In this opinion piece, Andrew Birmingham, the editor of B&T’s sister business site Which-50.com, says bank’s sluggish approach to digitisation has them ripe to be disrupted…

Here it is in such simple terms that even the board of directors at a bank can understand. It’s the Loan Book, Stupid.

Lending constitutes one third of the revenues of a typical retail bank, but recent analysis by Bain & Company and SAP Value Management Center finds that “…most banks have digitalised only fragments of the process for marketing, selling and servicing loans.”

That’s basically an open invitation to disruptors.

The finding is contained in a new report called “Retail banks wake up to digital lending” written by Bain analysts Richard Fleming and Joe Fielding.

“New digital entrants, ranging from financial technology start-ups to incumbent retailers and telecommunication providers, have spotted the opportunity, and are attacking thin slices of the lending profit pool,” they say.

And they note that Fintechs have proven particularly adept at providing a better experience for often underserved parts of the market. While they don’t say so explicitly the implication is that banks are paying the price for taking customers for granted.

“The fintechs also are creating new models to make lending decisions, source capital and service loans. Often, they can offset at least some of the scale benefits of large banks with simpler digitalized processes. In some instances, they enjoy a regulatory arbitrage; Prosper and LendingClub source funding in a way that requires less capital to be held on their own balance sheets.”

The authors caution that banks need to accelerate investments in digital lending or face a material decline in profits and loss in market share.

The Bain report echoes earlier research and analysis by the likes of McKinsey & Company, and Macquarie Equities. Indeed 18 months ago Macquarie warned that Australian banks are set to lose up to a third of their revenues, as dotcom giants like Google, Paypal and Alibaba muscle their way into the payments markets and use their superior customer understanding to disintermediate the incumbents.

And looking at the Bain report’s assessment of key digital metrics in retail banks around the world, its hard to believe matters have much improved.

Among the findings of the study;

• Most banks lack digital cross-selling expertise, with the average number of loans at just 1.1.
• Banks spend only 18 per cent of their marketing budget on digital initiatives.
• Some 14 per cent of simple loans and 36 per cent of complex loans require rework.
• All of the above translates to mediocre combined annual growth in loans, at 3 per cent for 2011 through 2014, and flows through to cost efficiency metrics.

“Across all countries, most banks’ capabilities fall far short of their own aspirations,” say the report authors.