A Cloud-Native Approach To Transforming Loan Servicing With An Advanced API Strategy
Raunak brings 7+ years of experience in an early-stage startups, with a background in business development, strategy, GTM, and operations, in a mission to remove friction in financial data flow through the firm.
Technological innovations such as cloud computing and API (Application Programming Interface) have enabled banks and other financial institutions to offer their infrastructure for use by third parties. They have also paved the way for Banking as-a-Service (BaaS) to find its footing in the digital economy. In India, Yes Bank and RBL bank took the lead in offering BaaS when they allowed third parties to access banking infrastructure through APIs. The aim? To facilitate particular functions such as loans, deposits, card issuance, and more. Currently, ICICI and other banks have APIs to enable non-banks to facilitate the delivery of banking services by them. Efficiency, flexibility, and agility are the focus areas for these third-party integrations. The idea is simple: taking the load off the legacy institutions using cloud computing & API technology and allowing them to quickly launch solutions to meet customers' demands.
What is a Cloud-Native Approach?
Cloud-native approach refers to the software development methodologies to build, deploy and manage applications in a cloud computing environment. The applications are designed and developed to leverage the unique capabilities of the cloud to derive business benefits such as faster time to market, greater agility, more robust reliability, and more. Cloud-native applications also hold the potential to be scaled cost effectively as organizations can tailor infrastructure consumption to match business demands.
Why are finTech Companies Adopting a Cloud-Native Approach?
Today's economy is such that the demand for low-goto-market time is at an all-time high. Naturally, this is the edge that the cloud first approach provides, from rolling out software updates more quickly to launching new digital services and features and leveraging data insights effectively for product and service innovations. The flexibility of cloud-native applications enables fintech companies to deliver new services quickly, innovate at scale and offer consistent positive customer experience irrespective of traffic fluctuations. Some key benefits of the cloud-native approach for fintech companies include:
●Enhanced Developer Productivity & Efficiency
With cloud-native application development, developers spend less time on infrastructure provisioning and production support. This allows them to focus on business requirements and application development. It allows developers to work on new applications without disrupting core services and revenue-generating applications. To put things into perspective, practical cloud usage enables developers to improve development and maintenance productivity by 38 percent. It improves efficiency by reducing manual efforts through API-based models, standardization, and automation, enabling developers to focus on their core tasks.
●Lower Security Risks & Downtime
Cloud helps fintech improve platform integrity through automated, embedded security processes and controls (such as DevSecOps), which reduces instances of cybersecurity breaches and attacks. A resilient architecture also helps minimize downtime, enabling fintech to minimize financial and reputational loss.
●Innovative Business Models
The access to unlimited infrastructure capacity, computational power, and innovative tools enables fintech to test new business models and services at a lower cost and more incredible speed. The ability to easily configure cloud solutions allows fintech to keep pace with the evolving regulatory landscape and competitive business environment.
●Rapid Business Scaling
To quote data from a Mckinsey report, in the case of Fortune 500 financial institutions, following Fintech to leverage cost-optimization levers and business use cases unlocked by the cloud can generate as much as $60 billion to $80 billion in run-rate EBITDA in 2030. This indicates how effective a cloud approach for business can be from the perspective of a broader set of customer segments, geographies, and channels by leveraging cloud providers' infrastructure and global presence.
Planning & Implementing Cloud Solutions for Loan servicing
The credit and lending model is often treated as the orphaned child in the Fintech domain, with limited enablers working in the sector. However, loan serving can greatly benefit from a cloud-first approach, and this is exactly how.
The Process
Loan servicing refers to managing a loan from when the proceeds are dispersed to the borrower until the borrower repays the loan. The process includes collecting periodic payments and passing the right amounts to financial institutions, tax authorities, and other entities. Loan servicing was traditionally a core function held within financial institutions but now has the potential of being an industry that includes third party servicing companies, loan-originating banks, and financial institutions.
The Gaps
Recently, loan servicing costs have increased due to compliance with the regulations enacted to curb predatory pricing and enhance transparency in lending. The need to service millions of customers with multiple data points requires validation and matching with the documentation of each loan, posing a challenge for the industry. The lack of efficiency due to manual data entry & validation practices and the need for workflow management solutions are other loan servicing challenges that can be addressed through a cloud-native approach.Q
The Solution
A cloud-hosted data repository helps in safe data storage and retrieval. The cloud enables servicers to ingest massive volumes of data and make it quickly available in a usable form to customer service agents. Artificial Intelligence (AI) and Machine Learning(ML) solutions offered by cloud service providers (CSP) help in understanding customer payment behavior and identifying outliers to enable businesses to make proactive interventions. The hook here is a pre-emptive approach to solution building, as opposed to the traditional reactive approach that fintech players follow.
Adding the API layer over the potential that cloud harbors allows loan-servicing players to improve processes leading to higher efficiency and lower servicing costs. Form a solid base of enhanced collaboration, from enabling a secure connection between loan origination and servicing systems to eliminating data entry duplication efforts to generating automated reports to reduce human errors and higher accuracy.
What Keeps Financial Services Companies Away From Cloud Solutions?
Cloud adoption in the financial services sector is still at a nascent stage. Within the Indian financial services industry, eight corporate banks will transition their trade finance and treasury workloads to Cloud within the next two years. Indian banks have urged the Reserve Bank of India (RBI) to frame rules & guidelines to enable them to store and analyze data on the Cloud, which is critical for digital transformation. Regulatory risks, security, and data protection concerns keep financial services companies away from cloud solutions. Besides, the heterogeneous technology environments constrict the financial firm's cloud journey.
The Next Chapter of Banking
The low tolerance for failure and reputational loss due to the potential exposure of sensitive customer data has constricted banks & financial institutions from large scale cloud adoption. Cloud native technology is vital for the scalability and agility required in today’s digital transformation initiatives, regardless of industry. When it comes to financial institutions, the pandemic and the need to compete with nimble fintech are leading to the evolution of the risk averse attitude of executives for cloud adoption in core banking. As the application-driven transformation grows by leaps and bounds over the next few years, engineers will continue to work with cloud first infrastructure, to scale computing workloads to deliver quality cloud-native applications while addressing the security and reputational gaps. Naturally, and by extension of this sentiment, Cloud Banking becomes necessary, making it the next chapter of the Banking as a Service industry.
Technological innovations such as cloud computing and API (Application Programming Interface) have enabled banks and other financial institutions to offer their infrastructure for use by third parties. They have also paved the way for Banking as-a-Service (BaaS) to find its footing in the digital economy. In India, Yes Bank and RBL bank took the lead in offering BaaS when they allowed third parties to access banking infrastructure through APIs. The aim? To facilitate particular functions such as loans, deposits, card issuance, and more. Currently, ICICI and other banks have APIs to enable non-banks to facilitate the delivery of banking services by them. Efficiency, flexibility, and agility are the focus areas for these third-party integrations. The idea is simple: taking the load off the legacy institutions using cloud computing & API technology and allowing them to quickly launch solutions to meet customers' demands.
The flexibility of cloud native applications enables fintech companies to deliver new services quickly, innovate at scale & offer consistent positive customer experience irrespective of traffic fluctuations
What is a Cloud-Native Approach?
Cloud-native approach refers to the software development methodologies to build, deploy and manage applications in a cloud computing environment. The applications are designed and developed to leverage the unique capabilities of the cloud to derive business benefits such as faster time to market, greater agility, more robust reliability, and more. Cloud-native applications also hold the potential to be scaled cost effectively as organizations can tailor infrastructure consumption to match business demands.
Why are finTech Companies Adopting a Cloud-Native Approach?
Today's economy is such that the demand for low-goto-market time is at an all-time high. Naturally, this is the edge that the cloud first approach provides, from rolling out software updates more quickly to launching new digital services and features and leveraging data insights effectively for product and service innovations. The flexibility of cloud-native applications enables fintech companies to deliver new services quickly, innovate at scale and offer consistent positive customer experience irrespective of traffic fluctuations. Some key benefits of the cloud-native approach for fintech companies include:
●Enhanced Developer Productivity & Efficiency
With cloud-native application development, developers spend less time on infrastructure provisioning and production support. This allows them to focus on business requirements and application development. It allows developers to work on new applications without disrupting core services and revenue-generating applications. To put things into perspective, practical cloud usage enables developers to improve development and maintenance productivity by 38 percent. It improves efficiency by reducing manual efforts through API-based models, standardization, and automation, enabling developers to focus on their core tasks.
●Lower Security Risks & Downtime
Cloud helps fintech improve platform integrity through automated, embedded security processes and controls (such as DevSecOps), which reduces instances of cybersecurity breaches and attacks. A resilient architecture also helps minimize downtime, enabling fintech to minimize financial and reputational loss.
●Innovative Business Models
The access to unlimited infrastructure capacity, computational power, and innovative tools enables fintech to test new business models and services at a lower cost and more incredible speed. The ability to easily configure cloud solutions allows fintech to keep pace with the evolving regulatory landscape and competitive business environment.
●Rapid Business Scaling
To quote data from a Mckinsey report, in the case of Fortune 500 financial institutions, following Fintech to leverage cost-optimization levers and business use cases unlocked by the cloud can generate as much as $60 billion to $80 billion in run-rate EBITDA in 2030. This indicates how effective a cloud approach for business can be from the perspective of a broader set of customer segments, geographies, and channels by leveraging cloud providers' infrastructure and global presence.
Planning & Implementing Cloud Solutions for Loan servicing
The credit and lending model is often treated as the orphaned child in the Fintech domain, with limited enablers working in the sector. However, loan serving can greatly benefit from a cloud-first approach, and this is exactly how.
The Process
Loan servicing refers to managing a loan from when the proceeds are dispersed to the borrower until the borrower repays the loan. The process includes collecting periodic payments and passing the right amounts to financial institutions, tax authorities, and other entities. Loan servicing was traditionally a core function held within financial institutions but now has the potential of being an industry that includes third party servicing companies, loan-originating banks, and financial institutions.
The Gaps
Recently, loan servicing costs have increased due to compliance with the regulations enacted to curb predatory pricing and enhance transparency in lending. The need to service millions of customers with multiple data points requires validation and matching with the documentation of each loan, posing a challenge for the industry. The lack of efficiency due to manual data entry & validation practices and the need for workflow management solutions are other loan servicing challenges that can be addressed through a cloud-native approach.Q
The Solution
A cloud-hosted data repository helps in safe data storage and retrieval. The cloud enables servicers to ingest massive volumes of data and make it quickly available in a usable form to customer service agents. Artificial Intelligence (AI) and Machine Learning(ML) solutions offered by cloud service providers (CSP) help in understanding customer payment behavior and identifying outliers to enable businesses to make proactive interventions. The hook here is a pre-emptive approach to solution building, as opposed to the traditional reactive approach that fintech players follow.
Adding the API layer over the potential that cloud harbors allows loan-servicing players to improve processes leading to higher efficiency and lower servicing costs. Form a solid base of enhanced collaboration, from enabling a secure connection between loan origination and servicing systems to eliminating data entry duplication efforts to generating automated reports to reduce human errors and higher accuracy.
What Keeps Financial Services Companies Away From Cloud Solutions?
Cloud adoption in the financial services sector is still at a nascent stage. Within the Indian financial services industry, eight corporate banks will transition their trade finance and treasury workloads to Cloud within the next two years. Indian banks have urged the Reserve Bank of India (RBI) to frame rules & guidelines to enable them to store and analyze data on the Cloud, which is critical for digital transformation. Regulatory risks, security, and data protection concerns keep financial services companies away from cloud solutions. Besides, the heterogeneous technology environments constrict the financial firm's cloud journey.
The Next Chapter of Banking
The low tolerance for failure and reputational loss due to the potential exposure of sensitive customer data has constricted banks & financial institutions from large scale cloud adoption. Cloud native technology is vital for the scalability and agility required in today’s digital transformation initiatives, regardless of industry. When it comes to financial institutions, the pandemic and the need to compete with nimble fintech are leading to the evolution of the risk averse attitude of executives for cloud adoption in core banking. As the application-driven transformation grows by leaps and bounds over the next few years, engineers will continue to work with cloud first infrastructure, to scale computing workloads to deliver quality cloud-native applications while addressing the security and reputational gaps. Naturally, and by extension of this sentiment, Cloud Banking becomes necessary, making it the next chapter of the Banking as a Service industry.
