Harnessing technology to create tomorrow’s retail bank

Click here to view an edited video of the discussion

THE PARTICIPANTS:

THE ISSUES

• Online migration and the customer experience

• Environmental sustainability of banking operations

• The relationship between technology vendors and banks

• Looking to the future

• Online migration and the customer experience

What are the big issues in retail banking technology that concern you today? That was the opening question put to each participant by Stephen Timewell, editor-in-chief of The Banker and the round table chairman. Bruce Jennings, head of information technology (IT) strategy and planning at National Australia Group Europe, which owns Clydesdale and Yorkshire Banks in the UK, said the migration of transactions from branches to online is one of the main issues, along with the need to verify customers’ identities on remote channels and ensure security. Reducing service and transaction costs by maximising straight-through processing is also important. “In addition, we need to make sure we understand the proposition we give to our customers,” said Mr Jennings. “We have to segregate between servicing and sales. It is important that the experience we provide, when it comes to sales, is consistent across multiple channels. And when a customer goes into a branch, if all they want to do is transact, we have to make sure they’re in and out as quickly as possible.” Michael Anseeuw, head of strategy and business development, global retail ban­­king, Fortis, said technology has chan­­ged how banks interact with ­customers because it has made them more educated about financial services. “They want a different customer experience and our key challenge is to address this using technology,” he said. In implementing technology across many channels, and in Fortis’ case, across borders, banks run into barriers, such as legacy systems. Nevertheless, they must not lose sight of the fact that customers want personal interaction, and technology can be a tool to increase that interaction across all channels.

“Technology should help us to get more intimate with the client,” said Patrick Desmares, secretary-general of the European Financial Management and Marketing Association (Efma). “Another important issue for me is the internationalisation of retail banking. We have to succeed in internationalising it – we have Fortis here, which is a very good example. Third, we must manage our online distribution channels to make sure they become selling channels, not just transaction channels.”

Amit Dua, head EMEA, Finacle, Infosys Technologies, said that globalisation was a major trend. Large Western banks have been moving into new territories, such as eastern Europe, China, India, Russia and Latin America. “At the same time, banks from the developing world – banks from India and ­Russia, for example – are getting into Western markets,” he said.

There is also heightened competition from direct banks. “In the midst of all this, obviously, there’s a customer who is getting savvier by the day. You know, he wants convenience and he wants sim­plicity. He is more promiscuous, because he can switch accounts very quickly. Our belief, given this context, is that technology can enable the banks to be agile, cut costs, offer new products and innovate. I am not suggesting technology is a panacea, but it can be a good enabler,” added Mr Dua.

“Most of my thunder has been stolen already but it is good to see some common themes coming up,” said Simon Barrows, the head of architecture, ­consumer banking, cards and payments at Lloyds TSB. He said it is important that customers find it convenient to interact with their bank, using the different channels, including both the internet and going into branches, and providing the technology to allows customers to do that. “So, if someone does something on the internet and then goes into a branch or calls up, we know what they’ve been doing and can join that up,” he said.

Customer understanding is also important – knowing what products they hold with their bank. “We need to get better at that and we need to apply that to the front line in terms of how we deal with customers and what we offer them,” added Mr Barrows. Third, banks need to be more efficient, getting faster and better at things, and tech­nology is a great enabler in that area, he said.

Fuat Erbil, executive vice-president, responsible for retail banking and alternative delivery channels at Turkey’s Garanti Bank, said that customer loyalty is ­crucial if retail banks are to be successful, but if direct channels, with their lack of face-to-face contact, continue to develop as they are, it could cause a drop off in loyalty.

“The other challenge is competition, in two respects. First, competitors can rapidly copy what you have done in terms of innovation, new services and new products, because of technology. Second, you can easily be undercut on service charges and fees by competitors using cheap technologies and cheap alternative delivery channels,” he said.

Retail banking is still the main force in banking, said Michael Imeson, contributing editor of The Banker. A Boston Consulting Group survey earlier this year showed that 57% of global revenue for banks came from retail banking. “Within that, technology is helping to keep revenues growing, especially with the steady trend to online and direct banking, away from branches,” said Mr Imeson. “But that doesn’t detract, entirely, away from the need for branches, because branches are still necessary as sales points.

“The second point about retail banking and technology is the fact that it boosts processing efficiency, and third, it helps reduce costs. There are many other issues as well, but those, I think, are the three most important things.”

THE KEY ISSUE:Environmental sustainability of banking operations The sustainability of banking operations – minimising the impact of banks on the environment – has moved up the agenda in recent years as society has become more concerned about mankind’s contribution to global warming and climate change. Data centres and other hardware consume a great deal of energy, which adds to a bank’s carbon footprint. “What are banks doing to make their equipment more energy efficient?” asked Mr Timewell. “How can technology be used to improve the sustainability of a bank’s entire operations through, for example, sophisticated heating controls and sensors to ensure lights are turned off at night? And third, what role does technology have to play in developing green products, such as paperless bank statements?” “We have just built a second data centre in Glasgow, using the latest air conditioning, the latest heat and power and more effective insulation,” said National Australia Group’s Mr Jennings. “The reduction in carbon emissions between the new and the old data centre is something like 50%. So, when you get the opportunity to take advantage of some of the latest techniques and tools, you can make a significant difference,” he said. However, it is always a challenge to make a business case for replacing an old data centre with a new one. “The carbon issue is not a big issue, unfortunately, in Turkey, although Garanti has a number of environmental initiatives,” said Mr Erbil. “The bank has supported the World Wildlife Fund for 20 years and has recently begun encouraging customers to receive electronic statements by e-mail rather than paper ones by post.”

Banks can play a huge role in encouraging green practices, said Mr Dua of Infosys. “I know bankers have always liked talking about green stuff but this is another type of green, here,” he quipped. When choosing bank products, most consumers will lean towards the green option if there is one. “Co-op bank in the UK is a classic case of an ethical bank, and it is doing very well on that positioning,” he said.

Banks, globally, are contributing to the environment in two ways, said Mr Dua. “First, by offering green products, such as e-statements, credit cards where a percentage of the spend is donated to a relevant charity such as the World Wildlife Fund, and cheaper loans for alternative-fuel cars.

“Second, banks are beginning to encourage green ­projects through their financing, such as renewable power generation and organic farming,” he said. “There’s real money on the table and, by taking that approach, banks can expand their business.”

“You’re right, up to a point,” said Mr Imeson. “I get the impression that banks are fighting among themselves to try to be more ­environmentally friendly than the rest; greener than the rest.

“It is all very laudable, what they’re doing, and there’s more to be done, but I am a bit sceptical. Each bank claims to have been the first to have done something, such as being the first bank in the UK to become carbon neutral. But then another bank comes up with a similar claim. It is difficult to know who, exactly, is best. But the key thing is they’re all trying, and I think the UK is pretty far ­advanced compared with other ­countries.”

Whatever a retail bank does in the environmental domain can make a huge difference because of its scale, said Mr Anseeuw. “Take the current account. If you stop printing on paper everything relating to that – such as statements – that is not legally required, you save a humongous number of trees,” he said.

“You will need to change your ­systems to ensure that automatic print-outs are not generated, and this is where technology comes in,” Mr Anseeuw added.

“In every country in Europe, Fortis offers cheaper loans for more fuel-efficient cars and houses built to certain energy conservation standards,” said Mr Anseeuw. “The bank also helps customers to calculate their carbon emissions – based on things such as the car they use, how big their house is – and then helps them to compensate for those emissions by investing in green funds.”

• The relationship between technology vendors and banks

“What is the key to a good vendor relationship?” asked Mr Timewell. “Where should banks be giving vendors a hard time, and vice versa?” Mr Erbil said that Turkish banks tend to develop their own solutions, to save on cost and to get exactly what they want. Vendors come up with packages which then have to be tailored by the bank to suit its needs, so it is often better for the bank to develop its own systems. Mr Jennings agreed in relation to channel delivery systems: “When you get to the channel space, there are very limited choices and you may as well bite the bullet and start doing your own thing.” Mr Anseeuw said that Fortis has good IT departments because it has had to build so much itself rather than rely on packages from a vendor. But this tends to apply only in its main markets. “When we looked outside the main markets, where we didn’t have the scale, we went for a core banking package, although it needed modifying,” he said. “That was in 2006. The new system has been released with its joint-venture partner An Post in Ireland, and it is being rolled out with Belgian Post this year. “The relationship with the vendor is very important because it knows its package better than the bank. For the new core banking solution, Fortis has an agreement with the vendor that goes beyond building and implementation. For the moment, the package works but problems may arise in three to four years time when volumes rise, he said. Only then will the bank know whether the package is ­feasible for a 10-million-customer business or only for small-scale business,” said Mr Anseeuw. Mr Barrows said that the question of whether to buy a package or build one did not have a simple answer. “It depends on what part of your business architecture you are talking about as to whether a package will do,” he said. “A package is unlikely to differentiate you from another bank, so if you want a market-leading capability in customer relationship management it is often best to build your own.”

A major benefit of using a vendor’s core banking solution is its scalability, said Mr Dua, something that is particularly important for large cross-border banks. “Take, for instance, our own system, which can scale up to 100 million-plus transactions an hour. There is not a bank in the world that can do so many in a day. So there’s enough headroom. It is a technology than can integrate with other systems around it. This is technology that can allow you to squeeze your back office costs, which can help you innovate more easily and which allows you to be more agile,” he said

Mr Dua said that, despite the standardisation, which provided efficiencies, it was possible for banks to make ­modifications that would allow them to cater to local market conditions and local ­regulations and give them a competitive advantage.

• Looking to the future

Moving on to the final topic of how retail banking will develop during the next few years, Mr Timewell wondered how much the increased level of cross-border banking would affect IT strategy, what more could be done with technology to meet customer expectations, and whether the credit crunch and economic downturn would have any effect on how retail banks deploy their technology. Mr Anseeuw said that for Fortis, meeting customer expectations was key, and customer demands will increase. They will want better advice, more efficient transactions and access to more channels. “The bar will continually rise, and the customer will become more savvy and have a higher set of expectations,” he said. Fortis is already anticipating that and using technology to improve its services. For instance, it is putting ATMs that can take cash deposits in Belgian railway stations, said Mr Anseeuw. “Technology will be a driver for change but the key will be the individual. Technology can do most things but it is the people in the bank and the personal interaction they have with customers that remain the differentiating factors.” Mr Imeson asked: “I wonder to what extent banks develop something in one country – like Fortis with its ATMs in Belgian railway stations and its direct personal banking for high-net-worth individuals, also in Belgium – and then, once it has proved successful, it is rolled out in other markets? National Australia in the UK has, for example, created financial solutions centres for SMEs [small and medium enterprises], which have proved so successful that the model is now being exported to Australia and New Zealand.” Mr Jennings said that these ideas can be exported but they often have to be ­tailored to suit different markets. These modifications create challenges for technology because the business functions have to be decomposed and then reassembled in a different order. That may require building a specific new bit-piece of technology or reusing what already exists.

Mr Erbil said that for Garanti bank, technology would continue to be used to “increase efficiency, lower costs, provide alternative channels and enhance the customer experience”. But it is now also time to concentrate on using IT “to sell more through alternative channels”.

Mr Desmares asked Mr Anseeuw how close Fortis was to “building a factory that could service all of Fortis’s markets in, for instance, customer credit or mortgages”. The reply was that legal and regulatory differences between countries make that difficult. Another hurdle is the need for centralised call centre staff to speak the languages of the countries being served, and to understand how products differ from market to market. “We’re not yet in the situation where any bank can have one back office serving all European countries,” said Mr Anseeuw.

“A long-term customer of ours, the Spanish bank BBVA, tells us that the most prized asset for any bank is going to be the customer relationship,” said Mr Dua. BBVA says that this means it will have to become an aggregator of products from other banks. As a result, it has started routing other bank products through its systems, for which it charges customers a small fee. “It is comparable to a supermarket, where the bank provides a one-stop-shop even for other banks’ products,” said Mr Dua.

Mr Timewell raised the possibility of banks copying some of the winning formulae used by social networking sites, such as Facebook. “It is certainly on the radar,” said Mr Barrows. “But do you really want to make your internet banking site all-singing, all-dancing? And is it the place someone is going to go to first when they open their internet browser?”

Mr Barrows believes that there is probably a halfway house where a bank, through its online banking site, can start to bridge the gap with what social networking sites offer. “But at the end of the day, we are banks providing financial services and information and we need to be careful about security, so we can’t get too frivolous,” he warned.

Regarding internet security, Mr ­Desmares referred to Efma’s annual European online banking survey of 3000 customers. “When they prioritise their concerns, security comes only fourth or fifth. User-friendliness comes first, price second,” he said. This shows that customers are getting less concerned about security because the banks have proved they handle it well.Sponsored by