Cloud Lending : A Good Long-Term Investment?

Posted: 5 May 2022
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Cloud Lending: A Good Long – Term Investment?

Migrating to a Cloud-based platform and/or Core Lending System (CLS) is like opening up to the world of innovation. The many benefits of this transition allow Cloud Lending to be identified as a good long-term investment.

Many financial entities have migrated to a Cloud Lending system. However, even if the acquisition of a new system requires some time to adapt, it is a promising choice for the bank. Indeed, it implies changing the way of working and thinking about a new strategy, with KPIs based on other factors, and therefore setting new objectives. For this change to be properly implemented, it is necessary to have a solid Change Management and Corporate Governance strategy for the teams.

A modern architecture

It goes without saying that banks are aware of the digital evolution and have for the most part already taken the plunge by acquiring more modern third-party systems a few years ago. However, the current architecture and model of most banks is still traditional and does not yet allow for complete flexibility of all their information systems.

A Cloud Lending System (CLS) is the truly revolutionary tool for banks to automate IT and business processes and to orchestrate all the systems integrated in the current architecture. Migrating to a Cloud Lending platform allows to be more efficient. In fact, according to a study by Accenture

“Adopting a flexible, scalable platform and decoupled technology architecture could increase loan volumes by 15 to 20 percent while reducing operational costs by 20 percent.”  

In addition to cheaper and simpler third-party system implementations, a cloud-based architecture eliminates any stress that can be provided by inconvenient system upgrades representing a heavy burden on bank IT teams. Cloud Lending platforms then offer a much smoother, automated software maintenance process.  

Moreover, for banks with a traditional architecture, credit underwriting times are still very long and require a lot of time from the advisors in charge of the loan applications. According to different studies made by Deloitte, “30 to 40% of the time of credit resources is spent on non-essential tasks”. This is due to the management of loans by disaggregated systems and manual processes that can be replaced by automations as could be offered by a Cloud Lending service. Migrating to a modern architecture is then an opportunity for financial institutions to reduce their loan approval time, but also gives the possibility to lighten the burden on employees and also minimize the risk of error when managing files. Teams can therefore be more efficient and faster, allowing banks to handle a higher volume of borrowers. According to Accenture, mid-sized banks with a cloud-based architecture have 58% of their workloads managed via the Cloud Lending Platform.  

Return on investment

The return on investment is a good indicator to measure if the implementation of a new structure is a good investment in the long run. In reality, the ROI for the implementation of a cloud-based architecture is difficult to measure and depends not only on the success of the IT but also on the needs of the financial institution.   

In order to get an idea of the profitability of the investment in the Cloud, we will therefore evaluate more the savings made thanks to this migration. By identifying the reasons why banks have turned to a Cloud lending platform, it is possible to identify factors to measure the return on investment. For example, comparing the cost of hosting on the cloud with the old method of hosting. Or the response to the desire to improve the agility of the banking business and reduce technical debt. The return on investment is possible only if from the beginning the bank is willing to delegate and accept to create some dependency on an infrastructure that is managed by a third party entity. However, the client must understand what it will cost, what parameters may influence this cost, and at what point there is a return on investment. Overall, to see the full ROI in all its facets, and not the beginnings, it will be necessary to wait 3 to 5 years after the investment. Indeed, the amortization of the cost of implementing Cloud Lending can be more or less long depending on the solution chosen and the characteristics of the latter.   

Staying competitive

Besides the financial point of view, Cloud Lending offers the possibility to banks to be competitive, and this permanently, by offering an agile and flexible infrastructure. Indeed, the modern architecture offered by Cloud Lending gives the bank the flexibility to adapt its products and services to trends but also to regulations that may evolve and require changes.   

If one of the first selection factors for the choice of a bank for a loan is the proposed rate, the quality of service is also very important and constitutes a selling point. The borrowers of today live in a context where digital technology is an integral part of their daily lives and where a large number of services are accessible very quickly. Traditional banks are among the institutions for which automation and acceleration of processes has taken time and is still evolving. Therefore, offering a fast, simple, and digital service may push the borrower to turn to one bank rather than another even if the rate is more or less similar.

Moreover, having a product designed both for the bank and for the borrower’s needs is a real advantage in the context of a strong competitiveness in the banking sector.   

All these aspects make the bank an agile financial institution.

Being agile means :   

  • Adapting to a rapidly changing environment (rates, customer behaviour, employee expectations, etc.)
  • Improving productivity in the face of neobanks and Fintechs that encourage banks to lower their margins  
  • Accelerate the development and marketing of offers and services, thanks to flexible organizations and short cycle operations.  

Moving to an agile mode therefore requires better adaptation to the needs of its customer, putting the customer at the heart of its business strategy and its working methods.   

Less costly scalability   

Scalability, the ability of an application to adapt to fluctuating demand and/or traffic, is very important for activities such as those of banking institutions, which can experience high demand via their digital interface. For example, in the context of an uncharacteristically high demand for payments in instalments during a given period, such as Black Friday or the Christmas period.

Increasing the computing capacity on a traditional architecture is very expensive and requires heavy maintenance. With a cloud-based architecture, it is totally possible to increase the digital capacity related to high traffic for a determined time and at lower costs. In fact, thanks to the Cloud, it is possible to rent an additional percentage of resources. All thanks to storage service and Cloud data centres, such as those offered by IBM, which can offer more computing resources to maintain the performance of a digital platform. 

Cloud Lending therefore gives banks the possibility in the long term to adapt their products and services in all circumstances without having to make a significant investment, sometimes beyond the bank’s financial capacity. The transition to a system based on the Cloud pushes banks to leave a dynamic of Capex (Capital expenditure) in order to migrate to a strategy of Opex (Operating expenditure). This one is much more profitable on the long term, more adapted and especially less costly. This dynamic gives banks the opportunity to spend less to earn more. A promising bet!     

In conclusion, implementing a Cloud Lending platform or acquiring a Core Lending System (CLS) is a real time-saver, an opportunity to reduce internal expenditure on lending. It also provides a seamless, automated, high-end borrower experience that is on demand. Overall, this Cloud transition is the beginning of a never-ending digitalization process, and the best strategy for banks to remain competitive. And, therefore, a good investment in the long run.

Written by: Eva PELLETIER