Many banks and financial service providers are innovating, optimizing customer experience, digitizing and digitally transforming to adapt and, ideally, differentiate themselves in a hyper-connected market reality. The battle for the consumer is on in retail banking (a.k.a. consumer banking) while the increasingly competitive and disruptive hyper-connected ‘digital’ information age in which it occurs, poses numerous challenges and requires various shifts.
Innovation, transformation, digitization and automation to respond to changing consumer demands, tackle the arrival of new market players, adhere to altering regulations and build a stable foundation for today and tomorrow isn’t enough though.
The question is how retail banks will truly become leaders in their market and avoid embracing or copying similar and easily replicable approaches of their competitors, while being “disruptors” or innovators instead of being the victims of large-scale disruption, as the WHOLE industry is innovating, digitalizing. and challenged by new entrants from other industries. In other words: how do retail banks make the difference, staying close to their mission, values, customers and stakeholders while developing the business competencies to improve, innovate, change, thrive and survive in times of accelerating transformation?
Developing customer-centric, connected and innovative competencies
Excelling at customer experience and customer service, offering the best mobile and digital experiences and speeding up processes and information flows to innovate better and faster are essential to succeed.
As usual, this is all easier said than done. With challenges on so many fronts gaining a clear understanding of what the challenges are and how they are (hyper-)connected is important. Moreover, it isn’t just about today: the next challenges and opportunities are around the corner and already being understood and acted upon by leaders and game changers. Change is perpetual and reality dynamic. It is even more so in this highly connected context of today and many years to come. Retail banks need to combine their efforts to optimize and innovate today with the creation of business competencies to act better and faster in the light of tomorrow’s challenges and opportunities. These competencies or innovation and transformation pillars become business pillars that make the organization agile enough to respond and ideally pro-spond in the future than they have been able to do so far.
Just as in other industries and even more so, most retail banks weren’t properly organized and fast enough to deal with changing business and consumer realities many failed to see. In more than one sense, digital transformation in retail banking is about catching up with these realities, rather than about innovating and truly leveraging the possibilities of digital technologies and information in a deep and ecosystem-wide way.
Reducing costs and managing risks remain key but digit(al)ization becomes crucial
Let there be no doubt: the de facto main priority of banks is keeping costs under control, managing risk and realizing cost reductions overall. Even if the implementation of digital strategies, customer experience optimization, reviewing the role of branches, replacing legacy systems and responding to regulatory changes are all important, costs and managing risk remain essential for all the obvious reasons. Still, things are changing. Digitization, digital disruption and digital transformation are increasingly recognized as priorities by the retail banking industry.
Technology and its cost, risk and transformation consequences
In a highly uncertain global economy, with challenges and urgent needs to transform, amidst digital and mobile first consumer demands and along with the pressure from politicians and regulators to digitize, controlling costs and managing risk is paramount. Current uncertainties in a geo-political context and urgent modernization and innovation requirements that need to be funded simply require retail banks to keep a close eye on costs and business risks. How else could it be? However, the perceived risks are changing.
When looking at the perceived business risks for 2016 and beyond we mentioned how in the Allianz Risk Barometer 2016, for the first time ever technological innovation appeared in the top 5 long-term risks facing businesses. In financial services we see that cyber incidents are perceived as the second most important risk. The number one perceived risk in financial services concerns market developments. However, as we also mentioned this category of risk is increasingly about disruptive forces and business models.
Digital technologies are seen as challenges and enablers at the same time. Branch consolidation is a way to reduce costs, digitization and digital transformation another. Yet, many banks still don’t make the link between digitalization and cost savings. As you can read below, however, there is a clear link. Digitizing back office processes and automating back offices, for instance, leads to cost savings on levels such as core banking replacement, document management systems and Business process Management. Moreover, back office digitization removes the inevitable costs of manual labor and paper-based processes while creating efficiencies that lower customer service costs and reduce churn when done in the context of almighty customer experience.
Legacy systems deserve special attention as they are costing banks a lot of money and have led to expensive failures as you will read further. They are simply not adapted to current demands and can’t be replaced by other legacy systems even if that is what some CIOs keep hoping. In the words of Ovum’s Rik Turner in a 2013 article: “These [legacy] systems work, so bank IT leaders think, Why rock the boat?”.
It’s safe to say that the need to rock the boat is not just a matter of adapting to the changed realities of banks but also that a modernization of IT systems reduces costs when done well. It’s in that ‘done well’ that there is a risk with CIOs who are not willing to take those risks as they’ve been relying on the same technologies and systems in a market that was among the first to embrace numerous IT systems and solutions.
Retail banking, cost reduction and digital strategy in perspective
When asked about their top priorities in the years to 2020 at the occasion of research by financial software specialist Temenos and the Economist Intelligence Unit, as reported upon by David Bannister on Banking Technology, the majority of retail bank executives answered ‘implementing a digital strategy’. The implementation of a digital strategy thus overtook responding regulatory requirements in the 2015 edition of the research.
As improving customer segmentation by product, service levels or distribution channel ranked second, the more ‘direct cost-related answers rank lower’. On the third spot we find adapting to changes in the size structure and role of the branch network (where cost savings really play a big role). And on four we see cutting costs or improving margins on retail business lines. Responding to regulatory requirements, while still a crucial one, only ranked fifth which was somewhat unexpected.
If we look at the reasons behind the implementation of a digital strategy it’s probably not a big surprise that it’s not just a matter of adapting to changing customer requirements, regulatory pressure, “concerns over competition from new entrants” or creating the possibility to be more responsive, agile and innovative. The same goes for customer segmentation improvement and several other answers. More revenues, more competencies to survive amidst all those changes, managing risks (of, for instance those new entrants) and, most certainly, saving costs, also through the implementation of a digital strategy.
But again the signs are clear, especially as according to Monica Woodley of The Economist Group, (quoting from Banking Technology) “the surge in interest in digital channel strategies was driven by concerns over competition from new entrants – 35% of respondents cited it as having the biggest impact on the industry, up from 22% last year and tech and e-commerce companies are the competitors that banks fear most”.
Legacy IT and back office challenges
So let’s take a look at some operational (processes), technological, contextual (ecosystem, economic, customer-related), behavioral and structural/cultural/organizational issues to tackle for retail banks and start with the challenges and opportunities regarding legacy IT and back office digitization and integration.
Legacy IT challenges: adapting to changing conditions
With a tradition of complex legacy IT systems, designed to meet the – very specific security and regulatory – requirements of banks before the current sea change in the industry, the back office and legacy systems are a challenge in more than one regard.
One of the challenges concerns legacy IT systems and business continuity on the level of system failure. As ample examples have shown over the past few years, legacy systems are not adapted to the changing and increasingly demanding digital evolutions and the processing and security challenges which are an inevitable consequence of them. It is even not so much a matter of cybersecurity but of sheer capacity and design of key back-office systems. Moreover, there are genuine risks involved with upgrading and connecting the legacy systems of banks to adapt to the demanding and non-stop processing requests and needs of consumer-oriented technologies and applications, for instance in the space of customer service, online banking and a mobile first world as it’s becoming a rapid reality in retail banking.
Obviously this shouldn’t stop banks from making the necessary changes and it doesn’t but even if most banks reduce risks through thorough testing there are several cases where it wasn’t through enough, leading to serious glitches. With ever more regulatory requirements and changes, technological evolutions and the ongoing changes in customer behavior and preferences, security and testing are of the utmost importance as it is clear that legacy systems will lead to an increasing number of issues as they’re simply not built, let alone adapted, to a digital and data-intensive reality.
Legacy IT challenges and the digitization of the back office
Customer experience is a keyword in back office automation and so are costs and agility:
- Capgemini found that only 30 percent of bank’s executives feel that their operational processes can adapt quickly to external changes. A clear sign regarding agility and the capacity of responsiveness.
- On the cost side of things it’s clear that manual, paper-based and siloed equals high costs, among others on the level of labor, infrastructure maintenance and error and rework as is illustrated by Capgemini.
While the case for back-office automation goes for all industries there is work for retail banks who want to dispose of the business capacities needed to respond to challenging conditions. However, in July 2014 McKinsey stated that across Europe retail banks had only digitized 20 to 40 percent of their processes.
The need to bridge the back office and front end and connect divisions, information silos and processes
With the customer experience as a core goal, back-office and front-end processes and systems need to be connected. Obviously the same goes for various departments that are challenged by a disconnect between the efforts regarding customer experience management in the front end and slow processes on the back end whereby digitization of operations is missing and information management fails to serve customer and business value creation processes and goals. The consequence is an inability to meet customer service goals (60 percent of customer dissatisfaction sources originate in the back office), disjointed customer experiences from an end-to-end perspective, wasted investments on acquisition, high leakage rates and poor agility and innovation capacity.