Banks Need Digital Business Transformation To Thrive (Survive?)

With the average return on equity (ROE) for the top 250 banks globally (by total asset) was at 6.29% in 2020, digital transformation to improve customer service and reduce costs is imperative, according to a report from the Banking Industry Architecture

Network (BIAN) and the IBM Institute for Business Value.

They have developed a list of six best practices for banks.

“A confluence of macroeconomic stressors paired with new competition from fintechs and nontraditional players presents an environment more challenging than ever for banks. The need to embrace continuous reinvention, augment business profitability, and reduce costs requires a substantial transformation of operations,” says the report.

The recommendations combine technology, culture, process improvement, partnerships and in-depth digitalization. Banks have made a start, but they still have a ways to go.

The survey of 2,000 banks CIOs and CTOs undertaken by BIAN and IBM showed that the percentage who reported achieving the modernization goals cataloged as the six best practices ranged from 18 to 37 percent. In some areas banks are doing better, or perhaps the survey question allowed them greater credit for effort. BIAN found that “78% of banks are modernizing platforms by leveraging AI—but there’s room to grow.”

Specifically the survey found banks were using AI in customer care, credit risk evaluation, workforce engagement and operational efficiency. But it said the credit applications and loan management are under-explored areas.

In building a resilient hybrid cloud it found that 79% were prioritizing key blocks such as scalable data storage; the avoidance of vendor lock-in; a unified security control framework; and accessible data and services.

The study said that CIOs and CTOs have shifted their focus from pure digitalization to digital business transformation.

Banks need to transform their processes, not just make existing practices digital, said Shanker Ramamurthy, global managing partner for banking & financial markets at IBM Consulting. As an example he cited robotic process automation which he describes as paving the cow path — taking yesterdays’ processes and automating them.

“That gets you so far, but not far enough. Digital business transformation requires stepping back and looking at what the future model for an enterprise will look like, rather than automating yesterday’s model.”

Instead of banks restricting themselves to a “lift and shift” of existing processes to cloud, they can embrace modernization of their operating models to empower new ways of working and innovation across both the bank and its ecosystem of partners.

Banks need to move quickly to transform their business, especially in markets where their return on equity is below the cost of capital.

“Substantial transformation is the order of the day in the banking industry.” Fintechs, or techfins as Ramamurthy prefers to call them, are moving forward to capture more of the most profitable and least regulated part of the financial services value chain, leaving the banks with the complex back office which consumes two-thirds of their spend. Banks have to move from relying on monolithic cores to a cloud-powered ecosystem that is stable yet flexible.

“Trying to achieve growth and differentiation at the customer end, looking to achieve efficiencies and doing it while managing risk and regulatory compliance, and doing all three simultaneously, takes a lot of energy especially when techfins are backing into some of the most valuable parts of your value chain.”

The BIAN-IBM study identified six best practices:

— Create small teams that are responsible for identified end-to-end operational tasks. “Culture is the organizational glue that coalesces internal and external innovators to spark collaboration and value creation. Hybrid cloud technologies create a playground for cultural change that gives small teams responsibility for end-to-end operational tasks encompassing the entire ecosystem.” So far only 18% of respondents said they had achieved this.

— Integrate monitoring early in the development process to provide data, obtain user feedback, and prepare for deployment and maintenance activities. 37% were monitoring early in development.

— Establish a data fabric that allows data to flow through a broad network “on tap.” Siloed data was standard in 65% of respondent organizations.

— Deploy AI factories and transform data environments that put data into action. Only 30% of respondents said test environments and sandboxes are always available for AI modeling and calibration.

— Embrace end-to-end extreme digitalization to streamline and automate complex operational workflows and drive innovation. Only 23% said they did this.

— Engage ecosystems of partners to fuel faster innovation and efficiency. Only 26% of overall survey respondents indicate that an ecosystem of partners always actively participates in products and services innovation.

Successful banks are actually applying these six best practices, said Ramamurthy. “This is not a simple one and done journey, but a journey where you move incrementally over time and work through complexity. And it’s not all within the enterprise boundaries, but requires figuring out how to leverage independent software vendors and any service provider who can be helpful.”

He cited DBS in Singapore as an example of a bank that has moved beyond traditional banking boundaries to get closer to the customer in the mortgage process.

“They embed themselves way upstream in that customer journey,” he explained. “Through the DBS website you can look and get connected into brokers and listing agents.”

The State Bank of India offers mobile banking users deals on e-commerce services such as hotel reservations.

“They get superior value and better pricing if they go thru the SBI app, because the bank brings a very large number of customers to the hotels — it’s a win-win.”