February 24, 2012

Walk into just about any bank boardroom today and you’ll hear a constant refrain: How can we reduce costs to recover profits in a tough and increasingly regulated environment?

True, banks' earnings of late have improved, but profitability has been largely driven by reductions in loan loss provisions, as new loan growth remains anemic. Looking ahead, it appears unlikely that pre-financial crisis returns-on-equity will return anytime soon for most U.S. banks.

Many banks are responding to the downward pressure on revenues in traditional ways, such as eliminating debit rewards, free checking and other programs to recoup fees lost to new regulations. Others are cutting branches, staff, or both. But bank executives recently surveyed by Accenture in the study "Achieving Sustainable Growth Through Strategic Cost Management -- Insights from the Accenture Cost Management Survey" reported that many of the across-the-board cost reduction initiatives they've implemented have actually adversely affected growth and long-term performance.

Indeed, given the economics of banking, cost cuts that negatively impact sales may look good on the cost side of the income statement, but will surely destroy shareholder value in the long run.

Increasingly, banks wanting to balance cost-cutting with smart revenue growth are turning their eyes towards technology. They are finding that modernizing their core banking platforms can not only help reduce back office expenses, but also expand and improve their customer relationships, creating opportunities for new revenues. Several of the leading financial institutions are engaged in core upgrades at the moment, with more expected to follow. They are investing in their cores in a bid to reorganize their business around their customers which in turn enables more cross-selling and up-selling of products.

At banks that do this right, product offerings are based not only on client segments, but are also tailored to specific customer profiles and needs, while the sales force is supported by advanced customer relationship management tools. These banks also deploy a sophisticated pricing model based on customer profitability and profile (risk tolerance, channel preference, individual sensitivity) and a fee model linked to value-added services.

As a result, these players boost profitability and loyalty. For example, international banks that have been leaders in core banking transformation enjoy higher cross selling ratios (above 4 percent) and lower rates of customer attrition (less than 5 percent), significantly exceeding market average standards. They also achieve a remarkable percentage of first contact sale ratios and rapid time-to-market to launch new products or services.

Without question, embarking on a core banking transformation is a complex decision. Depending on the business drivers, the size of the institution and the particular market dynamics, banks will need to follow different approaches.

For example, big banks in mature markets often move gradually, upgrading systems one line of business at a time, while small banks tend to opt for complete transformations, often leveraging a "utility" approach through ASP, SaaS or cloud services.

With a new generation of core banking solutions coming to market, banks of all sizes will find it easier to introduce innovative products and more quickly adapt to changing customer expectations. This is particularly important today as banks grapple with new online, mobile, cloud, social-networking and collaborative technologies.

We see these new solutions helping in five ways:

  • Enabling a holistic view of customer relationships through a single client database and orienting the business model around customers.
  • Decoupling product distribution and manufacturing while providing a multi-layered architecture that splits up processes, functions and applications, thereby allowing greater agility for the business lines.
  • Integrating rules engines to enhance system flexibility for document management and other functions.
  • Being technology platform- and database-agnostic, thus enabling a cost efficient technology base.
  • Enabling straight-through processing and real-time capabilities to reduce costs.
  • System consolidation and operational efficiency have long been the main drivers of core system replacement. But cost take-out alone, is no longer sufficient to justify the investment. Leading banks understand that the business case for modernization must also be built upon the need to generate sustainable revenues.

    Juan Pedro Moreno is global managing director of Accenture Core Banking Services; Fiaz Sindhu is an executive with Accenture's Core Banking Services group.