The world’s first “digital loan” and its implications on the business value of data.
Our loans come at a cost to us. Those who have good credit ratings and collateral generally get a higher loan amount and a more preferential rate due to higher credit worthiness.
As the world moves towards digitisation of everything, banks have now started to tie interest rates on loans to metrics based on the corporation’s digital transformation process.
Structuring a “digital loan”
For the first time, a consortium of 7 international banks recently made headlines by offering Olam International, a food and agri-business company headquartered in Singapore, the world’s first “digital loan”. (1)
In the case of Olam, the company said it secured a three-year digital-linked revolving credit facility of US$350 million.
The cost of the loan is linked to Olam’s “digital maturity score”, where Olam and the participating banks have agreed on annual improvement targets over the course of the facility which, if achieved, would trigger a reduction in the interest rate.
The digital maturity score is determined by the Boston Consulting Group using its proprietary “Digital Acceleration Index” ( DAI ) methodology which assesses companies adoption of digital transformation processes across four criteria, namely:
(a) business strategy driven by digital
(b) digitising the business core
(c) new digital growth and
(d) adoption of enablers
According to BCG, The DAI has already been proven to be a valuable tool among top-level executives and digital experts from more than 2,200 companies covering all industries and geographies (2).
Implication #1 : Data is reinforced as an asset
An idea where the cost of borrowing is backed by efforts of a company to transform their business digitally, puts data — the lifeblood of a company’s operations, into a different perspective. Data is the foundation in achieving digital maturity because the requisites of going digital involves a change in business strategy ( working with and using data tools ) , leveraging the power of data and technology ( using and mining data ) and integrating disparate ecosystems. ( exchanging data between entities ).
For data to be seen and treated as an asset, it must be able to generate economic value.
At NetApp, we enable companies to extract the value of data by providing services that will enable companies to :
- Unlock, and make data accessible and able to be utilised by the right knowledge workers at all times, regardless of where the data is stored
- Proactively manage the growth of data through its lifecycle, so that data can be used effectively to generate returns over its lifespan
- Protect, secure and ensure that data is never compromised in unforeseen situations, thereby providing business continuity of companies
Companies with a data strategy in place will thrive in the new economy.
Implication #2 : Data strengthens the partnership with banks
Linking credit worthiness of a company to its digital effort is a strong endorsement by financial institutions on the urgency of helping businesses survive and thrive.
Digital transformation is business transformation. Companies where the digital transformation agenda is high on their list of business priorities will survive and grow.
In a study commissioned by NetApp, it was found that Data Thrivers ( by definition, Data Thrivers aggressively using digital technologies to disrupt new markets, where the ecosystem and lessons-learned feedback is a constant input to business innovation ) enjoy 3X greater increased profitability, new customer acquisition, and employee productivity compared to those with low digital agendas. (3)
Banks want their money back. With a “digital loan”, that erstwhile fact remains. However, banks now will want to stretch the tenure of the loan to recoup the reduction in earned interest income. Banks will readily stay through the long haul with their debtor companies. And banks know that the chances of a digitally mature company surviving is much higher than one that is not.
Implication #3 : Data used to instill change in social behaviour
If banks are able to, via financial incentives, nudge and instil urgency in companies to transform themselves into becoming more “digital”, can the same incentives be accorded to consumers?
Those who are digitally savvy will stand to gain financially if a similar version of a “digital loan” is made available to consumers, and may also open up a new market for micro-financing for the under-banked in Asia, and across the world.
For example, China has a nationwide social credit system where citizens are given points to start with, and where points are subsequently added for good behaviour ( helping the elderly, paying dues on time ) and subtracted for bad ( such as using your cellphone while driving ). These actions, captured digitally through IOT and other devices, are scored to determine your ability to access healthcare, purchase public transport tickets, and to successfully obtain loans, among others.
If you are a law-abiding citizen who pays your dues in a timely manner, the government rewards you with welfare benefits, low interest rates on loans and more.
“Discredited” Chinese citizens face greater scrutiny from the public, meet tougher challenges when applying for new credit cards, getting bank loans and in more severe cases, may be blocked from buying airlines or train tickets, until they repay their outstanding debts and fines.(4)
While there are merits in using financial incentives to accelerate adoption of technology, some may argue that the same incentives should not be applied to track and govern social behaviour. Will such incentives establish a permanent change in social behaviour for the better, or are the changes in behaviour ephemeral and disappear once the incentives are removed?
Data and balance sheets
Financial incentives generally work. When used as a interest rate sweetener to accelerate the digital transformation journey of companies, corporate KPIs improve, and also paves a way for banks to work in a digital framework with their customers. This will lower the cost of funds for companies and in turn, become accretive to the bank’s digital transformation journey as well. The partnership between industry and finance will emerge as resultant winners.
Data, as the foundation of digital maturity, may show up in the balance sheets of companies one day. The question is, how much is it worth to companies?
