It's time to rethink loans

The banking experience is transforming on multiple fronts. This is in part accelerated by Covid-19, which drove up digital engagements and shifted customer behaviours and demands. It is perhaps unsurprising that the focus of this change is on service touchpoints. For most financial institutions, the question is how to be empathetic to our customer and whether we can deliver a personalised experience, even if separated from the customer by a screen. 

Deloitte Insights picked up on this in their 2023 banking and capital markets outlook where it suggested that there is a need for the industry to envision new ways to serve and engage with customers. 

Specifically, the consultancy called on banks to “create customer experiences that are data-driven, consistent across channels, and complete with personalised advice”. 

This is an important first step. For GXS Bank, this tailored experience should extend beyond service. It should also be about offering options to our customers and putting control back in the hands of consumers so that they can decide what is best for them. 

Technology is the enabler here, giving us a unique chance to leave behind legacy structures, and not just focus on service alone, but also ensure that our products are tailored to the needs of our customers.

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A radical overhaul

Take the example of loans. According to a study on lending behaviour conducted by FRC Singapore, a whopping one in two consumers who had previously taken up a loan, were dissatisfied with the application process.

Asked what issues or difficulties they encountered, many said the process was complicated; they had to wait a long period before their loan was approved; or that the minimum loan amount was more than they needed. 

After taking a loan that was not perfectly-fitted to them, these consumers continued to face a host of challenges. More than eight in 10 respondents to the FRC study said they tried to pay back their loans earlier but a third of them faced a range of barriers. These include not being allowed to make early repayments at all, or being slapped with early repayment fees. 

That this market practice is adopted across most banks means that the loans available in the market today offer consumers little to no choice.

It does not have to be that way. When we designed the GXS FlexiLoan, the guiding principle was that it should serve, and ultimately empower, the customer. To do that, the loan leaves the majority of control in the customer’s hand - for instance, they can choose a loan tenure from as short as just two months. In addition, the customer can customise their repayment date according to what best fits their preference and ability to pay. 

These include letting the customer decide how much and for how long they wish to take up a loan. And, to the 77 per cent of respondents to the FRC study who said they want to repay their loans early, we say: Why not?

We also have, in the app, the ability for customers to set up prompts and reminders to help keep them on track with their repayment schedules and to pay down their loan early if they are able to do so so they do not have to stay committed to a loan for longer than they need to. 

In the interest of inculcating good finance management habits, we enable our customers to repay early; if the customer is able to pay down their loan early, he/she should. Additionally, the customer should be rewarded for repaying early, with a reduction in accumulated interest fees, instead of being penalised, with additional early and/or prepayment fees. 

To better understand why this practice is not more widely adopted, it is necessary to look at how the interest on loans is calculated. 

Most banks use monthly rest interest to compute interest payable on the loan, in which the interest of the loan is calculated based on the outstanding balance from the previous month. As the outstanding loan amount is paid down every month, the interest reduces over time. 

As the majority of the financial institutions in Singapore apply the monthly rest approach, the interest is always calculated based on the month-end outstanding balance, regardless of whether or not early payment was received from the customer. 

The GXS FlexiLoan, on the other hand, computes interest payable based on daily rest rate, which means the interest is always calculated on the outstanding amount left as of the previous day’s end. This is a win for consumers, as they are able to enjoy interest savings when they make early repayments. 

Ultimately, it is about putting control back in the hands of consumers so that they can decide what is best for them. We are not saying that the GXS FlexiLoan is a silver bullet that will address all the pain points highlighted by consumers. However, we do think it’s a good first step in the right direction and we encourage other businesses to work with us to tear down constructs that no longer serve as well as they could. 

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‍Jenn is head of credit products at GXS Bank. This article was first carried on Singapore Business Review and Asian Banking & Finance. 

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