Digital transformation in the banking industry: Don’t overlook the hidden treasure in your middle and back-office

Digital transformation in the banking industry: Don’t overlook the hidden treasure in your middle and back-office
By Nachiket Deshpande, Global Delivery Leader, Banking and Financial Services, Cognizant, and Manish Bahl, Senior Director, Centre for the Future of Work, Cognizant

Banking and financial services organisations are using digital technologies to rewrite their future. Nearly every activity related to banking and financial services is being reimagined, attracting growing interest and investments. In Singapore, the industry’s disruption has been turbocharged by the government’s strategic investments in fintech and collaborations with countries such as the United States. Academic institutions such as the National University of Singapore have also kick-started programmes to promote training in fintech and blockchain technologies.

Cognizant’s research shows that banking and financial services businesses stand to gain more by going digital than the cross-industry average. More than 70% of banking and finance industry decision-makers consider digital important to the future of their business as compared to only 63% of other industry leaders. For the banking and financial services institutions surveyed, going digital has the potential to propel revenue growth by more than 12% through 2018.[1]

The same research also shows that companies that are slow to invest in digital report an average economic impact (cost savings plus revenue growth) of only 3.1% per annum. In contrast, digital leaders reported an impact of 7.4% as a result of going digital.

There is no escaping the impact of new technologies on work; and the basis for competition amongst banking and financial services companies has expanded beyond the traditional arsenal of price, product features, service quality, and branding, to include a new category ― hyper-personalisation.

Modernising the middle- and back-office
As companies work towards hyper-personalisation, they will move beyond traditional transactional relationships with customers and embrace a new standard of providing highly bespoke and integrated services. Big data and artificial intelligence will spur this change by helping companies modernise and accelerate the pace of change in the front-office.

What about the middle- and back-office? Today, the back office remains a wildly overlooked cost-savings and modernisation opportunity for banking and financial services businesses. Despite digital’s significant revenue-generating opportunity, its impact on the expense side of the ledger has thus far been meagre.

One of the survey’s key findings is that digital costs financial industry firms about 1.3% of revenue each year. The outlook is expected to improve only marginally by the end of 2018, with costs projected to decrease by an average of 1.8% across the industry. This indicates a tendency for banking and financial services decision-makers to first think of the front office ― where customer interactions take place or products and services are offered ― when executing digital programmes.

This rather limited, spending-driven view puts them at risk of missing something significant: the hidden treasure in their middle and back-office. Digital has as much to do with streamlining middle and back-office operations and improving processes as it does with defining the face of the company. In truth, very few banks have modernised or replaced their legacy systems to meet the speed of change that defines today’s digital era.

At present, an estimated 70-80% of IT budgets are spent on infrastructure maintenance, that is, on simply keeping the lights on. To remain profitable and unlock cost-saving opportunities of digital, the transformation cannot be superficial but must run throughout the business. Banks need to realise that customer-centric investments in front-end services will deliver value only if the middle and back-end systems are capable of delivering those services in a sustained and flexible manner. A holistic approach is needed to unlock the treasure hidden in the middle- and back-offices.

  • Smart operations: Banks looking to reduce human error and get away from the complexity of legacy technology and operations lends well to Intelligent Process Automation/AI and deep data mining. For instance, Blue Prism is applying bots to risk, fraud, and claims processing, as also to loan management in banking, saving millions. Another interesting example is that of ANZ Bank, which isleveraging AI for middle- and back-office automation to reduce time-to-market for the approval of unsecured and personal loans.

Insights generated from middle office data can go a long way in transforming the customer experience. By applying AI and analytics to business operations data, banks can unlock deep customer insights that can be fed into the front-end functions. For example, experiential customer data and transaction information collected from all stages of customer life-cycle can be leveraged to not just enhance, but also completely reimagine customer journeys across various processes.

Data-as-a-service is another area that can help banks monetise their data assets to generate new streams of revenue and build competitive advantage. For example, banks can tie-up with retailers to obtain information on the types of customers the retailers would like to target and then send offers to customers who fit the criteria and earn a commission when an offer translates into a purchase.

  • Modern technology foundation: Over the years, banks have added layers of systems to their IT backbone, making the core too complex and difficult to change. Moreover, the risks associated with changing any of these layers are very high and time-consuming. This challenge has limited banks’ ability to react swiftly to the evolving business environment and compete effectively with fintech companies. By modernising their tech foundation leveraging software re-engineering, back-end refactoring, complex platform engineering and other techniques, banks can turn their weakness into a strength to effectively defend the fintech threat. While the approach to legacy modernisation may vary, the journey has to kick-start early to embrace a disruptive future.

Software eating the world is no more a debate. Fintech start-ups have demonstrated this by rapidly developing sophisticated front-end applications to disrupt the financial services industry. A major factor enabling them to do so cost-effectively is their adoption of cloud technology. While banks are warming up to hybrid clouds, embracing cloud-native apps can really help them unlock their innovation potential with start-up speeds. With cloud, banks don’t have to spend on building new environments to test new ideas. They can take small, iterative approaches to quickly build and roll out ideas on cloud instead of adopting a big-bang and capital-intensive approach.

The recent WannyCry ransomware attack highlighted the importance of a secure IT foundation. For a highly regulated industry such as banking, robust risk and security are critical for maintaining client trust. Banks need to rethink their traditional approach towards security from merely a cost function to a long-term investment. As new security threats emerge, customers are becoming more sensitive about the risks to their money and financial information. Banks that invest in the right security tools and techniques will enjoy an upper hand in winning new customers.

Simplicity is sophistication in digital
The core purpose of retail banks is to help customers manage their financial lives easily. Ultimately, the goal of digital transformation for the banking and financial services industry should also be to simplify the business, while still adhering to regulatory demands.

To successfully integrate digital into the back office, banking and financial services companies must focus on the notion of channel integration to unify all their offerings to establish a “one-company” model that delivers enhanced consumer experiences, seamless sharing of data across channels, and valuable consumer insights and opportunities.

The industry will be able to realise the full potential of digital transformation when companies reduce the complexity of their legacy IT systems, business processes, and organisational structures in favour of better overall customer engagement.


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