The financial services industry is undergoing massive changes. Every day we see new products and services being launched in the areas of payments, investments, insurance, et cetera. And the credit industry is no different.
Our team had the gut feeling that in the area of B2B credit services a huge opportunity lies. To validate this hypothesis, we followed our proven methodology and did extensive research in the area of credits.
Based on this research and interviewing multiple industry experts, I was able to get a better understanding of:
- Forces changing the industry's dynamics
- Which processes are most time-consuming
- Approaches incumbents are taking to cope with these changes
Because we want to contribute to the industry, I bundled all insights in a comprehensive report. In this blog post, you will get a brief summary of the key findings.
Why traditional credit providers should act
Operational costs for credits are enormous
On average the annual operational cost of a credit is 1,2% of the loan amount. Given the €11tr of credits that is outstanding in Europe at the moment, this means European credit providers pay €132 bn per year to close, service and collect credits.
"European credit departments, a €132 Billion cost center."
According to Accenture (2014), this cost has quadrupled the last decade. This enormous increase is mostly due to increased regulation (KYC, MCD, CCD,...), increased customer expectations and of course the "credit crisis aftermath".
Margins in the credit industry are decreasing
Like in all other business lines of financial services, revenue and margins are decreasing. According to a study performed by McKinsey (2015), the margins in the credit industry will significantly be reduced by 2025. For consumer credits an estimated reduction of 60% is foreseen, for SME lending the decrease will be around 35%.
"Margins and revenue will be decreased by new entrants, digitalisation and automation."
What traditional credit providers can do
These two elements show us that it's time to start looking at operations differently. Traditional players are following different approaches (or a combination of approaches). The most followed ones are the following:
- Re-platforming: starting from scratch with a new core system
- Robotics process automation (RPA): automating processes by putting a digital robot on top of a legacy system
- Partnerships with Fintechs: collaboration with Fintechs to outsource certain elements of the value chain
However, most experts tell us that these solutions aren't everything. Re-platforming is risky and comes with an enormous cost, RPA is a short term solution that is not sustainable, integrating with multiple Fintechs that each cover a certain sub-process becomes too complex over time.
Outsourcing, the next frontier in credits
In the long run, credit providers should start looking at outsourcing their operations. This can be done by traditional bricks-and-mortar outsourcing providers, however all experts point towards fully digital outsourcers. Digital outsourcers cover the entire value chain by providing library of dedicated API's to its customers.
The outsourcer can for example provide an API for credit scoring, an API for early prepayments, an API for ESIS-generation and so on. Given the digital nature of these business, the costs are often significantly lower than traditional outsourcing partners.
What are your next steps?