are able to achieve excellence in retail lending origination will hinge on their ability to master a number of key capabilities. Mastering these will contribute to sustaining rapid and profitable growth in their respective markets. Each market, in turn, will require banks to address distinct sets of issues and objectives. Figure 9 provides a summary of the capabilities banks need to prioritize to build or recalibrate according to the performance imperatives and challenges in their specific markets.
Empower people
Simplification of legacy process complexities (i.e. elimination of old credit rules; reduced customer data requirements, improved verification)
Greater process control (i.e., increased data quality, process measurement, and shift of process from branch to central hubs)
Integrated technology platform with a data capture, rules mgmt, credit scoring, workflow, collateral mgmt and other capabilities
Improved data capture, automated credit decisioning and basic workflow capabilities
Simple credit scoring (i.e. for cards and small loans) and credit monitoring tools
Medium priority
Lower priority
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References
1 Retail lending constitutes credit related to credit cards, personal loans, auto loans, mortgage loans etc. Total lending includes non-consumer credit. Data for India is as of the 2011 financial reporting period. 2 Source: Credit card usage in the Philippines, Technograph, May 2011. 3 Data for India is as of the 2011 financial reporting period. Data is not available for total loans in Philippines. Components vary subject to availability of data per country. 4 Data on loan breakdown by category is not available for Japan, Indonesia and China. Others include personal loans, auto loans and other consumer loans. Credit card data is not available for Japan, Thailand, Indonesia, and China. 5 Source: OECD, The Emerging Middle Class in Developing Countries, January 2010. 6 Based values in US$, derived from sample of 78 banks in Asia. Net Interest Margin is calculated as Net Interest income divided by earning assets. 7 Based values in US$, derived from sample of 78 banks in Asia. Pre-Tax ROE is calculated as Profit Before Tax (PBT) divided by Shareholders Equity.
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About Accenture
Accenture is a global management consulting, technology services and outsourcing company, with more than 223,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the worlds most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. The company generated net revenues of US$21.6 billion for the fiscal year ended Aug. 31, 2010. Its home page is www.accenture.com.
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