Online lending marketplaces and the elephant in the room

By Marketing - IDEALINVENT

(Image credit: Guardian)

Peer-to-Peer Lending is an online loan dissemination method that challenges the approach traditional banking institutions take towards credit lending. Instead of extremely time taking procedures stipulated by a bank or a credit institution, you can easily obtain a loan through the P2P platform online. The platform allows, lenders and borrowers to directly interact and discuss loan terms. Typically, the transactions happen between two individuals.

The growth of the P2P sector is largely due to the fact that alternative lenders are offering innovative and competitively priced loans that are easier to obtain. Filling up a simple online form can make you eligible for a loan in just a matter of hours. The high interest yield is now attracting more and more institutional lenders to this field. P2P platforms are seeing a high influx of traditional lenders who are looking to cash in on the attractive interests that this platform can yield. With the availability of both traditional and alternative lenders on a single platform, the definitions of P2P are changing fast. P2P platforms are now more popularly known as Online Lending Marketplaces.

This marketplace is ideal for small and medium business owners and individuals looking for quick unsecured personal loans. SMB owners need not jump through hoops to get a competitive loan anymore. The lenders on the marketplace make use of algorithms to analyze and predict the financial health of the business. Current cash flow statistics and data on the performance of the business goes a long way in judging the potential of the borrower. The USP of the Marketplace lending model, however, is that borrowers can compare and shop for loans on offer from a variety of lenders. This effectively cuts out on of the major problems faced by lenders and borrowers alike, the search costs. Marketplaces generate revenue by charging a small fee from borrowers who are sanctioned a loan.

But what about the elephant in the room? When do the regulators step in?

The Online Lending Marketplace has grown leaps and bounds over the past few years. However, it still has a lot of catching up to do. Traditional lending operations still handle an exponentially higher volume of loans. With the rate at which the Marketplace is growing, industry analysts predict that it will be trillion dollar industry by 2025. This kind of extensive growth may come at a price, some analysts fear. Those who advocate regulations argue that with this model SMB's may become the next sub-prime lending crisis if left unchecked. There is also the question of transparency. Lack of a regulatory oversight means that the online lenders may not be accurate and transparent always.

On the contrary, a majority believes that imposing regulations on the Online Lending Marketplace at this stage might stifle innovation and the progress of the model as a whole. The new entrants are popularly being seen as disruptors who are here to replace an inefficient and outdated marketplace. Early and aggressive regulations at this stage will only serve to cut off the innovative access to funding that SMB's are currently relying on. Traditional banking institutions will tell you how strong post-recession regulations have cut their wings. Banks fear that they may no longer have the competitive edge over the new entrants.  

The Online Lending Marketplace is crucial to the survival of Small and Medium businesses. It is important to sustain this model by giving it ample space to grow. Post-recession times have seen a great number of opportunities open up. And the way that SMB's can compete in this market is by being able to get access to capital when they need it. Innovation and the onset of technology will continue to drive progress in this field. However, not having any regulations is just as harmful as over aggressive regulation. Any central regulatory body that would take up this responsibility would need to try and strike a balance between the two. The Marketplace needs to be given ample room to grow with just the right amount of oversight and regulation.

Six reasons why cloud banking will transform banking in the future

Managed services for retail banks and financial institutions

SaaS is the future. It is hard to imagine a future where financial systems can carry on using the outdated legacy systems. The rise of technology and a new generation of consumers has exposed the vulnerabilities of banks and other traditional financial services. Post recession regulation imposed on banks is also another major factor that opened up the doors for disruptive players. Banks are losing a large chunk of their business to these disruptive challengers, and will continue to do so until they do something about it.

Financial institutions are still playing a game of catch-up with regards to technology. This rapid growth in tech has seen software taking over much of the traditional banking operations. The utility of banking is gradually being replaced by software. Banks' apprehension to embrace software has majorly been due their concerns about security. However, this is turning out to be inconsequential to the modern consumer. With almost every retail product only a click away on their smart phone, consumers have began to look for such ease of access in all their interactions. Moreover, no consumer today is interested in a visit to the bank or a personal interaction.

Traditional financial institutions world over are under pressure to be more efficient. Legacy systems are being scrapped for leaner and more snappy offerings. IT spending has to be calculative and efficient. The consumer demand is gradually driving banking institutions towards the cloud. However, most of them are still apprehensive about giving up on valuable customer interactions. Banks need to get over the fact that they are not going to be in control anymore.

At this point, if you are still not sold on the cloud banking idea, let us try and list out the various advantages that arise out of adopting a SaaS implementation.

1. Reduction in costs: This is a bit of a no-brainer. Once you discard the clunky legacy systems, you have significantly reduced your spending on upgrades and maintenance. Cloud operates on a Pay-on-demand model. Having your applications on a cloud lets you bring down IT expenditure and focus the corpus saved elsewhere on areas that require improvement.

2. Flexibility and scalability go up: Volatility in the market has always been a concern for banks. With the cloud model banks can respond to the demands of technology and the consumer almost instantly. Being able to scale up or down rapidly will give banks that competitive edge that they need.

3. Increased efficiency: The standardized operation due to cloud will ensure that integrating new applications and technologies in the future is easier. Banks can now drive out complexity.

4. Faster customer service: Services and bundled products are much easier to develop on the cloud as software/hardware procurement delays are effectively eliminated. Computing power can be boosted to suit the consumers demands and access to data is as simple as logging in from your browser.

5. Client relationships are much more enhanced: The availability of so much data and big data analytics means that banks can now understand their customers much better than before and provide them with products that suit their needs. These valuable insights make customer service much more personalized This goes a long way in generating good will for the bank.

6. Clients are closer to their clients: Payments between sellers and buyers are simplified with transaction banking. Current cross-platform payment inefficiencies are effectively removed by bringing both sellers and buyers on the same platform. 

The customer service metric has changed drastically, consumers no longer judge the services of banks based on interactions. Service quality is purely about providing the consumer easy access to his banking with the least possible interactions. The future of the banking industry is not yet very certain, but the best bet for anyone right now would be to invest some time to look into SaaS. Greater connectivity to banking minus the long interactions and waiting is what disruptive challengers offer consumers. Banks cannot really afford to lose valuable business on something that is in their control to change.

SaaS Banking does give rise to several concerns. Please check out our perspective on these concerns in a previous article on banking on a cloud model.

Are There Security Risks with SaaS Delivery of Core Banking Services? 

BIAN – the Banking Industry Architecture Network - A banking language for everyone, by everyone.

By Sunay Mruthyunjay, Chief Technology Officer - IDEALINVENT

(Image credit - BIAN)

“The cost of integrating applications is often several times the cost of the application itself”. This may sound like an all too familiar grouse in the IT world across domains. Despite integration costs reducing significantly, it’s still a bank’s significant area of IT cost and continues to also be challenging technically. With the emergence of standard ways of integrating, things are a lot better now than before. From a point-to-point integration, banks have largely chosen and implemented middleware that aids integration via standard protocols like web services, irrespective of the genre of the individual applications.

While the protocols are standardized, the processes are still esoteric and this leads to costs getting driven up depending on the fit of a particular system to the processes prevalent in a bank. Customizations are inevitable but what if they drive up costs and negate a significant portion of the benefits accrued due to standardization in integration?

Is there a magic potion for all these complexities? Are there any well laid out standards defined that can cater to all possible scenarios of different types of banks and their systems. The answer may well lie in BIAN – (the Banking Industry Architecture Network, www.BIAN.org) and its service landscape definition.

From the outset, the BIAN organisation has come together with BFSI stakeholders playing key roles in its deliberations – banks, IT system vendors and system integrators – all deliberating via a single platform to arrive at a commonly agreeable formal description of banking services. Through its well defined service landscape comprising of service domains and grouped into different business domains like Party Data Management, Product Management, Sales Management to name a few, BIAN has drawn up a very comprehensive service directory. Simply put, if all the stakeholders talk the same language, it makes integration a lot simpler. By taking an approach that is focused on services rather than the underlying technology, BIAN is defining a common language of sorts.

For a new bank BIAN standards can help in structuring the business, operations and systems in a well partitioned manner and help it measure each unit’s efficiency easily. It can also help banks to decide what kind of systems are needed to cater to their service requirements, what portions of the services should be supported by external service providers and also define the integration standards that should be adopted – thus making the choice of systems easier.

For banks that already have applications and operations in place, BIAN can help understand the overlaps between business and applications thus eliminating duplicity. It also helps assess portions of the business domains that are under-served and those that are over-served and balance them out with appropriate changes to procedures and systems. While doing all this, if the bank considers its services keeping in mind its end customers, it adds further benefits to such an exercise.

The beauty of BIAN’s service definition is that it focuses purely on semantics while keeping the technical definitions open. BIAN also focuses its definitions keeping in mind inter-application communication. This helps it to co-exist with other standards like IFX, SWIFT, ISO which differ from BIAN as they are more message oriented and focus on B2B communication.

With the pace of adoption of BIAN standards, banking systems could be finally moving towards a uniformly accepted definition of services that will also lead to a quicker and cheaper integration of applications. With new-age systems that are SaaS friendly, BIAN provides a unique opportunity for easy integration with on-premise systems. BIAN has the potential to also become a minimum criterion when banks choose an application which should be welcomed by all stakeholders.

Sunay Mruthyunjay

Sunay brings over 17 years of experience developing IT products for the banking industry into IDEALINVENT. He cut his teeth as a product designer and developer before moving into product implementation and delivery management. Notable achievements include being a key member of the first ever Indian led complete system replacements in one of the largest corporate banks in Japan and has been instrumental in several project implementations of varying complexities in Western Europe including a Payments and Core implementation in a leading Swiss bank.

Are There Security Risks with SaaS Delivery of Core Banking Services?

By Sunay Mruthyunjay, Chief Technology Officer - IDEALINVENT

(Image credit - Cloudvolution)

Are worries about the security of your bank’s data stopping you from considering SaaS delivery of core banking services? Do you feel it’s not worth the ‘risk’ even though the benefits, especially in regards to reduced cost and improved business agility are well proven? As CTO in a company that hosts ‘Banking Software as a Service’, it’s my job to consider and respond to all the perceived negatives of our B-SaaS™ offering and would ask you to consider the following points.

It’s human nature to avoid risk. In our decision making process, many of us consider different scenarios, evaluate risk versus rewards or benefits and then make a judgment call as to how much of risk is appropriate for a certain reward. So in the end, it boils down to balancing the risk and reward and this applies to any rational decision - be it our personal lives or matters related to business.

With this as the background, let’s try to analyse the number 1 perceived risk of a SaaS offering  - data security; This is of course the most significant risk that a bank gets exposed to with SaaS. Data flows through the internet, is stored in a location that is physically away from the bank and the bank cannot really control who gets access to its secure data.

To put this in perspective, let us take an example. Say you got some money; what would you normally do. Probably spend some and put the rest in your bank. It’s your money and you find it alright to leave it with a bank. The reason is, we know that it’s safe, probably also earns interest and most importantly, the bank knows how to safeguard my money better than I do (hopefully and in most cases!). The same money is available to you whenever you need it. You also trust the systems so much that you are fairly sure that your money cannot be withdrawn by someone else - thanks to the authentication mechanisms in place.

This ‘money’ security works - so what’s the big deal with data security?

Firstly, sensitive data of the clients, their personal identities and such others should be secured. Information related to products and pricing are equally sensitive. Last but not the least, the bank's strategic initiatives and goals, control measures and other operational procedures also need to be protected. If in the unfortunate case of a data breach, banks stand to lose a lot – most importantly credibility and that trust factor with their clients which in turn can lead to huge losses in business and revenues.

Thankfully, these fears need not deter a bank from ruling out SaaS. Technology today is well advanced to ensure mechanisms that secure data while being transferred. Complex authentication mechanisms and cryptographic techniques ensure data on the move is not easy to be hacked and deciphered. Data hosted on a public cloud is just as safe (if not safer) than that hosted on a private cloud or in-house on stack servers.

As far as data storage is concerned, a number of preventive measures can be implemented to avoid any data leakage. With a credible service provider, periodic security reviews or audits, third party assessment and certification, implementing ISO standards for managing information security are some of the easy means by which data can be secured in a SaaS scenario.

Having an information inventory with the appropriate risk measure associated with each item on the inventory list can help get a good grip on the information loss risk that a bank deals with from a SaaS point of view.

The other significant risk in a SaaS offering is that of integration. Typically systems that are on-premise have to exchange information between systems that are on SaaS. Apart from the usual complexities of integrating two systems, integration with a SaaS application poses additional challenges of dedicated bandwidth and security. Banks have to ensure that the SaaS application they choose has standardized ways of integrating that can co-exist with the other applications within the bank.

SaaS applications are getting smarter by the day. They allow a reasonable amount of customization to suit your needs without any intervention from the provider. The costs are extremely predictable and controllable. All the upgrades are automatically included and most importantly, the bank can focus on their core business with minimal diversion on IT systems.

Overall banks can reap significant benefits from a SaaS system without compromising on any security risks by acknowledging, assessing and effectively managing them, just as you do with any aspect of your life or business.

Sunay Mruthyunjay

Sunay brings over 17 years of experience developing IT products for the banking industry into IDEALINVENT. He cut his teeth as a product designer and developer before moving into product implementation and delivery management. Notable achievements include being a key member of the first ever Indian led complete system replacements in one of the largest corporate banks in Japan and has been instrumental in several project implementations of varying complexities in Western Europe including a Payments and Core implementation in a leading Swiss bank.

TO SaaS OR NOT TO SaaS: THAT IS THE QUESTION……

By Deborah Aubrook, Marketing Manager - IDEALINVENT

Whether 'tis nobler in the mind to suffer the slings and arrows of outrageous competition,Or to take arms against a sea of disruptors, and by opposing, end them? 

I hope my paraphrasing of Shakespeare doth not offend thee but it seemed to fit the purpose of this article. 

There is much talk in the BFSI sector about ‘unfair competition’ from upstart disruptors who are free from the encumbrance of regulation - disruptors who are stealing Millennials’ hearts & minds and potentially ‘stealing’ the banks’ future business. But this competition is definitely what the consumer wants, hence their success, and if banks are looking for a sympathetic ear, I think they will be waiting a long time! 

So how to deal with this inevitable competitive future, where banks could fade into insignificance if they ‘suffer the bows and arrows’ & bury their heads in the sand? Of course there are many options; you may choose product specialization, go branchless, transform to digital, become social media mavens, you may even, heaven forbid, look to collaborate with your competition for the good of the consumer. However, at the end of the day two things are essential for any decision you make to be successful – to be competitive you must have business agility and to be agile you must have the right technology. 

Business Agility is an agreed ‘pain point’ for banks and it isn’t something that can be achieved with bolt on tech to your already groaning legacy system. The right technology to support business agility is of course essential. The future of core banking platforms, as we all know by now is SOA, modular, API driven, preferably platform agnostic and with support from BIAN (www.bian.org) will also have a unified architecture. But of course the world of technology moves rapidly on and Software as a Service is the new Agile. Legacy transformation projects of the future will no longer be ‘full fat’ bloated in-house systems - why buy a license with a full stack at insane cost, when somebody else will provide it for you, maintain and update it regularly – for no cost at all and you only pay per use for the SaaS! And for those with data security issues around putting your Core operations on a public cloud you know exactly where your data is stored and how it is managed. All research suggests there is no more chance of a security breach with a hybrid cloud than on an in-house stack.  

The majority of decisions within the business are, at the end of the day, driven by cost. SaaS delivery of your core banking functions will reduce your costs by between 30-70% and take a lot of capital expenditure off your balance sheet. Of course, every bank’s requirements are different, but can you really afford to ignore that fact!? 

The day is already here where we can sit on our sofa and access everything we need on one screen by wi-fi via the Cloud – (even our SaaS based core banking platform can be accessed sat on the sofa via your laptop, smartphone or tablet, see www.B-SaaS.com for details) so how long is it going to be before your competition will also be Cloud enabled, and gain all the benefits that accrue – I’m afraid it’s inevitable! I can guarantee you that your new disruptive competition will be fully digital and SaaS based.

It is time to ‘suffer the slings and arrows’ and risk destruction or ‘take to arms’ and compete with the upstarts  – what will your choice be?!

Banks – Let the Fight Back Begin!

By Premkumar Bhagwatsaran, CEO - IDEALINVENT

Last week I wrote about the rise of new, disruptive financial institutions that specialize in only one thing but do this extremely well, just like smartphone apps – one click and your requirement is met. This specialization allows them to concentrate on the user experience and woo customers with their funky interfaces and frictionless interactions – something traditional banks with their multiple priorities, compliance and regulation restrictions find difficult to compete with.

However, all is not lost, it’s time to fight back! By learning from the success of these upstart companies and looking to trends in retail, banks can use their significant IT infrastructure and experience to fight back. Here are some tips to put banks on the right road:

Secure your Eco-system: Life thrives in a good eco-system. One of the important reasons for apps success is they focus on just what they do. This continues to be possible because of the eco-system provided by iOS and Android platforms, leaving them to focus on their offering. Our specialized financial institutions too need a nurturing environment that provides them with a banking platform eco system that promotes focus on their offering and allows them to be lean and efficient.

Scale vertically: in a retail business, it is better to be known to as many customers for 1 or 2 things rather than be known to few customers for a lot of offerings. These new financial institutions should establish themselves as specialists in a certain area (Lendo in Sweden is a good example in the credit segment) with a unique positioning and offering to its customers. Again, follow the apps – do just one thing and do it well.

Be efficient: An app that drains your battery or clogs too much memory is quickly ejected. These institutions should be wary of this and remain efficient in their cost/income ratios, ensure good Net interest margins (yes it is possible) and provide higher return on equity. They would do well to look at sharing the cost of banking platforms to ensure day to day processing and regulatory reporting while retaining their edge on pricing their risk to translate into benefit for customers.

Be ubiquitous: why do people use so many apps in their mobiles? Because they can! Financial institutions have to learn that as long as your customers can reach you in an instant and you are there to capture the business moment as it happens – you are remembered and rewarded. Therefore investing in technology and an agile platform to be present when and where your customer needs you is a must-have.

It is said that the average banking relationship lasts longer than a marriage, but that is changing. Customers, especially Gen Y, are not as loyal as they were and, unlike having only one spouse, you can now have many bank accounts that cater specifically to your different needs and change them frequently! And if you wonder how customers are going to handle the complexities of multiple accounts - savings, deposits, transaction accounts, mortgages etc., across different financial institutions, never mind – where there is a need, there will very quickly be an App for that! 

The Rise of the Apps – Will Banks take the Hint?

By Premkumar Bhagwatsaran, CEO - IDEALINVENT

Over the past decade we’ve seen a smooth and rapid evolution from complex do-it-all applications to slick ‘1 click’ apps.  The most successful apps are those that perform 1 or 2 activities, but they do it so well they become indispensable. We now have apps that can enhance every part of our lives – an alarm app to wake you earlier if the weather is bad, a ‘design & order your own pizza’ app, you can even learn French – just from clicking on an app.

We also have an app that literally does only one thing – says Yo! It’s been called ‘stupid’ by US TV host Stephen Colbert, but more than 300,000 downloads in 6 months and a $1.5 million VC investment says otherwise….

The rapid penetration of the smartphone has facilitated a quantum leap in application design. A 2012 study by Nielsen mentions that US smartphones had an average of 41 apps installed back then, this number could well be above 50 by now. Taking into account that the average American spends over 60 hours a week ‘using’ their smartphone, that’s a lot of potential app exposure. Take a test on your smartphone, how many apps do you have – and how many of those do you use? It seems we don’t mind the number of apps as long as it’s well within reach of our fingertips, does what it’s supposed to do and does it well.

But this blog is not about apps, it’s about banks! It’s about how we’re moving from big do-it-all providers to small, specialized ones - as long as the specialized ones do what they do extremely well and are available, just like apps, at our fingertips. This is beginning to play out in the financial services landscape where customers in much of the developed world are moving from big universal banks to financial institutions with a much leaner, customer focused and dedicated approach to the services they provide.

A barrage of these new, small, specialized financial institutions are vying for headroom by carving unique positions across the UK, Nordics and Northern Europe and this could well reach much of western and southern Europe once confidence returns to the market. Some of these players focus on the second tier of credit to personal customers (whom the large financial institutions won’t lend to), others on the growth of small businesses by enabling P2P platforms for SME customers to raise funds. Yet others focus on deeper credit scoring models that evaluate credit for mortgages, not only by taking into consideration property values, but also customer behavior, family status and by employing unique profiling methods to price the risk better. 

A clear indication of this shift is in the Nordic region, with the large movement of deposits from the big 4 banks to these smaller, but better yielding, disruptive financial institutions – the big 4 are the biggest losers because they are trying to be all things to all men, the smaller ones the biggest gainers because they’re lean, agile, digital savvy and focused. 

But is this rise a flash in the pan? Will the big banks strike back? Can these institutions hold out to win the day or will competition drive them to extinction? 

In next week’s blog I will explain the 4 major ways that banks can take a cue from the ‘Rise of the Apps’ to help them address the current Fintech climate and conditions that are confronting them. 

Premkumar Bhagwatsaran

Premkumar Bhagwatsaran is the founder and CEO of IDEALINVENT which provides product innovation in the BFSI software space. With more than 17 years of industry experience gained by working for leading banks and banking software companies, he leads the team from thought and conceptualization of products to implementation.