The Future of Banking
According to a recent IBM report on the future of banking, technology will become even more critical to success and a central component of strategic decision making. Banks must use new technologies to differentiate themselves from competitors, seize market opportunities faster and more effectively, and serve customers better by offering more personalised products and banking experiences.
As customers’ individual life patterns and financial needs become more unpredictable and fluid, choice and diversity will be the norm by 2015. Over the next 10 years, success will depend as much on innovation and the ability to anticipate and proactively meet customers’ needs as on streamlined efficiency and operational excellence.
Increased competition will come from new providers, who will compete with traditional banks on brand, cost, and service excellence. Facing stringent regulation, global competition and margin pressure, many companies have already restructured and reorganised: customers, rather than internal business processes, are increasingly at the centre of the most competitive organisations. Lean, efficient and quick to react to market demand, these customer-centric organisations with respected brands have reduced capital and operational expenditure. Focused on their core business, they are willing to outsource or create partnerships for everything else – practices the retail banking sector should follow.
Customer-centric organisations are able to leverage their knowledge of client needs to not only cross sell and up sell opportunities, but also to better segment customers and create packages designed to anticipate the needs of target populations.
Increasingly intolerant of poor responses from banks, knowledgeable and more demanding customers are already redefining the rules of the game. Shopping around for the best products/services and reliable advice, customers are no longer blindly loyal but ready to move around frequently. Whether they go to traditional banks or to the growing number of new organisations offering financial services, they are walking away from inefficient organisations and complex, difficult to understand products and fees.
Expected to be even more fickle and savvy about technology, tomorrow’s customers will also vote with their feet, moving to organisations better able to anticipate and service individual needs. They will not accept complicated fee structures or contracts with vague terms and conditions but instead will demand greater transparency in all their dealings with the bank. People will pay more for personal value but demand low prices for basic goods.
By 2015 technology will make it even easier for customers to research, compare, form and break relationships with financial institutions while demanding greater advocacy and control over their transactions.
A recent survey shows that faith in banks is already falling: around 31 per cent of customers at the top 10 American institutions believe companies act more in the interests of their own bottom line than that of their customers, leading to defection rates at some banks of 30 per cent.
On the basis that it is cheaper to keep existing customers rather than acquire new ones, knowing the client base and continually improving personal experience are essential competitive strategies for the future. Although critical, it will not be enough simply to offer loyalty schemes, greater choice and bespoke products and services. Banks must focus their efforts on first identifying and then cultivating their most profitable clients. They must be able to mine and drill down into existing databases in real time to anticipate and proactively suggest banking solutions that meet particular lifestyle needs. Such functionality is fundamental to a bank’s ability to anticipate and accommodate changing and often unpredictable customers.
Along with demanding consumers, banks are challenged by consolidation, regulation, technologies, specialisation plus new working patterns that combine to increase the pressure to replace traditional growth/development strategies with flexible practices.
Yet the path for new entrants will not be entirely smooth because regulatory hurdles will make market entry difficult. Although banks have room to improve their customer service, they are still more trusted to provide security and privacy than companies in other industries. However, demands for transparency and supervisory pressure from regulators will increase, especially as banks involve external suppliers. Regulators already insist that financial institutions increase security and adhere to data protection laws while reducing operational and partnership risks. Because of increasing globalisation and consolidation, regulators will continue to legislate in favour of creating a level playing field.
Although the cost of compliance is expected to rise over the coming 10 years, banks can potentially reduce these costs over the long term by managing their business more effectively and instituting enterprise-wide deployment.
Increasing their reliance on specialist suppliers and partners will involve a degree of risk: vendor due diligence and audit programmes will be expanded and strict performance, reliability and disaster recovery measures enforced. Added to which, regulators will monitor the structure of external relationships and the financial viability and capability of partners.
As they change their operating models to focus on critical, differentiating business components, banks will have to outsource non-core tasks to external specialists. Global connectivity combined with more powerful computing will create and support specialisation. Digital connections will be faster, more affordable and pervasive, making relationships with partners and customers practically seamless. Banks will become more flexible and responsive to rapidly changing market conditions.
Yet restructuring to compete must have board level support and involve the entire workforce. The challenges are twofold: employees must be encouraged to perform well and more time and effort must be dedicated to managing critical relationships with external partners.
Banks must optimise employee productivity and retain superior expertise to drive new strategies. In a recent poll, 49 per cent of retail banking executives blamed less than optimal employee performance on misguided incentive schemes with 36 per cent suggesting they are too difficult to understand.
As the bulge of experienced banking staff starts to retire, not only will there be intense competition for new employees but traditional labour pools will shrink. Recruiting internationally will increase but managing workers from abroad requires new skills. New working practices, older, more diverse and increasingly mobile workers create management challenges best met by more flexible operations and flatter organisational hierarchies.
Most financial services executives believe that talented employees not only contribute to business performance but are essential to competitive advantage. To create sustainable growth over the next decade banks must foster an internal environment that supports innovation not only in products and services but in operational processes, customer knowledge, new channels and diversification strategies. Optimising collaboration and the exchange of knowledge between individuals and teams fuel innovative ideas and generate new capabilities.
Increasing employee productivity will be necessary, but the ability to bring new products to market fast and offer clearly differentiated services will also be a critical part of any competitive strategy. However, most banks’ efforts are hampered by cumbersome, inflexible legacy operating systems, technologies and solutions that need updating and modernising. Typically, existing core bank systems are fragmented and data is stored in separate silos that make it difficult to interrogate databases effectively. Few companies capitalise on the benefits of imposing enterprise-wide solutions.
To overcome these legacy limitations, banks are expected to invest more in IT and customer analytics and install emerging technologies like grid computing, service-oriented architectures, visualisation of data and storage plus predictive intelligence. An alternative to building these capabilities in-house is to create partnerships with specialist suppliers.
Although the quantity of information will increase by 2015, advances in data storage, tracking, analysis and protection applications will make it easier to correlate structured and unstructured information and extract value from multiple sources. Banks will therefore be able to make better use of existing resources to handle increased demand and perform more detailed data analysis. Since customer data will be gathered, analysed and collected at personal levels, the ability to tailor financial solutions and the quality of service can increase dramatically.
Storing and transmitting data digitally will enhance security and reduce threats to business continuity. Security-rich and resilient IT infrastructure protects banks against insider fraud and malicious attack. Emerging technologies will provide more personal security and better customer authentication.
At the start of any restructuring programme, banks must conduct an internal audit to identify which technologies, components or business modules best support corporate strategies and contribute to differentiation and competitive advantage. Each solution, component or function should be assessed to determine where and how it should be managed. Instead of investing heavily in innovative IT systems it may be more efficient and cost effective to outsource non-strategic and less critical components.
Whether banks buy their own systems or choose an outsourcing model, the pace of change, innovation and lead times to market will be enhanced and speeded up by service oriented architectures, open standard applications, advanced computing power and global connectivity. Aiming to gain optimum competitive advantage by 2015, the most astute banks will focus on core strengths and partner for everything else. Not only will they exploit the potential of each customer relationship to sell products, but they will employ effective performance management techniques to develop the potential of their workforce. Technology will be a critical element in their success.
To survive, banks will need to become more responsive not only to more empowered customers but to changing market conditions and emerging competitive threats. Innovation and specialisation are important factors in their ability to compete. Banks must focus on core critical and differentiating services and distribute non-core tasks to external specialists able to support an open, flexible business structure.
Traditional segmentation approaches and ‘go-to-market’ techniques will become obsolete. Customers will use ubiquitous sources of information to compare products and services and control their banking relationships. Universal banks will compete directly with community banks offering unique value propositions to targeted customers. A flood of industry specialists and ‘non-bank’ banks will drive specialisation across the board.
Competitive advantage and differentiation in an increasingly crowded market will be supported by advances in technology, IT functionality, the ability to exploit the power of data and unprecedented levels of global connectivity. Strategic acquisitions will focus more on reaching specific customer segments than on acquiring added capabilities. Alliances with nimble service providers will free up capital for ongoing investment in strategic business components.