With the average return on equity (ROE) for the top 250 banks worldwide (by total assets) at 6.29% in 2020, digital transformation to improve customer service and reduce costs is essential, according to a report from Banking Industry Architecture
Network (BIAN) and the IBM Business Value Institute.
They have developed a list of six best practices for banks.
“The confluence of macroeconomic pressures coupled with new competition from fintech and non-traditional players presents a more challenging environment than ever for banks. The need to embrace continuous reinvention, increase business profitability, and reduce costs requires a major operational transformation,” the report said.
The proposal combines technology, culture, process improvement, sharing and deep digitization. Banks have made a start, but they still have a way to go.
A survey of 2,000 bank CIOs and CTOs conducted by BIAN and IBM showed that the percentage who reported achieving the modernization goals cataloged as six best practices ranged from 18 to 37 percent. In some areas, banks perform better, or perhaps survey questions allow them to get greater credit for efforts. BIAN found that “78% of banks are modernizing platforms by leveraging AI—but there’s still room to grow.”
Specifically the survey found banks using AI in customer care, credit risk assessment, workforce engagement and operational efficiency. But it says credit applications and loan management are under-explored areas.
In building a resilient hybrid cloud it was found that 79% prioritize key building blocks such as scalable data storage; avoidance of vendor lock-in; unified security control framework; and accessible data and services.
The study says that CIOs and CTOs have shifted their focus from pure digitization to digital business transformation.
Banks need to transform their processes, not just digitize existing practices, says Shanker Ramamurthy, global managing partner for banking & financial markets at IBM Consulting. As an example, he cited robotic process automation that he described as paving the way for cattle — taking yesterday’s processes and automating them.
“That gets you so far, but not far enough. Digital business transformation requires stepping back and looking at what the future model will look like for the enterprise, rather than automating yesterday’s model.”
Instead of limiting themselves to the “adoption and migration” of existing processes to the cloud, they can embrace the modernization of their operating models to power new ways of working and innovation across the bank and its partner ecosystem.
Banks need to move quickly to transform their businesses, especially in markets where their return on equity is below the cost of capital.
“Great transformation is the order of the day in the banking industry.” Fintech, or techfins as Ramamurthy prefers to call them, is moving forward to capture more of the most profitable and least regulated parts of the financial services value chain, leaving banks with complex back offices that consume two-thirds of their spending. Banks need to move from relying on a monolithic core to a stable yet flexible cloud-powered ecosystem.
“Trying to achieve growth and differentiation on the customer end, looking to achieve efficiency and doing so while managing risk and regulatory compliance, and doing all three simultaneously, takes a lot of energy especially when techfins support some of the most valuable parts of your value chain.”
The BIAN-IBM study identified six best practices:
— Create small teams responsible for identified end-to-end operational tasks. “Culture is the organizational glue that brings together internal and external innovators to spark collaboration and value creation. Hybrid cloud technology creates a playground for culture change that gives small teams responsibility for end-to-end operational tasks that span the entire ecosystem.” So far only 18% of respondents say they have achieved this.
— Integrate monitoring early in the development process to prepare data, obtain user feedback, and prepare for deployment and maintenance activities. 37% have monitored early in development.
— Create a data fabric that allows data to flow through a wide network “on tap.” Silent data is standard in 65% of respondent organizations.
— Use AI factories and transform data environments that turn data into action. Only 30% of respondents said test environments and sandboxes are always available for AI modeling and calibration.
— Embrace extreme end-to-end digitization to streamline and automate complex operational workflows and drive innovation. Only 23% said they did this.
— Engage partner ecosystems to drive faster innovation and efficiency. Only 26% of all survey respondents indicated that the partner ecosystem always actively participates in product and service innovation.
Successful banks actually use these six best practices, says Ramamurthy. “This is not an easy and finished journey, but one where you move in stages over time and through complexity. And this is not all within enterprise boundaries, but requires thinking about how to leverage independent software vendors and any service providers that can help.”
He cited DBS in Singapore as an example of a bank that has gone beyond traditional banking boundaries to approach customers in the mortgage process.
“They embed themselves upstream in that customer journey,” he explained. “Through the DBS website you can view and connect with brokers and listing agents.”
State Bank of India offers mobile banking users deals on e-commerce services such as hotel bookings.
“They get a better value and a better price if they use the SBI app, because the bank brings a large number of customers to the hotel — it’s a win-win.”