There should be little doubt that transformation is a necessary step for the successful 21st century bank. Unfortunately, the recognition of that need is not accompanied by the knowledge of how to fulfil it.
While the benefits of initiatives such as structuring organisations around customers’ needs, establishing enterprise architectures and implementing straight-through processing have been understood for years, the industry has long grappled with exactly how it can execute reliably on them. A bank that is truly committed to transformative change should approach the challenge strategically, with a specific set of goals in mind.
Go horizontal
Making the transition from traditional banking operations to an integrated organisation requires banks to align functionality across vertical areas. For example, billing or customer-records functionality within each business area should be consolidated and put to use across multiple lines and products. This also applies to the underlying knowledge base of a bank. Banks should look outside the industry for expertise.
For statement rendering, the worlds of manufacturing and high-speed printing can provide assistance. For cash and cheque movement, the superior logistics capabilities of leading courier and delivery companies can be tapped.
According to Somil Goyal of BearingPoint UK’s core banking practice: “A critical enabler of such a transformation will be the business process management and business monitoring tools honed in insurance, healthcare or process-based manufacturing industries.”
Balance objectives
In an age of limited resources, cost/benefit analysis is critical – balancing the use of technology resources to support revenue growth with the ongoing need to control costs and retain existing customers. New, customised products that generate additional revenue are inherently high in cost, requiring the coding of systems and the creation of new processes.
How many types of deposit accounts are worth the cost of attracting new customers? Alternatively, should investment be made in customer analytics to identify how to prevent attrition?
Focus on governance
Any money spent on technology must be evaluated in terms of the needs of the enterprise, not those of a single line of business. (If the credit card, mortgage, and retail banking operations are all doing their own content management or image solutions, precious resources will be wasted.)
The return on any technology investment relies on the alignment of that investment with business strategy. With a top-down view of a bank’s full portfolio of projects, executives can recognise the benefits and limitations of those projects and properly understand their potential impact on meeting business objectives.
Any transformation process inevitably includes the need for new technology. “But the key to the success of any technology initiative means balancing the required functionality of the solution against the following criteria: flexibility, scalability, globality and capability,” says Peter Nikonovich, managing director at BearingPoint New York.
Flexibility
Software needs to be flexible if a bank intends to keep its time-to-market short. Mr Goyal notes that: “This is especially necessary in the European banking environment, which has to experiment to build new products for a single market in core banking.” That level of flexibility applies to the adoption of new products, the change of process models and work-flows, and integration into the existing architecture.
Work-flow engines or rule-based technologies should be employed to ease adoption across platforms, including those belonging to partners, third-party providers and outsourcers. The introduction of an integration layer in the enterprise architecture will provide a simplified means of adding new applications and handling client data.
Componentised software will enable the adoption of emerging service-oriented architectures and support outsourcing strategies on the process side.
Scalability
Software needs to be scalable as well, prepared for growth not only in the number of transactions processed, but also in the numbers of users working on the system, products, price models, accounting codes, time zones supported by the system, and so on. Scalability is the key for a future enhancement of the business strategy, whether that means adoption of new processes, integration of new businesses or entering new markets.
Again, growth can come in many forms – clients, products, locations – and the organisation must be able to scale up the system accordingly. “What is more,” says Mr Goyal, “the confidence that a truly scalable back-office system bestows on a bank will drive the ambition and strategy in the competitive, global marketplace for core banking services.”
Globality
The ever-expanding reach of top-tier banks means that core banking must take on an international perspective. At the very least, that means that systems must be multilingual and able to support multiple currencies. In addition, they must support central data storage and central systems operations across time-zones and thus be functional on a 24-hour basis
Capability
In essence, all back-end functionality should exist only in support of the front-end user – namely, customers. (Even if they cannot see the processes involved, the impact on them should be the perpetual concern.)
“Customers’ expectations regarding their experience when interacting with their financial institution are changing dramatically. Customer preferences—and regulatory requirements—are driving specific communication and contact restrictions,” says Mr Nikonovich.
One reason for the current emphasis on integrated core banking is that the window of opportunity for it to be a competitive differentiator is rapidly closing. As transactional banking grows increasingly commoditised, this is the moment for top-tier banks to put distance between themselves and the non-retail competitors that inevitably will enter the field, appealing to customers on the basis of cost alone.
Many banks, it should be noted, are already on the journey toward 21st century systems and software. But the irony is that larger banks often face much greater obstacles, given the multitude of systems they have acquired, built or inherited over the years.
Continued downward pressure on interest income and transaction fees will drive the need to understand customer profitability and risk more accurately, as well as the need to raise customer satisfaction and loyalty. Years from now, today’s commitment to upgrading and modernising core banking systems will prove the difference between the good banks and the great ones.
Potential drivers
That is why top-tier banks have a unique opportunity right now – provided they know what they are looking for. Apart from MiFID, for the most part, compliance issues are in the past. (Some banks continue to deal with issues associated with international financial reporting standards and Basel II but those, too, will be taken care of by the year’s end.) But during this period of tightening regulation, the wisest banks viewed regulatory burdens – which could be seen by some as little more than a sinkhole of costs – as a potential driver of revenue or even profit.
Regulations requiring a more consolidated use of data also provided an excuse for arranging data sources in a more efficient, more productive and more valuable manner. As client data is successfully captured and unified across the enterprise, the integration of this data will be increasingly central to a sound client experience, which is itself central to the bank’s success.
But the external forces driving change also enabled the leading banks to dramatically – and permanently – restructure operating expenses, by eliminating redundant or low-value activities and technology platforms, and by outsourcing non-core activities and technology. Forward-thinking banks can also achieve sustained migration to lower-cost channels.
By aligning processes, applications and infrastructure around the customer experience, banks discovered they could also drive customer loyalty through superior customer servicing, and increase revenue through the improved cross-selling and up-selling made possible by enhanced data capabilities.
Thankfully, technology has advanced to the point where simplifying systems and streamlining processes is now a feasible reality. Service-oriented architecture and improved business processes will make it possible to scale-up, provided a stable platform is constructed. Long-term, comprehensive technology strategies addressing enterprise architecture, process automation and customer analytics will be a key factor in bridging the gap between the 20th and 21st centuries.
Mr Nikonovich notes: “Perhaps not far off is the coveted ‘universal bank’: a single sales and service platform that crosses all lines of business, from retail banking to wealth and investment management to corporate and private banking. It is an ambitious vision but one that banks can, and must, pursue to thrive in the years to come.”
Britta Schnittspahn is a senior manager at BearingPoint Germany’s Core Banking Practice.
