“We should go digital” is often proposed by financial service providers with the assumption that it will make life easier for everyone involved. But digital transformation is a challenging process, requiring both a strong structural and cultural foundation to be successful. To make the process as smooth as possible, lenders must take the crucial first steps of assessing and building their digital readiness, as we wrote in our recent publication Demystifying Digital Lending.
Build your digital readiness — and avoid a ‘digital mullet’
One of the most common mistakes financial service providers make when going digital is giving themselves a “digital mullet” — they look digital in the front, with fancy mobile applications or automated credit distributions, but they have a lot of labor-intensive work happening on the back-end, which fails to deliver on the expected benefit of greater operational efficiency.
Building digital readiness means putting in place the core processes and systems that will ultimately support end-to-end digitization of lending products and the customer experience as a whole. For example, to help streamline operations, reduce costs, and increase scale, financial service providers (FSPs) can deploy digital channels and tools, such as digital field applications (DFAs) or cloud-based core banking systems — but deploying such tools is just a small part of the broad range of activities required to build digital readiness.
A baseline of digital readiness can help mitigate common digital lending implementation challenges, including data quality and availability, building strong partnerships, and change management.
In digital lending, the whole is greater than the sum of its parts
To become a digital lender, a traditional financial service provider must undergo a comprehensive digital transformation to create an integrated digital product proposition that improves the customer experience. This draws a useful line in the sand — digital lending isn’t just doing the same thing better, but rather creating something new. It implies an end-to-end process of developing and delivering a data-driven financial product that is applied for, disbursed, and managed through digital channels, and ultimately improves the customer experience.
As we note in the report, FSPs should understand the distinction between digital readiness (the ability to offer existing products in a digital format, typically enabled by a number of digital tools) and a digital product proposition (the launch of an end-to-end digital product). Many FSPs plan to launch digital products without realizing the time required to build their digital readiness first — this often involves multi-year planning to develop systems and skills to enable the delivery of digital products before actual digital products are launched.
At its core, much of digital readiness is about building the institutional capacity to use data effectively, which is a prerequisite for launching a successful digital lending product. The diagram below, from our publication Unlocking the Promise of (Big) Data to Promote Financial Inclusion, depicts a simple diagnostic framework for understanding an institution’s data capacity.
As the diagram above illustrates, digital readiness can be broken down into three broad categories — people, systems, and strategy:
- People — ensuring the business is ready for scale from an organizational culture and internal capacity perspective. This includes reviewing the skills, capacity, and commitment of the institution at all levels, and assessing whether existing team structures and individual incentives are suitable for delivering a digital proposition.
- Systems — ensuring the core infrastructure is in place to scale the business, such that information flows smoothly and is used effectively across the organization. This includes an institution’s core banking system, electronic document management system (EDMS), data warehouse, middleware, and reporting dashboards. The systems required to offer digital lending are comparable to a CRM (customer relationship management) system in which the institution can disaggregate customer-level information from the lending process and ultimately build a comprehensive, 360-degree digital view of individual customers over time.
- Strategy — ensuring the business is ready for scale from a strategic and operational perspective. This includes data and channels strategy, customer segmentation and understanding, and process reengineering. An essential step in building digital readiness is taking stock of current processes and identifying opportunities to streamline and leverage data.
To quote J.R.R. Tolkien — “the road goes ever on and on…” — but by keeping this framework in mind, combined with a Bezos-like obsession with customer needs, financial service providers can position themselves for a successful digital transformation.
This post is part of our series on digital lending.
Accion has developed many tools and resources to support FSPs in these first critical steps to build digital readiness, including a case study on the use of DFAs, tools on credit scoring and operational risk management, and a guide on developing the operational capability and infrastructure required for the strategic use of data.