Author: Veejay Jadhaw
Going forward banks will have an increased focus on improving profitability. While bank profits have exceeded historic profitability rates, return on equity (ROE) is still low compared to the years prior to the Great Recession. Regulatory pressures, customer demands, and non-traditional banking entrants are requiring banks to transform their business strategies, operations, and technologies to improve profitability, enable revenue growth, and improve customer centricity.
“As banks are addressing these challenges, the broader world is changing around them. In one way shape or form, the banking industry will be influenced by four “larger trends” listed below.
- The Global Marketplace
- Digital Business
- Demographic Shifts
- Changing Workforce
The above forces and trends are affecting all banking segments, including Retail, Commercial, Mortgage and Capital Markets. Innovations in technology can drive a revolution through parts of the financial services industry”1. In the long run, banks that will modernize will be able to sustain or improve their competitive position in the global marketplace.
Banks need to make tough choices and prioritize various strategic banking platform modernization & digitization programs
Modernization is not merely a technology upgrade. Upgrading technology only will not allow banks to realize the full potential of modernization. Banks need to simplify their current operating model, underlying business processes, and customer interactions and leverage technology modernization in an incremental fashion. A combination of business process simplification and technology modernization will provide the maximum expected business benefits. In addition, banks need to reduce their technology operating costs by gradually transitioning the core business processes to a Private or Hybrid cloud deployment model while maintaining a sharp focus on Data Privacy and Security requirements.
Key Drivers for Banking Platform Modernization & Digitization:
- New regulations, e.g. Basel III, Foreign Account Tax Compliance Act (FATCA), CFPB, Dodd-Frank Act, increased capital requirements, and shifting buying patterns are all compressing margins and affecting profitability.
- Over the last 20-30 years legacy systems have created fragmented business processes which have led to business process complexities, resulting in a decrease in speed to market & operational efficiency and inconsistent customer experience & attrition.
- Traditional banks are facing increasing competitive pressure from non-traditional banks and new entrants such as online and direct banks. These banks are running on new, flexible, Real-Time modern banking platforms and are creating new standards in innovation and customer service.
- Multi-Channel to Omni-Channel Evolution: In the recent past, banks started offering multiple channels for customer interactions, e.g. branch, call centers, online banking. The Multi-Channel strategy did lead to increases in customer touch points, however, in most cases also added additional complexity in their IT landscape, and did not provide a consistent customer experience across all channels and touch points.
- Emergence of Omni Channel and Social Network Integration: offers an opportunity for banks to provide a cross-channel seamless transaction process flow and consistent customer experience and integration across all channels, any time, any place, on any device.
- Millennials are driving the future of banking and the Retail Merchandise Industry is a key influence on the Banking industry: Customers are used to being targeted by the retail industry with product and service offers based on their personal preferences and buying patterns. Similarly, customers today expect the same personalized service from the banks, regardless of channels.
- Maturation of communication channels, such as advance mobile transactions, text messaging, video & social networks are changing how customers want to communicate. They expect banks to provide secure and advanced banking capabilities on their mobile phones.
Customers expect banks to provide a seamless experience between the physical and virtual world.
Key Drivers for Leveraging Private & Hybrid Cloud for Banking Platform Modernization & Digitization:
- Innovation versus IT Run Cost – Paradox: Typically approx. 70% – 90% of IT cost is allocated to run the banks’ current technology landscape, impacting banks’ ability to invest in innovation.
- Cloud Computing will be Omni-Present: Cloud computing’s most disruptive impact will be changing the way consumers research and buy financial services by offering banks the capabilities to easily leverage social networks and mobile technology to improve banking experience, particularity for the millennials, e.g. mint.com
- Banking Value Chain Evolution: Cloud computing will serve as a catalyst for the banking industry to emulate the retail industry (e.g. Amazon) by providing banks the ability to integrate with multiple cloud-based services and product providers, e.g. BankSimple
Gradually all components of the banking value chain will transition to the Cloud. Banks need to focus on industrializing their IT & business processes and start developing a strategy to gradually transition their capabilities to the Cloud, starting with commodity processes, e.g. HR, Marketing, Core Banking “Servicing” functions.
How to Develop a Banking Platform Transformation & Digitization Strategy:
As banks think about modernizing their various core business platforms, they should consider the following building blocks in building the transformation strategy:
- Building a business case:
- Establish a Business Case: Establish alignment with long term business goals.
- Document key IT/Business processes and respective performance metrics associated with the business goals, e.g. IT
SDLC, Support, Origination, Fulfillment, Servicing, Products, Customer Services, Customer Experience, Channels.
- Take a baseline of all the associated performance metrics and document the target state values for the performance metrics based on stakeholder input and industry peer groups.
- Engage with all the business and IT stakeholders and conduct interviews to understand the key pain points impacting customer experience, attrition, cost, revenue, market share.
- Engage relevant strategic technology partners to understand the key capabilities of their systems.
- Forecast new values of the performance metrics based how the new system will impact the underlining functional areas and processes.
- Create estimates for the cost of implementing and maintaining the new systems.
- Calculate the ROI, NPV, IRR and Pay Back time
- Business Process and Operating Model Simplification:
- Traditionally retail banks have organized their operations by product line – such as, loans, deposits, and investments, in individual business silos and channels, each of which has varied business processes.
- Banks need to evaluate the consistency of customer interaction and customer information across various channels, e.g. Branch, Online, Mobile, and Call Center etc.
- In the new and emerging business model, banks will need to transition into more modular business processes to gain operational excellence (interoperability, scalability and flexibility):
- Modularity: Grouping similar types of tasks and defining functional building blocks consistently across different products or channels.
- Commonality: Treating similar modules as one and considering one outcome, standard solution.
- Banks should also create a business process map and highlight business processes that do not require mass customization and position for Cloud transition.
- Technology Architecture Planning:
- In legacy environments, usually most of the logic resides across the various application layers with hundreds of point-to-point interfaces developed over time.
- The above leads to major sources of complexity in new product and/or capability development (both in effort and
- Each channel has a different data source and is one of the main barriers in enabling an Omni-Channel customer experience.
- Target State
- Take an inventory of all duplicated or fragmented code supporting a single business function.
- Establish an ideal state blueprint noting all the relevant business object models and respective technical components. The goal is to simplify the target state by eliminating redundancies. For starters, the target state should be established based on modularity of business processes, scalability, consistent user experience, performance, data access and security.The goal is to enable decoupling of the application logic from the channels back to the core engines.
- Simplify the overall architecture, providing flexibility and interoperability.
- Product Evaluation: The key points in selecting a solutions provider are following:
- Select a “platform” provider who offers an end-to-end scalable banking platform built on open technology and that is database agnostic. This will enable economies of scale and reduce your TCO in the long run. Avoid specific application vendors.
- The selected vendor must have a depth and scale of business domain expertise. This is extremely important to minimize disruption to your organization
- The solution provider must offer prebuilt content or “preconfigured” out-of-the-box workflows, and standardized interfaces for relevant business processes that need to be modernized.
- Evaluate the vendors partner ecosystem, internal capabilities related to cloud deployment models, customer service, and INNOVATION capabilities
- Pilot: Before signing a contract ask for a 60 – 90 day pilot.
- Deployment Model: If you do not have a cloud strategy in place, this would be a good place to start. Banks must thoroughly evaluate all the various cloud deployment models, (Private, Hybrid, Public) and respective pros and cons. Realistically speaking, banks will have a place for all three types of deployment models; therefore, it is important evaluate what business processes are suitable for public, private and hybrid models. Performance, Data Privacy and Security should be the primary criteria in selecting a model that is the right fit for your organization.
- Implementation Planning: This component of the overall strategy is one of the most important aspects for banking transformation planning. This is where the rubber hits the road.There are various approaches to transform banking platforms. It could be an a “horizontal” approach, where the you select one product or LOB, and incrementally modernize the entire business process (front to back). Alternately one could take a “vertical” approach, where you can modernize all products or LOB by specific business areas, one at a time, e.g. Front, Middle, and Back. Experience shows that the vertical approach is usually more expensive due to increased integration with legacy systems. In addition, the modernization can take the shape of a hybrid approach. Regardless of what approach you choose, you must break it down into smaller release cycles of 3 – 6 months, DIRECTLY aligned to a measurable business value. Ideally you can make the overall transformation SELF FUNDED if you map out the release plan correctly. Banks also need to think about data conversion and data archiving as part of the implementation plans.
- Organization Change Management, Program Governance and Risk Management: Setup a multi-tier governance model to ensure proactive risk identification and mitigation plans are in place. Solicit complete participation and support for all relevant stakeholders and executives.
Reference 1: www.EY.com
About the Author:
Veejay Jadhaw has over 15 years of experience working in Financial Services, within Banks and High Tech Industry focusing on Financial Services Technologies. He is currently the Global Head, Core Solutions & Platforms in Cloud at SAP Global Financial Services. Veejay is a recipient of Five US Patents. Accomplished speaker at various customer and technology conferences around the world with expertise in Product Management, Strategy, Innovation, Research & Development, Architecture & GTM.