It’s no longer news to anyone in the banking industry: Digital transformation is a given for any bank planning to thrive.
In the European banking world, digital transformation has quickly gone from an advantage to a necessity; but the road to digitalization is proving to be challenging. This reality is clear in a study from the European Central Bank from earlier this year. In it, the ECB reports that while 88% of significant European institutions have some kind of digital transformation strategy, the nature and maturity of those plans vary, with many struggling to develop Key Performance Indicators (KPIs) to monitor digital progress and quantify the impact of digital transformation on their profitability. Nowhere is this felt more keenly than in the development of digital lending and finance products.
This is not for lack of effort. Engineering and IT personnel at the banks are just as keen as their counterparts on the business side to bring new digital products to the market. However, they (the engineers) are faced with two daunting challenges, one technological and the other cultural: their legacy systems, and long-established internal processes. To compound the problem many banks have a bitter history of deploying point solutions only after too much effort, time, and money has been spent.
To be quite blunt, any attempt at digitalization will fail that does not embed itself in the culture and technology of the bank. Any new system should aim at enhancing established processes and technology, and not pretend to switch them out. Furthermore, the answer to the digitalization puzzle cannot come in the form of multiple-point solutions, each one dealing with a single aspect of digitalization; the more single-purpose solutions that are deployed the more difficult it becomes to orchestrate their functionality.
What is a Core Lending Platform?
A core lending platform can manage the entire lending lifecycle, from origination to servicing to collection. This very notion can make a bank’s management team nervous as it gives the impression that it replaces the entire lending infrastructure. That implies risk. Effort. Expense. Distraction.
A core lending platform must be designed to integrate with the bank's existing systems, from CRM to ledger to customer support and beyond. A core lending platform should provide a unified and flexible approach that can support various types of loans, such as personal loans, business loans, mortgages, and auto loans. It also automates the processes of credit scoring, underwriting, approval, disbursement, repayment, and reporting.
To be clear, most banks do already use some type of electronic system for lending; even though it may involve plenty of manual paperwork, let’s not pretend we’re still back in the 1980s. But this is where the terminology is important: A core lending platform is different from traditional lending software which is often siloed, rigid, and outdated; software developed a decade or two ago cannot — almost by definition — handle the complexity and diversity of demands for modern lending products, such as peer-to-peer lending, microfinance, and alternative lending: It will also lack the features and capabilities that customers expect, such as online application, instant decision, and mobile access.
These paradigms and technologies didn’t exist when the software was written; tacking them on today is often an overwhelming task if not a complete non-starter.
Moreover, traditional lending software — even without these new features — is costly and time-consuming to maintain and upgrade, as it requires extensive customization and integration with multiple systems. The IT expense alone for on-premise software solutions like these, when compared to cloud-based infrastructure, is well known and almost on its own a justification to upgrade.
Top 5 Technological Requirements of a Core Lending Platform
Now that we understand the drawbacks of traditional lending solutions and the need for a technologically advanced alternative, we can look at a core lending platform's definitive features and corresponding benefits. As you review this list, an interesting fact will be clear: you cannot prioritize this list – each one is simply critical to a bank’s success for today’s clients.
Reusable - It must be able to share components and functionality across applications. This will reduce time-to-market and management effort. [add]
Configurable - No code and low code are the key terms here. Authorized product and risk personnel should be able to make changes to decision making, flows, and other aspects of functionality on their own without depending on change requests from the software vendor.
Modular - Individual components cannot only be used across the platform, they can be added or exchanged easily. Existing assets are re-used.
Scalable - Cloud based. Growth in markets, products, and distribution channels is dependent only on the institution's appetite and not restricted by the technology.
Extensible - As an open platform, its capabilities and integrations are extensible by partners or by the institution's own technology functions.
Higher security and compliance: A core lending platform is designed to ensure the security and privacy of the data and transactions, using advanced encryption, authentication, and authorization techniques. It can also help banks comply with the relevant laws and regulations, such as KYC, AML, GDPR, and PSD2. With all the data stored and organized, it provides instant audit trails, logs, and reports, facilitating the monitoring and auditing of lending activities.