Transformation is nothing new in the banking sector. For decades, bankers have often been the ones carrying the torch of innovation, seeking out market-changing techniques and technologies to stimulate growth or streamline processes. As a result, banks have grown increasingly dependent on technology in general, and on core banking systems in particular, and the related costs have grown in lockstep with that reliance. Today, as the industry finds itself navigating a powerful confluence of raging currents – globalisation, consolidation, regulation and more – banks are facing a need to renew their focus on efficiency and customer management.
The leading banks now understand that technology can help them to achieve a better competitive position, primarily as a means of leveraging information across business lines and units. For example, mortgage operations, card and payment operations, global treasury, and document imaging, which typically were separate silos in the 20th century, are now seen as components in an holistic, customer-centric operating environment.
However, the situation has reached a tipping point. In the past several years, many banks have delayed making major changes in their core banking architecture as precious resources were diverted to an ever-expanding array of external compliance issues: the Y2K crisis, the conversion to the euro, Basel II, IFRS Reporting and so on. As a result, banks are now facing complex, costly technology landscapes that have been pieced together and patched up over the years, and which are now partially or even completely outdated. In some cases, banks are relying on more than 100 separate applications for mission-critical and customer-facing activities.
Even under the best of circumstances, however, changes to a core banking system are a major undertaking for anyone and are fraught with significant risk. Projects can run for several years and carry price tags that occasionally exceed the annual earnings of the banking unit or even of the bank itself. Today, the typical top-tier bank can spend between 3% and 6% of its annual revenue on technology. It is little wonder, then, that cost containment has become such a crucial issue.
Still, some banking executives remain undaunted. According to research conducted by management and technology consultants BearingPoint with Datamonitor, more than 30% of banking CIOs are now planning to make essential changes to their core banking environment in the next five to 10 years. Those with the best chance of success will need to articulate a coherent vision that continues to acknowledge the changing requirements of the banking industry, which includes accelerated expansion, process efficiency, customer sophistication, increased competition and tighter regulation.
Accelerated expansion
Thanks to the spate of mergers and acquisitions (M&A) brought about by global deregulation, the largest banks of the 21st century will soon control far more assets and deposits than those of the 20th century. As the barriers to entry fall away and newcomers rush in, the demands on core banking systems will grow exponentially. These systems will have to incorporate businesses in new countries, extend some smaller businesses and open up new markets. Often, this will mean expanding an existing platform; other times, it will mean absorbing an acquired bank’s existing systems and data.
Regardless, a bank’s success will rely to a great degree on the stability of its technology – and that technology must be able to sustain the greater workload without raising costs to an unsustainable level.
Process efficiency
Automation will allow banks to devote more resources to customer retention and acquisition efforts. Improved risk management and unit-processing scale will allow them to compete with lower margins. Better data-storage and data-management techniques will capitalise on an ever-growing pool of information about customers, products and competitors. Organisations with the most efficient operations and most comprehensive data will be able to develop new products and services faster, speeding them to market for competitive advantage.
Customer sophistication
Virtually every major bank has numerous customer-centric projects under way, including the redevelopment of the branch, the establishment of a ‘parallel channel’ strategy, and the advent of sophisticated customer analytics undertaken to paint as complete a picture of the customer as possible in relation to a bank’s products and services.
The key is to understand a customer’s evolving needs in the context of technology and consumer patterns, including 24-hour service, online origination, electronic bill presentment and payment (EBPP), and their potential as buyers of new products.
Increased competition
As transactional banking becomes more commoditised, non-banking retail organisations (such as Wal-Mart, for example) will naturally see retail banking as too lucrative to ignore. Because this will lead to some erosion of transactional income at retail banks, the current strategy of perfecting online banking, integrating channels and establishing higher-value advisory services is clearly aimed at retaining deposit bases that support value-added investments, such as loan operations.
While this may help banks to maintain higher-value customers, it may do little to keep transactional customers on board, particularly if lower-cost alternatives emerge.
Tighter regulation
While the deregulation in the past several years has allowed banks to offer more services across more markets, regulations such as Sarbanes-Oxley and Basel II are exacting an onerous toll on technology resources. There is, however, a potential upside: enterprise-wide data-integration efforts implemented now to deal with short-term compliance may, in the next five to 10 years, pay dividends in the form of increased employee productivity, lower operational costs, shorter cycle times and better risk management.
What these five conditions have in common is clear: they will require banks to adopt flexibility, speed and transparency across their operations. As always, it is critical that any new implementation not only reduces costs, but also meets long-term objectives of efficiency, revenue-generation and customer growth. As these initiatives develop, there are several areas where the application of technology has begun to enable long-term transformation: client experience management, process, enterprise architecture, information, sourcing and business alignment.
Client experience management
As the commoditisation of retail banking continues, it becomes paramount that banks understand customer profitability and risk more accurately in order to strengthen the relationship with and loyalty of the customer. The end result of such customer experience efforts will be the establishment of an analytic-enabled ‘e-bank’.
Recent failed attempts to create the e-bank may have made institutions pause but have not caused them to scrap the idea of direct channels with sophisticated analytics applications. A single view of the customer, enabled by analytical customer relationship management (CRM) and supported by online product acquisition, remains very much a part of the long-term customer-servicing functionality.
While the goals of improving customer experience are common throughout the industry, the steps being taken vary. Some banks are concentrating on front-end systems, while others are largely centred on infrastructure improvements. In either case, the key to success involves a more comprehensive approach to technology, enabling ease of use on the front end that will allow for the human element to make the best use of the complexity and high-value data residing behind the scenes. With these elements in place, banks will be able to focus on a high degree of personalisation across all channels of client interaction and more revenue-generating aspects of customer service.
Process
Despite the industry-wide shift from cost-saving initiatives to revenue-generating ones, the reduction of paper-based and manual processes remain an important long-term priority. Current process automation efforts in the US are primarily centred on transferring documents to electronic images, a process that has received a boost from Check 21 legislation, which allows for the substitution of cheque images in place of cheques in settlement. Unlike many other process changes, electronic imaging removes cost in a way that is transparent to the customer.
Automation has tremendous potential to streamline a host of business processes, not only removing paper, which would reduce administration costs and eventually enable greater data integration, but also removing people, potentially freeing them up to pursue revenue-generating activities such as cross-selling. Automation efforts are also enabling new customer analytics functionality as information is used across systems more efficiently and more rapidly. And the move to straight-through processing (STP) will further reduce the need for people in administrative functions, reducing cost and error and improving cycle times.
Business process management (BPM) software is increasingly being used in the banking industry to reduce the manual tasks in any number of processes. Business rules and work-flow engines also reduce administrative complexity within the overall systems, as they allow non-technology staff to integrate changes to the system easily or apply rules for reuse in other areas. Somil Goyal of BearingPoint’s UK core banking practice notes that: “Aspects of this technology – for example, business activity monitoring – are of great benefit in the highly automated sectors of the European core banking industry, such as payments, and form a part of every well thought-out process architecture.”
Enterprise architecture
An enterprise architecture, particularly a service-oriented one, satisfies many of the requirements of a flexible, business-driven technology strategy. And the creation of an open, enterprise-wide framework, rather than a hotchpotch of proprietary code, makes integration of both internal and external applications relatively simple, allowing for far easier and faster changes to the business.
Point-to-point architectures, which still dominate in global financial services, are notoriously inefficient and banks are well aware of the limitations they have in reusing services and transferring data. A true service-oriented architecture (SOA) has only recently become a practical proposition for banks. The presence of a more flexible enterprise architecture will allow banks to reduce their dependence on legacy systems, which is often the by-product of aggressive M&A activity.
Although banks may be sold on the notion of SOA, some scepticism remains over the technology and the hype surrounding it. Such architecture overhauls are expensive, time-consuming and potentially risky, particularly the migration from a legacy environment to a componentised one. Nevertheless, SOA clearly represents the next generation for banks and other industries. Once its role is clearly understood, it will probably become the guiding principle for all future changes in the technology landscape.
Information
The development of enterprise architecture alone does not provide the necessary components for complete horizontal integration. Strategies that place the customer, rather than the product, at the centre of the banking transaction will require a seamless integration of information across product and business lines, as will the increasing regulatory burden.
Regulatory-compliance spending represents an increasing percentage of overall technology budgets. As a result, retail banks are now evaluating their data-retention requirements, including data integrity, storage, accessibility and retrieval. By integrating data and combining it into an holistic view across the organisation, banks will be able to deliver real-time information across the organisation. To use that collected data fully for core banking operations, risk assessment and customer management, all transactions have to be managed in real time and the data must be stored centrally.
Once data retention is no longer at risk, data consistency will become imperative to meet the demands imposed by regulatory authorities. However, ensuring consistency remains a significant challenge; it requires identifying, classifying, storing and accessing data residing in multiple applications and on multiple platforms.
Sourcing
Today’s largest outsourcers have established themselves as an essential part of a bank’s technology strategy. Big banks have been reluctant, however, to outsource their core banking operations. In the future, economies of scale and increasing expertise could lead to the creation of shared service utilities that are capable of managing virtually all retail banking processes – effectively separating the administration and management of core banking from the strategy.
Some banks have already begun to increase their usage of low-cost development centres to focus internally on revenue growth. Others have shown a great degree of scepticism about outsourcing, doubting the true cost savings, and fearing the potential loss of intellectual property and competitive differentiation.
These lingering questions about the quality and cost of outsourcing suggest that many banks will continue to see the business case for outsourcing as hard to prove if cost savings are minimal. At least for the short term, outsourcing will probably be limited to areas that do not offer a competitive difference, such as software development and some processing areas.
Only when intelligent solutions for vendor management have been introduced will successful outsourcing become standard. “Banks crossing that Rubicon sooner, however, will gain from a superior ability to focus on product innovation, process efficiency and, most importantly, the customer,” says Mr Goyal.
Business alignment
In the last century, technology was often isolated from business, with a focus strictly on infrastructure and integration. Technology strategy remained disjointed and often became an inhibitor, rather than an enabler, of business strategy, and the business side failed to understand fully the benefits and limitations of the technology.
Attempts to align technology and business objectives have been stymied by the vagaries of the business cycle, market forces, and a means of effectively proving the return on technology investment. Yet the importance of that alignment is a fundamental necessity of the critical initiatives presented earlier.
Banks must define technology initiatives within the context of their overall corporate strategy, and track and measure projects to make sure they meet both short-term and long-term objectives in an ongoing and iterative process.
A key component of that process is the presence of sophisticated, top-down governance as part of a unified technology and business strategy. A business-led IT strategy will enable a better understanding of evolving customer behaviour. Technology should enable that strategy, rather than drive it. Banks should avoid the pitfall of becoming technology-driven; the ideal should be to become process-driven and customer-centric, with technology enabling those goals.
Awareness and constraint
There seems to be a growing awareness among top-tier banks of the need to shed their traditional, transactional orientation and to focus instead on improving their efficiency and customer centricity. At the same time, banks continue to face greater regulatory constraints and growth is hampered both by new competitors threatening traditional markets and the slowing of M&A activity.
Considering the difficulties of that environment, the breadth and urgency of the industry’s current transformation efforts are stunning. Fortunately, after years of hype, today’s technologies finally appear ready to make good on their promise and to make true transformation a reality.
Britta Schnittspahn is a senior manager at BearingPoint Germany’s Core Banking Practice.
