Can the SAP HANA platform transform the current financial markets scene? More prominent access to big data and predictive analytics is challenging traditional banking systems. A tremendous opportunity is opening up to FinTech companies, i.e. Peer-to-Peer (P2P) lenders, as the current role of conventional banks is being threatened with cheaper and less regulated competition. Nevertheless, it is possible for banks to fend off their competition by turning to the SAP HANA Platform.
Economic uncertainty is everywhere
Brexit has caused great volatility in the economic conditions globally, leaving many people wondering about the future of their money. In the UK, banks have slashed their interest rates to promote spending and thereby boost the economy, yet borrowers still need to pay double digit rates to get a loan from the bank. Consequently, an increasing reluctance to pay for expensive credit has spurred many individuals to look for an alternative source of funding and turn to P2P lending.
Similarly, savers are unsure and unhappy about the ultimate yield on their investments. On the 1st November 2016, Santander bank slashed its 3% saving interest rates to a bare 1.5%. If UK inflation hits the forecasted 2%, none of the existing bank accounts will help us to save money. Given the circumstances, P2P lending companies like Zopa or RateSetter have an opportunity to challenge the financial landscape by offering a whopping 7% interest on cash deposits and provide a cheap source of investment funding.
How does P2P lending work?
P2P lending is a new type of crowd-funding dominated by FinTech companies who have aggressively entered the UK market since 2013 with their competitive products. They operate by connecting lenders, with a surplus of cash, together with borrowers, who need that cash. The goal of these firms is to replace banks as an intermediary between savers and borrowers. Unlike established banks, the profit they make is derived from arrangement fees rather than the bid-ask spread between the interest rates.
The leverage that P2P lenders have over banks comes from the fact that they are not restricted by the Financial Conduct Authority, in terms of capital requirements. This results in higher operational freedom but also increases the credit default risk. To mitigate that problem, Zopa and RateSetter not only analyse data based on online banking details (financial history of the customer) but also use information from credit bureaus such as FICO and Experian, past bills, car payments and even pay cheques from employers. Access to a larger number of data sources combined with predictive analytics offers these companies huge competitive advantage over their rivals.
Reducing risk with predictive analytics
Predictive analytics is used to extract information from existing data. It searches for patterns and logic which can indicate future outcomes and trends. For P2P lenders, it provides a real-time insight into borrowers’ behaviour. Therefore the assessment of possible credit default is actively monitored with the know-how to prepare relevant protection against a default, or provide the opportunity to revise lending-terms. This type of assessment can also be used by lenders to estimate the market sentiment. Forecasts based on what-if scenarios and risk-assessments can prove to be useful in creating relevant products, i.e. more diversified portfolios with lower risks. This intel can result in outmanoeuvring the competition.
Where most business intelligence (BI) solutions are based on past/old data and are only used for reports and dashboards, the HANA platform delivers real-time insights from live data. One of the unique features of HANA is data virtualisation linked with the ability to access and analyse data from any source. An automated decision-making engine applies configurable business rules to analytical and contextual information, determining the next best course of action to take within a given business process. Thanks to this tool, every major decision to drive a bank’s revenue, control costs, or mitigate risks can be infused with data and analytics to derive a valuable insight.
Getting the right products to the right customers
With access to real-time data, including data gathered from social media, it’s possible for banks to gain an up-to-date 360-degree view of their customers and understand their receptiveness to different marketing campaigns and products. This knowledge has the ability to greatly impact lending practices and allows a bank to rapidly adjust its interactions with its customers.
Finally, the HANA platform can protect banks' critical data from unauthorized access and ensures compliance with the growing number of rules and regulations imposed by Financial Authorities. Financial regulation requirements can be customised by deployment tools to help, build, and deliver smart applications and solutions directly on HANA.
Defending a reputation
Predictive analytics for risk management and the benefits associated with this area are one of the key drivers of digital change within modern banking. The HANA platform’s powerful predictive analysis and machine learning capabilities meets these needs. For P2P lenders this solution means less credit defaults and greater customer insight, higher security and lower losses. For banks, financial predictions help to look ahead and proactively create the right set of activities and products to increase profits. By utilising SAP HANA, traditional banks have the potential to restore their waning reputation as the best place for credit and savings.