The Covid-19 pandemic has accelerated digital transformation across businesses, including those in the banking industry. Customers accustomed to ordering food online are now expecting the same frictionless experience when applying for a credit card.
Meanwhile, regulators across the region are issuing licences to new players to give customers more choice. With the emergence of neobanks, digital banks, fintechs and Big Tech, traditional banks are being threatened from multiple directions.
To attract new customers, banks have been embarking on partnerships to strengthen digital pathways – but with mixed results. During our discussion, the senior banking leaders were unanimous in pointing out it was crucial to not only find the right partner but to also be aligned on organisational goals.
For example, a bank might partner a telco to expand its lending base but it is unlikely to be a priority for the telco. Hence, for such a partnership to even have a fighting chance, the partners will have to first agree on a common goal before proceeding.
While banks are typically focused on the data generated by a partnership and how they can score customers better with it, they can also benefit from other elements in the collaboration. When it comes to generating leads and retaining customers, technology companies in the areas of e-wallets, payments and superapps have been able to influence customer behaviour with promotions and rewards, which are becoming an increasingly important part of the financial services proposition.
Complementing each other
Other than “who” to partner with, “how” is the second most important question. There are different types of partnerships in play, with varying levels of control.
At a basic level, a bank could participate in a tech ecosystem of, say, an e-commerce company and provide its products through APIs. It could also enter a more traditional equity type of partnership and exert influence from the inside. Or instead of participating in another company’s ecosystem, the bank could even orchestrate its own ecosystem and contract service providers to support its proposition.
No matter the type of partnership, it is key to recognise that both partners bring different capabilities to the table. For instance, most of the new players do not have the collections capability and distribution strength of traditional banks. Yet at a time when customers cannot go to the bank branches due to pandemic restrictions, the technological platform of the new player and its ability to deliver fast can be an advantage for its partner.
To bear this out, co-lending has been ramping up in the last five years, with companies willing to share their balance sheets and credit risks, especially under the impact of the pandemic. By focusing on each entity’s capabilities, the perspective moves from one of competition to that of complementary collaboration.
Speedbumps along the journey
Many banks work with major players such as telcos, e-commerce, superapps and other fintechs with the aim of leveraging alternative data for better risk assessment, only to realise that making sense of the data is not so straightforward.
As one banker put it: “We thought we would be able to get a lot of data from our partner but, in reality, getting the data from them, then using it for insights on other customers was not as easy as we’d initially assumed.”
The biggest challenge lies in having a unified decisioning engine that can ingest different data streams with different target variables from different sources, and is able to mathematically optimise the best sources to provide the most optimal financial decision, while keeping risk levels reasonably low. As a result, banks had to invest significant amount of time and resources into extracting value from the data.
Even when platform ecosystem partners offer their own scores, the predictability of such alternative credit scores is still in early stages. These scores need to be proven with the right governance in place, as well as validated and tested through the cycle.
Still it is imperative for banks to remain on this journey.
“Although we have big-name partners, the business contribution from these partnerships remains minimal,” said the same banker. “But we cannot stop, we need to find more partners while continuing with the existing ones so that we can reach new customers and open up new segments.”
At Experian, we’re working with key partners in the region to build cohesive and credible models that banks and other financial services providers can utilise for lending decisions. We’re also collaborating with a multi-faceted and diverse set of partners including telcos and ride-hailing firms to piece together the right data that can be used to derive actionable insights through advanced analytical techniques.
By leveraging new ecosystems, accessing new networks, and tapping into alternative sources of data, both traditional banks and new players are positioned for a win-win situation as we mitigate the impact of the pandemic.