Banks today face a wave of cultural and regulatory developments that are unrivaled in scope and velocity. Maintaining the status quo is no longer an option as change surrounds us, threatening to leave behind those who aren't flexible, adaptive to change and, increasingly, mobile. Transformation which to a growing extent is powered by information technology (IT), is the only sure path forward. Banks need to rethink and re-engineer both their business models and their cost of doing business. While U.S. banks are among the leading consumers of IT, many have steadfastly resisted core transformation. It's time to jump in, as we've reached a tipping point where the risk of delaying modernization greatly outweighs the traditional -- and now largely mitigated -- risks of proceeding.
Relationships between consumers and their financial institutions are changing rapidly. In the U.S., the branch is no longer the consumer's banking "home" as we've embraced online banking -- expecting 24/7, on-demand access to service and our money. Further, we're warming up rapidly to the idea of using our mobile devices as our personal branches and bankers -- increasingly looking to transfer money, make direct payments, deposit funds, and even open accounts at the tap of a screen. Consumers are looking for a more proactive relationship where it is quite clear that the bank "knows its customer" and is able to shape value propositions and deal structures customized for that situation. Banks must deliver -- and deliver quickly -- on these requirements and many more.
Financial institutions are also buffeted by a more prescriptive regulatory climate in the post-financial crisis era -- adding costs and complexity and limiting their ability to deploy capital. The requirement for more frequent and rigorous stress testing and new liquidity ratios weigh heavily on our largest banks. Many banks simply do not have the systems and processes in place to respond promptly, cost-effectively and with agility to regulators' requests, which hinders operations and their ability to put their capital to work.
With higher costs, capital constraints, and restrictions on some fee-based income, banks also look to gain a much more precise understanding of customer profitability and strategies to increase it. There is significant work to be done on this front with some estimates pegging non-profitable customers at as high as 60% of a bank's base -- a huge drain on money and time spent servicing them. The cost of doing business and acquiring customers is also escalating, spurring an unprecedented focus on the customer experience and retention … especially for the "right" customers. The challenge for many institutions is identifying this group of customers.
All of these changes point to the need to transform business models by:
- Industrializing business processes, driving productivity improvements across front and back offices -- including in the compliance function -- and reducing operating costs.
- Enabling top-line revenue growth through multiproduct origination capabilities, comprehensive pricing strategies, and new distribution modes.
- Moving customer centricity from an aspiration to a reality by putting the customer and ubiquitous service at the heart of the business model.
- Creating business agility and enabling business innovation.
As banks work toward these goals, they often find that their legacy core banking environments -- a patchwork precariously stitched together to support current operations and ultimately preserve the status quo -- are simply not up to the challenge. It's time to face our fears and embrace modernization. The ability to transform business models depends on it.
In the U.S., core replacement has been among banking executives' greatest fears. A sense of "If it's not truly broken, then why risk it?" has prevailed. That question is increasingly irrelevant, however, because even though legacy systems -- many of which rely on batch processing -- continue to plug along to support the status quo, they are not built for emerging business requirements and a climate in which real-time processing is no longer a luxury, but a necessity.