Audio transcript
Introduction
You're listening to “Core Modernization with KPMG,” a banking podcast series dedicated to helping banks become future ready with digital transformation strategies that work and executions that deliver.
Daryl Grant
Hello, and thank you for joining the latest in KPMG's Banking Core Modernization series. Today, we'll turn our focus to the evolving world of commercial lending and explore some of the drivers and lessons learned from platform modernization within this important business function for banks of all sizes. For commercial lending, where both relationship development, as well as an intimate under of a customer's business, have always been viewed as critical elements for sales effectiveness. The competence of talented relationship managers has been paramount.
So, what would you say if I told you that in the near future banks' ability to drive growth within their commercial lending portfolios will be largely disconnected from the individual abilities or sales acumen of highly skill relationship managers? My name is Daryl Grant and I'm the managing director within KPMG's financial services practice, where I have responsibility for the suite of services and solutions that we deliver in helping our commercial lenders to drive innovation and profitable growth.
For our discussion today, I am joined by three KPMG thought leaders covering various aspects of the commercial lending transformation agenda. We have Anand Shah, Michael Herman and Todd Semanco. These gentlemen are KPNG partners who are focused on the critical dimensions of the overall banking transformation agenda.
So, Anand, I'd like to begin with you. I know that you and I both have consistently heard from clients that they only want to replace their commercial lending platform if it's in the context of a broader transformation effort. Do you believe that's the right approach? And if so, can you talk to us about what some of those broader objectives should be?
Anand Shah
Absolutely the right approach. I think transforming commercial lending is not necessarily just about a technology initiative, it's about transforming people, process, and technology to move to an operating model that's going to be efficient for the business, but also put them in position to generate more revenue. So the best transformations that I've been involved with are ones that actively involve the business, operations, risk, and technology all in harmony. And they think about the broader sales and service objectives of meeting customer expectations. So you have to think about the transformation, not solely through the lens of technology, which is a trap that a lot of organizations have found themselves in and they don't achieve the business objectives that they're looking for in terms of transforming their lending business. So absolutely the right approach.
Daryl Grant
Thanks, Anand. That is perfect. I would just add for the clients I've worked with recently it has really boiled down to how they measure ROI. What's the return on the investment, both from a quantitative and a qualitative perspective. And the reality is that the cost associated with these large scale platform replacements, means that you absolutely need to begin this journey with a clear picture of how the modernization effort will ultimately deliver benefits that you can measure. And so that's a big part of the work that we've been helping clients with. Quick question for Todd here. Todd, as you think about the transformation for commercial lending, are there potential risk and regulatory benefits that clients might consider as they start to frame up the case for change within commercial lending?
Todd Semanco
Definitely Daryl. And I think this is an area that we've seen really transform over time here. And I'm glad to bring up that ROI point earlier because I do think taking a more holistic view inclusive of regulatory and compliance upfront really helps to increase that return. I really think of it as automation begets further automation, so given this type transformation, it really provides substantial opportunity to automate controls and activities both at the point of execution as well as downstream. And so, as we think about these efforts, allowing for the optimization of manual legacy processes, digitizing the data, automating several of the key of compliance activities such as QA/QC, it really does provide a lift to the overall ROI and the value proposition at the end of the day.
Daryl Grant
Okay. So Anand, let me go back to you. So we would all agree that viewing commercial lending core modernization as a broader transformation program is a sensible, if not an ideal approach here. And so in that vein, we know that our clients are exploring new delivery models that are often tied to new products and service experience expectations of their customers. So I'd like to talk about how changing customer expectations are shaping how commercial lenders are choosing to go the market.
I will begin by saying that I've personally seen a noticeable rise in our clients considering digital-first delivery models, and even digital-only in a few cases, whereby the relationship manager is no longer central to customer or account acquisition, nor are they central to ongoing customer maintenance routines. And of course, the use of more advanced data and analytics capability becomes perhaps the primary enabler for delivery of these types of models. So that said, I'd love to hear your thoughts on this topic as well.
Anand Shah
Yeah Daryl, I think that's spot on. The customer expectation these days is to be able to do a lot more self-service. And so self-service means banks need to provide more digital capabilities to do things like upload documents or statements, or be able to check the status of a loan when it's going through origination process. So I think as you look across the entire value chain from sales, originations, to service, clients are demanding more access points into that value chain to perform activities that would've otherwise been done by calling into a relationship manager or calling into a help desk. So even on the servicing side they're looking to be able to do service transaction capabilities and having exposure to applying a payment or changing an address or doing routine service types of activities in a self-service mode. So the rise of the digital capabilities are definitely ones that banks have to address to not only optimize the customer experience, but also bring again efficiency to their own processes through letting customers self-serve.
Daryl Grant
Let me pull Michael into the conversation as our Salesforce lead for banking. Let's get your perspective here. While most would not consider Salesforce a core commercial lending platform, per se, I know we've certainly seen the use of Salesforce and similar platforms becoming more and more central to delivery of new capabilities that elevate a lender's sales and servicing strategy in some fundamental ways. Anand mentioned a few, but love to hear your perspective on this as well.
Michael Herman
Thanks Daryl. You're spot on, traditionally people have looked at CRM platforms, and any platform really, from a functional point of view—marketing, sales, service—and these are passive databases that offer reporting capabilities historically. But these platforms have changed from systems to systems of engagement, and really changing the way that customer-facing organizations interface and have relationships and build relationships with their customers. And it's a seamless set of experiences from demand generation, to acquisition, to onboarding, to service in a way that the client wants it to happen. And it's become very market and segment specific. If you look at commercial banking, you've got your covered and your uncovered. In your covered, you have mostly corporates in business banking and in you're uncovered, you're mostly business banking in the SMB space and those experiences need to be unique and really reflect the types of interactions and when they want to buy, what they want to buy in the channel that they want to. But also it has to take into effect how these customers potentially move up and down those value chains and help these companies grow and help these companies extend themselves. So we're seeing these companies really looking from these platforms, besides what I just meant a single solution as well across the commercial banking. So not one specific reach product. They're looking for real good, common, great customer experiences and they're looking to do it in a real personalized way.
Daryl Grant
Yeah, for sure. There's a concept that we've been talking with our clients quite a bit about of moving from a product-centric footing, to an experience-centric footing. So really blurring the lines between the traditional lines we've seen between various product silos. And I think some of the tools that you talk about really help enable to be able to do that. One other observation I make here is that if you look a decade ago, midsize and larger commercial lenders were making organizational design decisions around how they would organize their front middle and back office teams to drive a particular strategic market orientation. So whether they were trying to optimize themselves around operational efficiency, or if they wanted to focus on being a product leader, or even if they wanted to emphasize driving high levels of customer intimacy or high customer touch, there was a recognition that how you arrange your people to specific processes was really paramount in bringing that vision to life.
And so I would say now, while connecting organizational design to your strategy still matters, I suggest that the digital age that we're currently operating in really enables lenders to simultaneously pursue multiple strategies. And in fact, digital technology advancements, including a modern core, now could even allow for a lender to differentiate their strategic approaches by geography, or by industry, or by customer persona. You can take very different approaches to the market across a variety of dimensions. And I think the options really are limitless in the current environment.
So, with that, let's pivot to another question here. And Todd, I'll direct this towards you. We've talked about how core modernization creates opportunities for reimagining customer treatments and delivery model strategies. However, we certainly understand that failure to keep a strategic eye on the fundamentals of risk management and regulatory compliance can have some dire effects, to say the least. So my question for you is simply, “What new risk and regulatory opportunities or challenges does platform modernization create for commercial lenders?
Todd Semanco
Thanks, Daryl, you're absolutely correct in pointing out there are significant opportunities and upside as well as challenges. And to that end, we've really seen our clients embrace these modernization efforts to further digitize and automate core risk and compliance activities while also enhancing the business processes. So I think we mentioned a few of the upside opportunities earlier around digitizing the data, automating controls closer to the point of execution, and that also feeds downstream automation. Around QA/QC, broader testing and monitoring the development of KRIs and KPIs, all of which really helped to enable both better and earlier prevention and detection.
As far as the challenges, no doubt, it can be dire. And it's overwhelming to think about the aggregate. There are many as you balance the significant change during all of these initiatives, which are very fast-paced. So it becomes really critical to document and detail both the existing and the future state processes with that regulatory compliance overlay. And then supporting all of the requirements, and the development with the requisite artifacts that are going to help support the AU down the road. You think about regulatory obligation, mapping risk and control inventories, and what's that future state automated testing and exception reporting going to look like, for example. That's why it's really critical that the risk and compliance and strategy and the design upfront in order to fully maximize the overall value of modernization.
Daryl Grant
Anand, Michael, anything else to add on this point?
Michael Herman
On the regulatory side, people really wouldn't look at these applications as helping companies having more secured environment and controlled environment. But, because a lot of these, although most all of them are in the Cloud, they've really gone through a 180-degree shake-up around their risk and compliance capabilities. And Salesforce, for example, has done a significant amount of work around authentication for a lot of these commercial customers, even if you just look for lending around authenticating individuals, documents, organizations, they've also done things around, role-based and transaction-based security and control. So, who has access to what opportunities and what data fields, audit trails, escalations and notifications, up and down the organization, as well as sideways into other functional areas. Helping with things such as complaints. And lastly building a set of enterprise tools to help companies feel comfortable that their data is secure on the Cloud. So while not something that jumps out as a risk and compliance tool, these platforms have really had to spend a lot of time and a lot of investment to make these commercial banking companies feel comfortable about their risk and compliance potential issues. And also, act as a tool in the battles against those issues.
Daryl Grant
Yes, for sure, really excellent points. One comment I'll add here is that I've probably had a conversation a month over the past year with lenders who were looking to evolve some new underwriting approaches that leverage the advanced data analytics techniques that are available in the marketplace now. And the majority of my clients are really actively exploring or experimenting with ways to intelligently expand their credit bots without increasing their overall risk profile, which is obviously a good thing as a lender. And so they're looking to do this through a combination of machine learning credit models that consume a wide variety of nontraditional internal and external data inputs. And I bring this up in this context of risk and regulatory compliance because what comes along with this power to really master all manner of data in decisioning is a continued duty of care and fairness in their lending processes.
And there's been a fair amount of recent discussion on the topic of ethical AI models. And this a conversation that I think we're really just on the cusp of. I think even with some of the decision models that are in place today are being reevaluated. I've seen indications that there're going to be higher levels of scrutiny placed on the fairness of those models in terms of the impact and potentially disparate impact that we see across them. So, I think it's just one other area to keep an eye on within the commercial lending space as we move forward.
Okay, Anand, I want to come back to you for my last question here. What guidance would you give a commercial lending client who wants to better understand how they should execute the process of evaluating platform alternatives? What are the most important factors to consider in order to evaluate their options successfully?
Anand Shah
Sure, Daryl, great question. A question I get often asked by a variety of our clients. What we tell our clients is to consider how you move through the process in a straight-through way. The straight-through processing is extremely important. So think about the entire value chain, sales, originations, to service and how to keep integration across each of the processes A) for a better and efficient process; B) for reuse of data, as well as lineage of data, which could become a regulatory reporting issue if not kept intact. And so, the best way to think about platform alternatives is keeping in mind what platforms provide the best workflows for the products that you offer, what platforms provide the best capabilities for the customer experience and the integration that you're looking for, and which ones best fit in to the technical environment and the selections that you're making. Now, many of our clients are looking to cloud-based solutions to implement, whether it's originations or servicing based capabilities. And so the integration layer becomes an extremely important component when they're piping back into the core systems for payments or other capabilities. And so, the best way to think about this is to be comprehensive across your functional capabilities, your technical capabilities, your risk and reg capabilities in evaluating platforms, but also thinking through how you're going to achieve the ultimate goal of getting to straight through processing to protect the integrity of your data. Which Daryl, as you alluded, data is gold. And having quality of data and information can be beneficial in many ways, specifically around the analytics and the reporting components that you previously mentioned.
Daryl Grant
Certainly agree with those comments, and those are the evaluation dimensions that we recommend for our clients, and one shameless plug I'll make is that because our team has completed so many of these evaluations, and we obviously keep a pulse on the predominant platform options available in the market as well, we're able to help our clients move through these evaluation phases fairly quickly. Without giving up anything in terms of quality or the internal stakeholder alignment that we know is critically important for decisions at this magnitude and importance. So with that, I want to just thank you guys for your commentary today. Really appreciate it. I think we hit on a lot of different dimensions of this modernization topic for commercial lending, and hopefully this positions our clients to think about being a future-ready bank, particularly around the commercial lending portfolio.
Closing
Thanks for listening to this episode of Core Modernization with KPMG. We look forward to future episodes where we'll dive deeper into the core infrastructure.
