By Steven Reiter and Fiaz Sindhu, Accenture
Post-crisis, banks are awaking to a new world order marked by a regulatory wave requiring greater transparency, more self-sufficient customers with rising expectations, and greater competition from traditional and non-traditional players
Yet most banks' ability to respond to these forces is highly constrained. The processes, procedures and information technology that form the foundational layer of their operations are expensive to maintain and lack the flexibility needed to meet industry changes.A spaghetti-like maze of legacy systems - often the result of add-ons from years of mergers and acquisitions - inhibits a single customer view, timely introduction of new products, improved customer service, and ultimately, future growth.
According to a recent Accenture survey of bank executives and private equity firms, the winners in financial services by 2012 will improve the customer experience, reduce non-strategic costs, optimize their pricing and overcome vulnerabilities to risk. Banks will be hard pressed to achieve these goals, however, unless they start laying down the core infrastructure that can support operating model changes.
The recent interest among banks in core platform transformation is being driven by several factors:
1. Emerging foreign competitors Financial institutions from foreign countries - particularly those from Spain, Japan and Canada with relatively clean balance sheets - pose an increasingly competitive threat to U.S. banks in the near-term. Some of the leading foreign banks have achieved impressive cost-income ratios in their home countries and elsewhere through core platform transformation. And they are bringing those competitive advantages to the U.S. market.
U.S. banks' cost-income ratios generally range between 55 - 60 percent, while the best-run foreign institutions are in the 35 - 45 percent range. With the savings from their highly efficient operations, these foreign banks have the ability to competitively price their products, thereby gaining market share in the race for deposits.
In addition, their platforms allow them to bundle products and tailor offers for specific customer segments based on key customer demographics and attributes. With technology that enables a customer-centric operating model, these banks will be a formidable player as they begin flexing their muscles in the United States within the next two to three years.
2. Direct banks Non-traditional banks, such as those selling through the Internet, are also a rising threat. An estimated one-half of financial product searches now begin on Google, a figure that is likely to grow exponentially with the explosion of mobile devices and mobile banking.
With few, if any, retail branches, these direct banks are seeking to differentiate themselves based on pricing by running a low-cost, agile operation that facilitates the introduction of new products. Some card providers offering online banking services, for example, are investing in core platforms that will enable more opportunities to cross-sell products. Traditional brick and mortar banks should understand that direct banks are not just trying to capture deposits, but customer share as well by offering a diversity of products.
3. M&A activity In light of ongoing economic weakness which limits opportunities for robust organic growth, Accenture projects that merger and acquisition activity will likely accelerate this year, particularly among small- and mid-tier U.S. banks.
Acquiring banks must be careful, however, to avoid falling into the trap of simply patching the acquired bank's systems onto its own - thereby adding complexity and reducing efficiency. It isn't unusual for an acquiring bank's asset size to balloon by as much as one-third or higher with just a single purchase. As they enter markets outside their home base, sometimes taking on new lines of business as well, acquiring banks are taking a hard look at how their technology platforms can best support their expanded operations.
Banks should start the transformation process by assessing what benefits and savings can be derived from their core platform architecture - determining, for example, how they can lay the infrastructure to enable the selling of bundled products and otherwise increase share of market and share of wallet.
Banks also need a well-defined release strategy that balances speed of implementation with delivery risk and cost. Accenture has found that some organizations opt for the "big bang" approach, in which they effectively cut over to all new systems at once. Others find it more appropriate to break up the effort into manageable releases-by product, customer group, branch or other capabilities-to reduce operational and delivery risk.
Continuing to pour money into outdated core systems is a losing proposition. To fend off growing competition, banks' technology platforms must enable them to have a single view of their customers so that they can interact with them more efficiently and profitably.
Authors: Steven Reiter is a senior executive and banking technology lead at Accenture. Fiaz Sindhu is an executive and core banking expert in Accenture's North America banking practice.