Banks are making fundamental mistakes by not utilising the reams of data they receive during the loan origination process for small and medium enterprises (SMEs), according to Sean Hunter, CIO of OakNorth Analytical Intelligence (ONAI).
“They silo this data away and it could often be fundamental to the lending process,” said Hunter, who was speaking on the sidelines of the Amazon Web Summit in London last week. “For example, banks often don’t use the data they get when they originate a loan to check up on how the borrower is doing. They’ll have a business case when they originate the loan, but they won’t even compare the business’s performance to what it said it would do in the original loan application.
Banks’ data analysis capabilities are being held back as legacy systems are overburdened.
“I had a client say to me, ‘15 years ago we built everything ourselves and we’ve realised we actually suck at building things.’ Banks are better at integrating things. [This client] did a big strategic shift by focusing on choosing the best pieces of tech and making them work together well. A lot of big institutions are going from having massive IT departments and massive IT spend to trying to work in partnership with different vendors to choose the best solutions. This leads to a kaleidoscope that needs to fit together.”
According to survey results released by Fenergo this month, 74% of C-level executives at banks believe their data management is overlooked strategically, despite it being ranked in the survey’s top three critical business concerns. 20% said that the maturity of their technology infrastructure was preventing them from investing in new and disruptive platforms.
“It’s going to be a slow process. If you look at banks today they emerged in this form organically through mergers, acquisitions and more. Everyone talks about legacy but it’s not just the technology being old and outdated, it’s also having multiple systems in the same role. After a merger you might have two core banking systems and it becomes really painful to remove one, so you keep it around. Then you buy another company and suddenly you have three core banking systems.”
Hunter added that banks cannot afford to spend the time to deeply understand smaller businesses. “Whether you want to borrow £50m or £5m the analysis is actually extremely similar. If I’m in the credit team, I’d much rather spend my time on the £50m loan because there’d be a much higher arrangement fee on that deal. What happens then is that this larger SME segment gets overlooked and banks won’t – or can’t – spend the time with these businesses.
“One of the things about an institution is that as it gets to a certain size there are subgroups within the employees who try and serve their own ends rather than the goals of the institution. That siloing effect can occur all over the business, especially when it’s in the interest of a small group.
“I remember working with a bank prior to joining OakNorth and we wanted a very simple CSV feed from one of the internal systems at this bank. The person said, ‘this is going to take two and a half years.’ That’s a daily feed from one of their systems that I knew I could generate myself in two and a half minutes. They didn’t want to share it because they needed to preserve their own patch and that’s a powerful trend within the industry.”