Technology can help banks improve business processes and, in turn, prepare them for the many future challenges.

Profound changes are rippling through the financial sector, triggered in part by a spate of crises that have rocked the industry in recent years, from corporate accounting scandals, the dot-com implosion, regulatory reforms and fraud and identity theft threats to the current subprime credit crunch. In the midst of such crises, it is information technology that will determine the sector’s ability to manage the most crucial part of the financial services business: risk. Those that turn a blind eye will not survive. True to Darwin’s theories, only the fittest will.

Compounding these trends is the much more radical consumer behaviour patterns driven by today’s youth – the first generation to grow up with the internet, mobile phones, instant messaging, MP3/MP4 players, gaming consoles, and a host of other technological phenomena. Driven by a sense of immediacy and the spirit of spontaneity, this ‘Generation Now’ does not see a bank as a brick-and-mortar building, but as a web-based service, available anytime, anywhere. And for the first time, this group has also influenced older generations to demand quick and efficient real-time services. For ‘Generation Now’ does not seize the day: it seizes the moment.

Some banks are beginning to respond to this generation’s expectations. In the Middle East, for example, mall shoppers waiting for their ATM request to process are treated to advertisements about special offers in nearby mall stores – all of which are based on the customer’s buying history. And in South Africa, consumers do their banking and even pay their bills or buy insurance through a mobile phone. This trend enables poorer South Africans, who have never traditionally had access to banks, cash machines, or credit cards, to become part of the country’s economy for the first time. Such innovative technology, in turn, helps alleviate some of the scepticism with which younger customers regard financial institutions.

The need for change

Driven by these developments, the competitive landscape in the financial sector must change as some players, not entrenched in outdated IT infrastructures, drive innovation and raise the competitive stakes for those steeped in traditional business models. Such innovative financial institutions are often new entrants but, more and more, incumbent institutions are also turning into equally aggressive combatants. They must remember that this is a race for a highly demanding customer base which measures a financial institution’s value by the minute. Winning their long-term trust and loyalty requires equally aggressive, but agile, business strategies that are largely technology-driven.

While the need for transforming IT infrastructures in the financial sector has existed for some time, the present urgency for such change is heightened by the emergence of ever-essential technologies that require a complete restructuring of a financial institution’s IT estate; and by a looming skills gap spurred by the baby boomer generation’s retirement.

Still further change has been triggered by mergers and acquisitions. Such consolidation has forced the sale of weak business lines, broken up the value chain, and contributed to the patchwork of IT infrastructures. As a result, affected financial institutions must be able to transform themselves in the most nimble, flexible way to maintain their competitive stance. Such streamlined integration demands real-time interoperability that only IT solutions can offer: after all, if there is one lesson to be learned from these turbulent times, it is that there is no time to make errors, let alone correct them.

Part of today’s technology dilemma is that financial institutions are spending too much money keeping old software platforms running in order to avoid disruption to their respective organisations and customer bases. Major reasons for this reluctance to change the status quo include the cost and the risk of losing data which, in turn, could lead to customer dissatisfaction and even the loss of affected customers.

Strategies for change

While business model transformations will not happen overnight, the current environment is ripe to start taking small steps toward installing real-time interoperability, flexibility and adaptation as competitive advantages. Incumbent financial services institutions should start by simplifying the processes they currently have in place in order to reduce redundancy and bring immediate value.

In this ever-changing environment, financial institutions would benefit, in particular, from an integrated finance and risk architecture with integrated business insight that would enhance their compliance and reporting capabilities as well as giving them the tools to integrate risk within their business strategy. For example, financial institutions armed with such data are well placed to react to changing market conditions by bringing new and innovative offerings to market in the shortest time. The route that these businesses take to achieve this will ultimately determine who makes acquisitions versus who is acquired during future industry consolidation.

For those who want to be in the first group, among the key strategies for profitable growth should be to improve efficiency with information management tools. Banks need fully integrated business processes that are automated and standardised, but this requires IT infrastructures that can centralise data management across the enterprise and interface with external data sources – all the while controlling costs. An open, component-based software platform that supports third-party applications and that can be configured to the bank’s needs is the ­lowest-cost option for these information management requirements.

Improving customer management will also be critical. The path to profitable growth lies in effective cross-selling strategies that can accurately identify the most valuable customers and, in turn, meet their specific needs throughout their lives. Such customer relationship management strategies require strong customer trust built on world-class products and services, as well as the means to determine the needs of not only existing, but new customers too. This translates to strong background analytics, campaign management, event-triggered marketing and inbound marketing.

Making the leap

Many banks can also significantly improve operational efficiency if they upgrade or replace multiple distribution strategies involving disparate channels with one fully integrated strategy that uses a common browser-based architecture. Such an integrated platform provides a single view of customers across all delivery channels and can help overcome the siloed nature of customer data in many existing banking systems.

In this way, business management can also be improved by enhancing business knowledge. As reporting requirements expand, consumer privacy laws have become more stringent and complex. At the same time, new business strategies require higher-quality business information for enhanced decision-making. All of this requires increasingly sophisticated systems for capturing, formatting and distributing information, and converting internal and third-party data into actionable information for effective business outcomes.

Revenue can also be grown by optimising business process outsourcing. In today’s competitive environment, many leading banks are focusing on their core competencies and outsourcing their non-core business processes, such as document management, archiving and credit-card issuing. To make the most of core competencies, banks must develop a clear business processing outsourcing strategy that addresses related geographic, application and vendor risks.

Having such banking-specific technology to build upon a flexible and scalable platform provides the foundation for addressing the many challenges faced by financial services providers, especially in enticing and nurturing its ‘Generation Now’ clients and customers. Such challenges range from increased competition and value-adding customer services to the demands of regulatory compliance and managing new growth opportunities.

Change is never easy, but to stand complacent in today’s market is to lag behind. The good news is that financial institutions that persevere can make the leap and reap lasting rewards.

LÉO APOTHEKER CO-CEO OF SAP

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