The European credit industry, a €132bn cost center

The financial services industry is undergoing massive changes. Every day new products and services are being launched in the areas of payments, investments, insurance, et cetera. And the credit industry is no different.

One of the main reasons for this change is the increasing operational cost of credit departments. On average the annual operational cost of a credit is 1,2% of the loan amount. Given the €11tr of credits that is outstanding in Europe at the moment, this means European credit providers pay €132 bn per year to close, service and collect credits. According to Accenture, this cost has quadrupled the last decade, mostly due to increased regulation (KYC, MCD, CCD,…), increased customer expectations and the “credit crisis aftermath”.

A second important element causing the shift in the industry are decreasing margins. A study done by McKinsey showed that the margins in the credit industry will significantly be reduced by 2025. For consumer credits an estimated reduction of 60% is foreseen, for SME lending the decrease will be around 35%.

These two elements show us that it’s time to start looking at operations differently. Traditional players are following different approaches (or a combination of approaches). The most followed ones are the following:

1. Re-platforming: starting from scratch with a new core system

2. Robotics process automation (RPA): automating processes by putting a digital robot on top of a legacy system

3. Partnerships with Fintechs: collaboration with Fintechs to outsource certain elements of the value chain

However, most experts tell us that these solutions are not suitable for every company. Re-platforming is risky and comes with an enormous cost, RPA is a short term solution that is not really sustainable, and integrating with multiple Fintechs that each cover a certain sub-process becomes too complex over time.

In the long run, credit providers should start looking at outsourcing their operations. This can be done by traditional outsourcing providers, however all experts point towards fully digital outsourcers. Digital outsourcers cover the entire value chain by providing a library of dedicated API’s to its customers. These providers can for example deliver an API for credit scoring, an API for early prepayments, an API for ESIS-generation and so on. Given the digital nature of these business, the costs are often significantly lower than traditional outsourcing partners.

In an extensive market report done by 0smosis, a fintech venture studio from Belgium, you can read more on this industry shift and how it will impact your business.

Download the report on the following link: http://bit.ly/0smosisCreditReport