Sponsored: Delivering the lending business of tomorrow

Australian lenders need to balance regulatory and compliance risks with meeting their customer needs while also focus on emerging technologies. Nucleus Software and AB+F brought together leaders in the industry to explore how the banking industry is adapting to the new lending environment. Christine St Anne reports.

Sudeep Verma, Global Head – Lending, Nucleus Software
Daragh O’Byrne, VP & Global Head – Marketing & Alliances, Nucleus Software
Jatin Sharma, Business Development Manager - Australia & New Zealand, Nucleus Software
RP Singh, CEO & Executive Director, Nucleus Software
Andrew Stabback, CEO, AB+F
Chris Watts, Head of Credit, Heritage Bank
Damian Towler, Digital Domain Architect, CUA
Laurent Chaussende, Senior Manager Operations, RACQ Bank
Tracy Ingham, Senior Manager Application Development, Testing and Support, People’s Choice Credit Union
Donald Farquhar, Lending Transformation Program Manager, Bank of Queensland

Customers are expecting more as technology moves even faster. How long will it be before autonomous digital assistants powered by AI (artificial intelligence) chips on smartphones can negotiate loans on behalf of consumers, based on their likes, preferences and desires? How long before these assistants can offer new products based on their anticipated needs?

At the same time, overcoming legacy will remain the key theme for 2018 and beyond. While innovation leaders like Elon Musk have made their career on betting huge on innovation and technology, banks can’t afford those risks. Their DNA is different. They hold real people’s finances in safe custody and they take those responsibilities seriously. So how can banks balance these risks while innovating. With so much focus globally as well as domestically how can the ideal digital process meet the extraordinary demands of the customer whilst at the same time managing the ever-increasing regulatory minefield? Leaders in lending discussed and debated these themes at a Nucleus/AB+F roundtable in May. The key is to learn from others, following fast(er) and better, while addressing today’s key problems and keeping their businesses running in the face of growing challenges – competitive and regulatory. To do this banks and financial institutions will need a Lending IT platform to enable them to thrive through evolution in the face of disruption.

The roundtable participants were under no illusion that the lending industry has come under unprecedented scrutiny following a number of reviews into the sector. Nevertheless, the focus should be on meeting the lending needs of today’s and tomorrow’s consumers. Nucleus’ O’Byrne sees a world where the innovations seen in science fiction movies of the past are now a reality – for example facial recognition and artificial intelligence. “As a result of those kinds of technologies, entire industries have been upended or completely transformed. Others are in the process of being transformed,” O’Byrne said. Competitors such as the fintechs are coming into the sector quicker and faster than ever before. When artificial intelligence becomes mainstream it’s going to be even more challenging. Consumers can now deploy facial recognition on their iPhone. Some consumers are even applying their iPhone apps to access their ATM. It isn’t the stuff of movies anymore. “When first introduced into the landscape such techniques used to be very expensive, very hard and very complex. The world of tomorrow is only limited by your imagination, it’s not limited by the technology that is available. However, this ‘world of tomorrow’ could be held back by the challenges posed by legacy systems,” he said.

Digitisation is all about operational efficiency, getting your core systems right, your legacy in place and a lot of companies have not got that right, RP Singh, Nucleus Software

For Peoples Choice’s Ingham, challenges are around getting the right systems as the business grows its membership base across Australia. “We looked at business cases around our lending systems, for example, but we realised we needed a bigger picture digital and technology roadmap so our core systems could move forward and integrate with new systems. So, we’re going to need to focus on those systems that allow us to offer our members a much better experience while reducing costs and complexity,” Ingham said. “At the moment, we’re reviewing all of our systems to ensure we make the right investments to meet the current and future needs of our members.”

CUA has already embarked on a transformation program featuring core banking which began over five years ago. After many mergers, the credit union had several legacy lending platforms that also required a refresh. “This is taking longer than expected because we attempted to leverage incumbent technology components and integrate a new platform in-house,” Towler said. Following a review, it was clear the credit union could not fully replace all its platforms with a purpose built platform. “Were we overly ambitious for trying to build our own thing? The pretty clear answer was, yes,” he shared. Now the business is looking at software as a service, with a commercial off-the-shelf offering to help it transform its myriad of platforms and improve time-to-yes. “That’s one option. The other hotly debated topic at the moment is how business process outsourcing might fit into this, if at all,” Towler said.

According to Nucleus Software’s CEO RP Singh, banks and financial institutions are struggling with how to identify the differences between digitisation and digital. “These are two totally different things. Digitisation is all about operational efficiency, getting your core systems right, your legacy in place and a lot of companies have not got that right,” Singh said.

An untapped resource

He echoed views expressed by a professor from the Massachusetts Institute of Technology, who talks about the challenges of going digital. “If digitisation is not in place, going digital is going to be very, very difficult. Just putting a mobile app in place is not enough unless your processes and your core engines can support you with differentiating capability, Singh said. “Unfortunately going digital is like setting up a new business model. The cost is often difficult to justify.”

His colleague O’Byrne also touched upon the themes of data and scale. “Today it is often cited that data as we know is now the new black. It’s the new coal. It’s the new oil. But scale will be key if this data is to be effectively commoditised,” he said. It was a challenge he put to the roundtable.

According to Heritage Bank’s Watts, we have a lack of scale when it comes to data. “The mutuals sector as a whole have very clean balance sheets and finding richness in our data to develop score cards, for instance, is incredibly challenging. I’ve spent three years in Vietnam where we had to throw all the data away because it was too dirty and I come back to Australia and get a job at Heritage where I found the data useless because it’s too clean,” Watts joked but subsequently raised a serious point.

What about collective action in the mutual sector in achieving scale? “We could clump our data together and developed a mutuals’ score card. That could be more beneficial to us as industry than each of us trying to cobble up something independently. I think it’s a viewpoint we should consider because we just don’t have the depth of the data. It’s a problem and I think it’s something as a collective we need to talk about,” Watts said.

We looked at business cases around our lending systems…but we realised we needed a bigger picture digital and technology roadmap so our core systems could move forward and integrate with new systems,” Tracy Ingham, People’s Choice Credit Union

BOQ’s Farquhar touched on the issue of data commoditisation in a world of open banking. “I think that’s when things will start to change if a value on data is applied externally, but that’s already a consideration internally as well. I’ve often looked at this hypothesis for our own investment cases. Traditional investment cases are driven by benefits around costs, interest margins from growth which are the traditional drivers for lending. But the hypothesis being what if the rich data that we get from a lending application, internally, it was able to go into a data warehouse, a big data processing, and if that data was clean in terms of how it’s collected via automation and business rules and we were confident with that data, what price could that be worth internally to the marketing team, to the sales teams, to the risk team” Farquhar said. Here, businesses can start to put a price on data as a commodity.

For example, your investment case for innovation in lending will always have an element relating to net interest margins via growth underpinned by better loan originations as well as cost reduction flows from the automation that comes from new platform capability. However, with commoditisation of data internally, there is also a value drawn from 10,000 applications becoming 20,000 applications. “Then you can start to quantify that volume with the value of the data it provides as an additional benefit line in the investment case. That’s in lending obviously. That might happen across the entire banking domain in terms of what we offer, but that’s where I think, again from my hypothesis, that I’m looking at to inform investment cases and help fund further innovation. Data, I think, is an untapped resource for banking. We do have a wealth of really good information. Other digital companies, such as Google are already leveraging their data and I suspect why they are already playing in the payment space because they know how rich the financial services data is as a commodity,” Farquhar said.

CUA’s Towler would also like to see the mutual sector share their innovations on processing of the data. A key step would be assessing what are the best methodologies available in the industry. For example, CUA has chosen the Data Vault method because it gives the business a transparent understanding of data history and is readily extensible.

In fact, data warehouse automation software is a big focus for CUA and an initiative, CUA has “invested heavily into”. CUA has taken a world leading position on this with Towler presenting on the topic at a global data summit in Denver in November last year. “I can’t tell you the importance of what I would call little data. Big data is great. It’s got a niche purpose, but people have spent a great deal on big data without commensurate return. For many, ‘big data’ is in the trough of disillusionment. But if you actually invest in automated little data and match member data properly, it becomes very rich. You can then apply this data to members in a mass personalised way at the point of interaction and make their experiences both effortless and empathetic,” Towler said.

Towards digitisation

The discussion refocused back on justifying an investment in a full digitised strategy. For BOQ’s Farquhar it starts with breaking down the status quo. That is the old traditional empires of assessing a deal on a subjective basis. “Banks want consistency and that comes with the automation and algorithms available via new technology. We want that to give consistency in how we meet our own internal obligations whilst at the same consistency in meeting our obligations to customers and the regulators. However, with that consistency comes reduced friction in our loans processing, which means the customer gets a better experience also. But to do that we have to break our own status quos and that is the old and traditional empires that we run across the loan lifecycle,” Farquhar said.

For Watts, it is important that when it comes to balancing innovation with the investment trade off, the customer must always be in focus – a virtue he believes underpins the mutual sector. “I’ve only been in the mutual sector for eight months so it’s all quite new to me. But I think there’s a value that we have as a sector that we can’t lose is that customer satisfaction scores remain,” Watts said “You will still see that mutual banks top customer satisfaction surveys. We’ve got to make sure that the things we’re doing right don’t get lost through digitisation.”

The people layer could be your strongest offering that is complimented by emerging technology, not necessarily replacing it,” Donald Farquhar, Bank of Queensland

BOQ’s Farquhar also noted the importance of keeping the people equation in any digital strategies. “If you’re under pressure with your cost to income ratio that’s where you might be tempted to remove that service buffer, between customer and legacy process and/or systems, in doing that you risk exposing the customers to the true experience. The people layer could be your strongest offering that is complimented by emerging technology, not necessarily replacing it”.

As highlighted earlier, the mortgage industry has been under pressure with responsible lending also in the spotlight. The Nucleus team including Singh and Verma spoke about similar challenges offshore. They both spoke about the lack of control and absence of technology which has given rise to scams in Letters of undertaking. Letter of undertaking is a form of bank guarantee that allows a bank’s customers to raise money from another Indian’ bank’s overseas branch in the form of a short-term credit.

CUA’s Towler noted that businesses like his have been careful with responsible lending and therefore are not hit by such scams. However, he pointed out the broader issues in the industry – a key theme being tackled at the royal commission. “Mutuals are all about members. There’s just a very strong heritage of that. I’ve worked for the big four and I’ve worked for a bunch of mid-tiers and it is actually quite different. It’s quite a different culture,”
Towler said.

Towler acknowledged that Australian banks were considered ‘safe harbours’ during the global financial crisis. However, in a sense this was a disadvantage as irresponsible lending practices and harsh loan enforcement was left unchecked. “It has actually come back to bite us. As the Royal Commission has revealed, since 1991 the banking industry’s focus has been trending towards sales and productivity, while risk seats at the table have been diminishing. If we were more exposed in the GFC, then maybe our frameworks would be better enforced,” Towler said.

The role of AI

However, BOQ’s Farquhar did take lessons from the GFC as an observer of the securitization market. It helped inform much of his thinking in designing a better program in delivering loan originations. “What I actually see coming is a better standardisation in how all banks capture and consider customer information which will only make it easier for programs such as ours to build and deliver new lending platforms and processes” Farquhar said. For example, we are already seeing a level of standardization emerge on living expenses.

Here Towler believes AI can play a role because machine learning will have the ability to look at different documents and make a more accurate assessment of loan applications. “I think that will change everything”. Nucleus is focusing in this area. According to Singh, AI will also play a key role in payments, for example identifying suspicious or
fraudulent activities.”

Partnerships are of course key to innovation. The participants explored issues around achieving a balance between working in an ecosystem of partnership while maintaining control around compliance and regulation.

It’s a similar approach taken by CUA’s Towler. “We tried to do this homegrown thing and it just got really hard. Now we’re looking at partnerships because we are recognising that we are incredibly dependent upon external partners no matter which way we go. Another issue raised by Towler is around privacy particularly the inclusion of personal information in a business like lending. What happens when there is a very significant breach, or even when a third party could steal data. These are risks that need to be considered but Towler still supports partnerships. “External partners, absolutely. It’s time to say yes to the wonderful things such as automation and scalability. But this needs to be balanced with privacy and security concerns,” Towler said.

The general consensus among the group was that vendors should be seen as partners underpinned by governance and security standards. It is also easier to open up discussions with partners – rather than simply vendors – in areas of emerging risks.

Legacy challenges remain a consistent theme that was highlighted earlier in the roundtable and it was a topic that concluded the discussions of the day. BOQ’s Farquhar sees challenges around moving to the new from the old way of doing things. “People are comfortable with the legacy technology. So, whatever you put in place there has got to be a strong emphasis on change. If you’re going to maximise the value from the new technology versus the legacy then people need to embrace it,” Farquhar said.

It was a reason why BOQ moved away from “the big bang approach” to transformation. Instead BOQ has drawn up a roadmap and compartmentalised its scope and priorities. “From my experience, and from what I have learned from technology is that you just can’t plug and unplug it and solve your problems with a flick of a switch. You have to make sure that you’ve got a journey mapped out from current state to target state and that you keep stress testing that journey. I have stress tested mine on a six monthly and 12 monthly basis and I do that with my executives to ensure it is still relevant and that we are all still committed to it,” Farquhar said.

Towler acknowledges the role of mobile devices as not only transforming the way banking is now done but how it has created a new service-orientated architecture model. “It’s only in the last few years that we’ve invested heavily in that API-based micro-services integration capability. We have resisted in-house development of applications. But now we have developers working on this loosely coupled model,” Towler said. He also sees a “golden age coming with cloud and software as a service. Amid these trends, the business is still struggling with the “sizeable problem” in legacy systems around hardware, operating systems, and middleware. “We are now facing a significant technology refresh project to keep all these systems up-to-date with challenges around budget and people resourcing. However, I believe we are not unique.” New chief executives and management teams could help tackle legacy, a point alluded to by Heritage Bank’s Watts.

Similar to the experience at Heritage, Ingham also acknowledged the role a new CEO and executive group could play in shifting from legacy technologies. “There’s a real shift about where we want to be including a focus on what services we should be providing our members in the future. These members’ kids are growing up, they are generating their own income. They will need home loans. We need to rethink our systems today in order to provide for the needs of these new members,” Ingham said.

Tackling legacy

There could also be a certain comfort in remaining with legacy systems, particularly for larger organisations. Nucleus’ Singh has seen too many businesses not wanting to touch their legacy systems because of fear of what could be exposed. “It could expose some very big skeletons. I can tell you that in the 100 plus migrations that we have done there is not even one migration where data was clean. When I mean data clean I don’t mean defaults, I’m talking of loan outstanding matching the general ledger or loan outstanding matching the payments which have been received, they just don’t match. And nobody wants to take those big decisions which might involve write-offs, so they let the skeletons lie,” Singh said. However, it is “time to bite this bullet,” and Singh urges businesses to approach legacy transformation as a “business process and re-engineering product”. “It’s not a technology transformation system. It has to be a business-driven decision. Start afresh. Prepare for new business thinking. That’s the only way it can happen,” Singh said.

Ultimately transformation can be an enabler for businesses and broadly discussions centred around the importance of ensuring the engagement with customers in order for technology to be an effective enabler for any organisation.

From the experiences Towler shared at the roundtable, he admits the business has “learnt the hard way”. “If we look at all the little guys, all the little digital banks coming into the market. They don’t have the legacy systems, but they have to play by the same regulatory rules. For companies like us I think one of the things we should think about doing is spinning off little businesses to compete with ourselves,” he said. In fact Towler sees a “massive threat” from the big players who can afford to invest in
the technology.

It’s a point that was picked up by Watts. “What’s interesting for us over this side of the table is the issue of capital. Investing in technology uses capital. To grow uses capital. We only have one source at the moment. Potentially there’s a new source coming. But with that are new rules attached to capital raising that we don’t have at the moment. I think that’s going to be the interesting thing for us,” Watts said. He notes that if the Hammond Review comes out and the sector gets access to capital instruments, will be a game changer for a business like his. “Either we say no we’re not going to play in that space and we’re going to say stay little mutuals or we’re going to say we’d like to be bigger mutual. To do that we need technology and we still have to grow so we can access the capital. I think that’s going to be an interesting proposition for the mutuals sector for those who do go down that path and those who don’t,” he said.

BOQ’s Farquhar emphasised the importance of validating the approach to innovation and having organisational context on what problems you are trying to solve. “That is standardising some of the core activities of lending, including our policies, our obligations and our conversations so that what we build is scalable for all customers and all channels. Making sure they’re done at the right times at the right point. More than anything is that technology is accelerating what’s available but also there’s a wealth of it available, so it’s picking the right solution. If anything, it’s harder to choose what you need. But I think validating those solutions is easier with context to the problem and that started from my point of view in 2012 when we commenced our lending transformation program at BOQ,” he said.

Nucleus’ Verma is now seeing technology start to become a generator of new ideas. That includes innovations such as artificial intelligence. “A lot of companies have started investing and putting up a business team that uses technology to generate ideas. That has built a kind of “ideation box” inside that organisation. This is one of the trends that we are seeing across the globe,” Verma said. Echoing the point, he made at the start of the conversation around the growing role of machine learning and artificial intelligence, Nucleus’ O’Byrne said such innovations need large quantities of data in order to be taught. But where can organisations source the huge quantities of data?

“We talked a little bit earlier on about the need to take the data that we’ve got as lenders and find ways using data science in order to monetise it and generate new ideas. The challenge now is how do you move beyond just that pure enablement function of technology and then actually use it to completely transform your business.”

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