Whitepaper_E_Customer centricity the survival strategy for Japanese lenders

Whitepaper
Customer centricity:
The survival strategy for Japanese lenders

The Japanese consumer lending industry has
witnessed various phases of business growth and
decline over the years. The Japanese economy has
been traditionally dominated by the banks, who
preferred lending to large firms with excellent
reputations. This resulted in under serving of
consumer and small business loans segment.
Non-Bank Institutions (NBIs) took advantage of the
gap and dominated the consumer lending market
from 1994 to 2003. During this period of phenomenal
growth the NBIs made more profits than the major
banks in Japan. By 2003, share prices of the four
leading NBIs were up by 21%, as compared to the
6.4% growth of the TOPIX market index.
Much of the growth in 2013 was more due to
significant macro-economic events than
improvements in the market
The ready availability of funds at near-zero interest
rates and the ability to lend at high interest rates
(nearly 30%) were the main driving factors behind this
growth. However, a Government crackdown in 2006
led to a law that capped the maximum interest rate at
20% and placed a ceiling on the amount of loan that
can be extended to borrowers based on their income.
As a result share prices of all major NBIs plummeted,
culminating in the 2010 bankruptcy of Takefuji, the
biggest NBI in Japan. City banks and other major
banks of the country, who had their sights set on the
lucrative industry finally managed to gain a foothold.
The crackdown led to a drastic change in the market
dynamics and largely shaped the current condition of
the consumer lending industry.
In addition to this, a Japan Supreme Court ruling in the
same year forced the NBIs to repay billions of dollars
to customers that they had overcharged.
In 2014, consumer lending in Japan grew by 1% y-o-y,
which is in sharp contrast to the nearly 8% growth
attained in 2013, when auto loans and card loans
contributed significantly. While credit cards have
been a strong market in Japan for quite some time
now, the growth in auto loans can be attributed to the
proposed VAT increase from 5% to 8%, which led
consumers to make big-ticket purchases
immediately, in order to save tax. The key point here
01Customer centricity: the survival strategy for Japanese lenders
sales@nucleussoftware.comwww.nucleussoftware.comwww.nucleussoftware.com sales@nucleussoftware.com
Low margin, high competition, strict
regulation

is that most of the growth in 2013 was due to
significant macro-economic events rather than due to
improvements in the market conditions. Lending
rates today remain at 1.2%, leaving little room to
compete on price. It is ironic that the very boom which
led to an exponential growth of the consumer lending
industry has become its bane: near-zero interest
rates.
The industry is also feeling an impact of regulations
and structural changes. Most regional banks suffer
from a trio of familiar and entrenched
woes—extreme risk aversion, growing competition
and shrinking markets, as young people move from
small towns to big cities such as Tokyo, Nagoya and
Osaka. Like Japan’s “megabanks”, the regionals focus
mainly on lending to corporates, even with razor-thin
margins. Big banks can at least fall back on more
profitable foreign operations, but regionals are
usually purely domestic. Meanwhile, the NBIs are still
recovering from the impact of huge repayment claims
after the 2006 Supreme Court decision.
Under these circumstances, lenders are left with two
broad choices to increase loan volumes:
Through this whitepaper, we look at how technology
can help Japanese lenders grow their businesses by
enhancing customer experience during loan
origination. We also look at the current Banking IT
scenario in Japan and how companies can approach
this necessary shift in deployment models.
After the 2008 financial crisis, US lenders embarked
on a customer centric strategy which is now bearing
fruit. A 2012 survey by J. D. Power & Associates in the
USA revealed that customers’ overall satisfaction with
mortgage lenders has reached its highest level in the
past six years. The survey reports that on a 1000-point
scale, overall customer satisfaction has increased to
761 in 2012, up from 747 in 2011, and 734 in 2010.
Though not ideal in absolute terms, the steady growth
over three years is proof that US banks are investing
in transforming into customer centric entities. The
survey cites improvements in both transparency and
communication as primary factors in these
improvements. In a 2013 survey for loan servicing
customers, it was found that overall satisfaction with
primary mortgage servicers has increased to 733
from 725 in 2012. The increase in demand for auto
loans is a sign that the negative sentiment that people
associated with financial institutions is receding.
While US lenders had used customer centricity
primarily to diffuse the negativity associated with
banks, Japanese lenders can use the same strategy to
differentiate themselves from their competitors. Loan
origination is a great area to implement customer
centric processes as origination is the first point of
contact for a borrower with the lender.
Consolidate presence in the existing market
and sell more to Japanese customers
Penetrate new markets and sell to more
customers
Customer Centricity: The differentiator
1.
2.

Ease of configurability in the loan origination system
helps lenders to innovate. The freedom to create
new policies and rules, update existing ones, and
modify fields and forms will be crucial in ensuring
that the lender gains first mover advantage.
Workflow enabled systems can support
changing customer preferences, regulatory
requirements, and communication more easily
than inflexible, legacy systems.
The essence of customer centricity lies in creating a
positive customer experience. Technology is no longer
perceived as purely an enabler to achieve operational
efficiency. Customers today expect systems to know
their needs and enable them. A positive customer
experience in lending can be created by making it easy
for the customer to apply for a loan and by ensuring
quick approvals.
Omni-channel experience: An omni-channel
approach is different from a multi-channel
approach, in that it is defined by the customer’s
demand for consistency across physical, mobile,
digital, and online channels to ensure that a
seamless experience is delivered. Creating a series
of consistent interactions is critical in creating a
true omni-channel experience.
Relevance: Creating the right product for
the right segment
Convenience: Making it easy to apply for a
loan and get it approved
Two broad components drive customer centricity in
loan origination:
Product innovation communicates to the
external, as well as internal, stakeholders
that the company is well aware of changing
customer needs and is capable of catering to
those needs
Drivers of customer centricity
Relevance: Create targeted products
Convenience: Make it easy
With increasing competition, financial institutions
need to identify consumer needs and create loan
products catering to those needs. Lenders have to be
flexible in aligning their products to meet the
evolving market requirements.
While home loans, auto loans and personal loans have
been around for a long time, Japanese lenders have
already started introducing more specific loan
products like wedding loans, funeral loans, stationary
loans and shopping credit. First mover advantage will
be important to capture such specific markets. A key
requirement is the ability to quickly create innovative
products and launch them in the market rapidly.
Customer
centricity
Product
innovation
ConvenienceRelevance
Quick
approval
Self-service
Omni-channel
experience

Customer self-service: A key finding from
Accenture’s ‘Banking 2020 Thought Leadership
Series’ is that if lenders provide consumer-facing
technology to the borrowers, they will use it, and if
it is available online, it will be consumed. Banks in
the USA have witnessed a considerable increase in
online loan origination, which is evident from a
survey conducted by Accenture in 2014. When
asked where they bought or signed up for banking
products during the last year, 21% of the
consumers surveyed said they found their auto
loan online (up from 11% in 2012), 24% went online
for a personal loan (up from 8% last year) and 25%
went online for their mortgage loan (up from 15%
in 2012). For Home Equity loans, 30% said they
found the loan online, up from only 6% in the
previous year. The origination system should
enable self-service. Simple features like a web
portal to capture customer information, document
matrix to map the loan type to the identification
documents required, capability to upload
documents over the internet, image processing
solutions to capture soft copies of these
documents and verify Hanko (or the controversial
My Number System) of a borrower convey to the
customer that convenience is a top priority for the
financial institution.
One Click Mortgage by a Korean bank to offer
a first fully processed online mortgage
product platform. This product is processed
in 5 steps; e-application, e-underwriting,
e-signing, e-document and e-closing. During
the process, the potential borrowers do not
need to visit offline branches. By adopting
the One Click Mortgage system, potential
borrowers save time as well as money
because of online accessibility and efficiency.
Innovation from across the world
Product
innovation
Self-
service
Quick
approval
Omni-
channel
experience
Configure
workflow
Consistent
interactions
Document
matrix
Straight
through
processing
Inter-user
communi-
cation
Loan
tracking
at each
stage
High
visibility
Scan
&
upload
Hanko/ID
verification
Ease of use
Configure
policies
and rules
Configure
fields and
forms
Quick approval: At the heart of customer centricity
is operational efficiency. While Japanese lenders
are no strangers to automation and efficiency, the
new products that are being introduced in the
market are bound to test their IT systems. For eg:
shopping credit loans are supposed to be
approved in a matter of minutes. The less time
required in approval could be a crucial factor in
ensuring customer loyalty. This can happen with
automated processes and straight through
processing of loan applications. In case manual
intervention is unavoidable, simple features like
inter-operator communication, tracking the loan at
every stage and giving high visibility at the
application level will decrease the processing time
considerably.

It is clear that technology will be the key for Japanese
lenders to become truly customer centric. However,
the technology needs to be flexible and scalable
enough to support these customer centric models.
Japanese financial institutions can be broadly
segmented into 4 types: City banks and other major
banks, Regional Banks (I and II), Shinkin Banks, and
Non-Banking Institutions (NBIs). City Banks have
traditionally been at the forefront of adopting new
technologies into their banking operations. The
development of the “First” online system, a Core
Banking Solution, was initiated by some city banks in
the mid-1960s. Regional banks and other small to
medium size financial institutions jumped on the
bandwagon in the 1970s.
Subsequently, a “Second” online system was
developed in the mid-1970s, which apart from
improving processing capacity, created a link of Cash
Dispensers (CDs) and ATMs among financial
institutions by connecting them online. A “Third”
online system appeared in the mid-1980s, allowing for
Asset-Liability Management (ALM). In the 1990s, also
known as the lost decade of Japan, system
developments that were normally seen once in a
decade halted due to the bubble burst, closure and
consolidation of major banks.
It was at this point that IT vendors ventured into the
financial system industry and the concept of
vendor-led shared banking systems gained ground.
NTT Data was at the forefront of this revolution. The
Regional Bank Shared Services Center has been the
backbone of IT systems for Regional Banks ever since.
These highly customized shared systems will be a
roadblock in the quest for becoming a truly customer
centric organization. Customized solutions are not the
best enablers if a company wants to react quickly to
market and regulatory changes. This also adds to the
cost of operations in lending. Flexible configuration is
the need of the hour, not customization.
Conventional thinking suggests that it is not
economically viable to enable flexible IT models
without high risk. But, this thought is changing. It has
become common practice to ‘outsource’ customer
capabilities to independent services and reduce the
core systems to a little more than an accounting
ledger. Of course, the long history of shared services
in Japan will make it almost impossible to completely
replace core banking systems overnight and
progressive transformation is the key in loan
origination.
Bank IT in Japan: Shared siloes and the
road ahead

06
Nucleus Software is the leading provider of mission critical lending and transaction banking products to the global
financial services industry. With three decades of expertise and experience, today, it powers the operations of more
than 150 companies in 50 countries, supporting retail banking, corporate banking, cash management, internet
banking, automotive finance and other business areas.
For more information please visit www.nucleussoftware.com or contact us at sales@nucleussoftware.com
About Nucleus Software
Customer centricity: the survival strategy for Japanese lenders
Mr. Arup Das is the Vice President and Lending Product Head (P&L Management) at Nucleus Software where he is
responsible to lead the flagship product to the next level of global leadership.
Author email id: arup.das@nucleussoftware.com
Arup Das
Lending Product Head (P&L Management), Nucleus Software
Mr. Sanjeev Kumar is the Lending Product Manager at Nucleus Software where he is responsible for managing P&L
for the flagship product, FinnOne Neo for India and Japan region.
Author email id: sanjeev.kumar@nucleussoftware.com
Sanjeev Kumar
Lending Product Manager, Nucleus Software
Author email id: nachiket.sane@nucleussoftware.com
Nachiket Sane
Lending Product Manager, Nucleus Software
About the Author
Nachiket is responsible for managing P&L for FinnOne Neo for Japan.

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