Bankers often ask us how they can outperform their competitors. We explain possible obstacles to achieving that goal by asking, in turn, whether they can:
- Have 'real time' analytics if the underlying core is saddled with data that is poor quality, inconsistent or latent?
- Deliver a reliable digital experience to mobile customers if the core is not 'real time' enabled?
- Provide innovative product offerings if the core is inflexible?
- Achieve 'first mover' advantage for new products or features if core maintenance is costly and time consuming?
- Truly know their customers if relying on multiple, unintegrated legacy customer and product solutions -- each with their own version of the data?
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In short, the challenge for banks is whether their core platforms are enablers or inhibitors of growth. For many institutions, it's the latter.
Bankers generally equate core banking modernizations with cost cutting. True, the industry has streamlined, bringing down costs substantially in the past decade. But cost cutting is no longer enough to survive, let alone outperform the competition. Despite significant focus on cost efficiency, the aggregate efficiency ratio for North America's top 150 banks is still approaching 70%, while leading global banks have achieved ratios in the mid-40s.
Core banking projects are as much, if not more, about revenue generation. Properly executed core modernizations can drive 10-20 percent improvement in a bank's efficiency ratio, with as much as 40-70 percent of the benefits tied to revenue enhancements.
Achieving competitive advantage is a journey requiring banks to excel in multiple areas. Most banks are attempting to optimize their cost structure or to simplify their business by eliminating redundancies and improving processes. These worthwhile measures, however, merely help banks maintain -- not improve -- their current position. Becoming more agile and innovative will be the new table stakes by 2020, enabling banks to progress from the current 12% ROE average to a range of 18-25 percent. Core banking modernization will be a key enabler (or inhibitor) of this journey.
Many banks are starting to realize modernizing their core is required to empower their sales force, create innovative products, attract new customers and drive growth. Indeed, nearly half of the top fifty banks in the U.S. are delivering or evaluating a core banking program.
Besides cost efficiency, several factors are driving this trend:
Digital.According to Accenture research, traditional banks could lose as much as 35% of their market share to digital players by 2020. Yet many institutions are burdened with core systems that inhibit their ability to provide a digital customer experience. In fact, roughly 25-30 percent of banks' digital initiatives budgets on average are spent on remediating their core systems to achieve their digital business objectives.
Technology.Technology providers are starting to discontinue some of their older core platforms, thereby creating an opportunity for banks to evaluate alternatives -- including a new generation of core solutions with more robust technologies.
Regulatory.Regulators are encouraging some financial institutions to consider replacing or upgrading their sub-standard core systems in order to maintain the health of the banking system.
Future Projection.Embarking on a core banking project is not about 'Where am I today?' but rather, 'Where do I want to be in five to 10 years?' Preparing for the journey can generally take 12 to 18 months, plus three to five years to properly execute.
Banks that are embarking on core banking journeys recognize they can't justify the investment to modernize their core without making revenue generation a central part of the business case. In most instances, the majority of revenue uplift comes from a handful of drivers: developing product innovations, bringing products to market faster, cross-selling and reducing customer attrition.
Consider, for example, the experience of Commonwealth Bank of Australia. Shortly after transforming its core systems, the bank increased products per customer by five percent, personal transaction accounts by six percent and loan fundings by 28%, according to the bank's results for the half year ended December 31, 2013.
Core transformation also paid off for a North American bank. Its technology landscape had been hampered by multiple, complex legacy systems with manual hand-offs. After replacing its core, the bank was better able to assess customers' needs, leading to improved sales efficiency including a 5-10 percent increase in cross-sell rates, improved up-selling opportunities and reduced borrower cycle times.
This same bank increased its loan disbursement rate 10% by reducing manual intervention and standardizing fulfillment and disbursement functions. Additionally, automating administrative tasks enabled the sales force to cut mortgage origination processing by 60 minutes per loan on average, allowing more focus on new originations and other customer-related activities.
As the industry continues to emerge from the depths of the financial crisis and adapt to an evolving regulatory environment, the challenge is clear: Does your bank's existing core platform enable or inhibit your ability to:
- Survive or outperform competitors?
- Be a first mover or fast follower?
- Generate revenue from new and existing sources?
- Promote an optimal digital experience for customers?
Chris Williams is Managing Director, Accenture Core Banking Services, North America Lead; Luis Martin Gonzalez is Managing Director, Accenture Core Banking Services.