Technology Led Retail Bank Transformation In 2018..

Image Credit – Quora

In 2018, Retail and Consumer Banking provide the lions share of all global financial services industry revenues. After having recovered from the Great Recession of 2008, Retail banks, especially in the developed world, have begun experiencing declining growth rates of late. This blog, among other commentators, has been predicting the gradual decline of branch-based retail banking. Data released by the US FDIC supports the contention that large US Banks are closing branches at a record pace. According to the WSJ[1], US branch count decreased by 1,700 in the year ending June 2017.  This is due to a mix of diverse trends- market forces, customer preferences.Another trend to note was the employment of a higher degree of automation at the branch resulting in fewer tellers.However, increased competition from non-traditional players such as the FinTechs is beginning to make its presence felt. Let us consider what incumbent Retail Banks should do to counter this wave of digitization.

Global Retail Banking Needs a Digital Makeover

Retail Bank Branch Closings Accelerate in 2018… 

Back to the USA, the WSJ states that the current pace of bank closings is the longest stretch since the Great Depression. However, most of the closings were in areas that were deemed less profitable – especially in suburban areas where foot traffic was already dwindling due to branch over buildout. The other closings were in rural areas which regional lenders are exiting altogether due to profit concerns.  The recent list of closings is not limited to global banks such as BofA and Citigroup but also regional lenders such as Capital One Corp, SunTrust Bank, and Regions Financial which cut branches 32%, 22%, and 12% respectively over the five year period ending 2017. However, the biggest cuts for all these lenders came towards the end of the five year period which points to a rapid decline in branches [1]

Add to all this, news that all-conquering Amazon is considering offering basic checking accounts in partnership with JP Morgan Chase.[2]  The entry of players such as Amazon into Retail Banking will create interesting market dynamics. Not so much for its market cap  (at 700$ billion, Amazon’s market cap eclipses the combined value of JP Morgan and Bank of America) and vast financial resources but for its ability to tap into the vast amounts of data & its culture of digital innovation. If Amazon can drive a retail-like experience in Retail Banking, then the market share will easily follow. According to Bain Consulting, Amazon’s retail banking services could grow to 70 million customer relationships and also help it avoid $ 250 million in interchange fees every year. [3]

In fact, according to Bain Consulting, consumers trust Amazon more than their neighborhood bank to handle their finances. [3]

All that being said, incumbents enjoy a significant competitive moat as retail banking services remain the most sticky of all financial products. Most consumers stay with their banks for decades.

So what are the key strategic moves banks need to make to ensure they’re placed for success? So what can the average retail bank do?

While there needs to be strategic thinking on how to fix their business models, there are at least four steps that can be taken as part of a strategy for change –

Step #1 Radically Rethink the Customer Experience…

Banking industry’s younger customers are Digital Natives i.e they are highly comfortable with technology and use services such as Google, Facebook, Uber, Netflix, Amazon, Google etc almost hourly in their daily lives. As a consequence, they expect a similar seamless & contextual experience while engaging with Banks over (primarily) digital channels. Banks then have a dual fold challenge – to store all this data as well as harness their internal processes to take advantage of real-time insights. And then to perform this in a way that is constantly feeding internal marketing & sales.

Banks need to invest in technologies that provide the below six basic functions to the retail customer.

1. Provide a Unified Customer View across Web, Phone, Branch and Mobile Banking -As shown in the below illustration, at a minimum, banks need to be able to support four common channels or modes of interaction. These include Branch Banking, Phone based banking, an interactive  Website, Mobile apps. The mobile app is the central point which provides a wealth of account & product functionality, relevant financial information over a few clicks/swipes.
2. Enable painless Account Opening for a range of loans & services – This includes real-time or instant (and entirely digital) prequalification for simple products such as checkings/savings accounts and credit cards. While it is understood that more complex products mortgages will take more time than opening a new savings account, however, these should be granted in a matter of days instead of weeks & months.
3. Provide Seamless and Easy Navigability between Channels – Customers should be able to start, pause &  continue transactions from one channel to the other.
4. Real-time Service Changes – Detect changes in demographic information – such as address & monetary status (e.g. account balance) and other customer data (e.g. feedback on products) to drive real-time interactions.
5. Provide value-added tools not just for value added services such as Financial Advisory and Comparision Shopping but also for complementary areas such as Auto & Life Insurance. While all of the above products can be offered standalone, leading banks will build a network effect which will make switching harder resulting in higher customer retention and thus, revenues.If one thinks the above is too much to ask of Retail Bank IT, consider that one-fourth of all customers using voice assistants like Alexa would love to use voice assisted retail banking. [3]

The Wealth Management industry is the richer cousin of the staid Retail bank. Due to the lucrativeness of this space owing to large deposit base of high net worth clientele, the WM industry has been buffeted by FinTech competition in areas such as Robotic process automation, Robo-advisors, Machine Learning and AI. FinTechs have virtually mushroomed across all of the above areas leading to incumbents having to spend heavily on business transformation to be able to compete with niche players. It is now Retail Banking’s time to be disrupted.

Big Data Drives Disruption In Wealth Management..(2/3)

Change #2 Go “Cloud Native” for Greenfield Applications…

Large banks have experimented with “Bank of the Future” models which emphasize their role as a financial information advisor. However, in as much as physical branch design matters in certain key zip codes, the ability to sell higher value products & services largely depends on IT capabilities. Retail Bank IT has been dominated by mainframes and monolithic systems for decades. The mainframe provides a range of core banking services and transaction processing capabilities. Monolithic systems, on the other hand, host a mid and back office Book of Record applications. The first step in any IT redesign has to be to reinvent the core or at least parts of it that are customer facing. As a blanket rule in this era, Retail Banks need to move to a “cloud first” strategy starting with their greenfield deployments.  To be compliant with regulatory mandates such as GDPR, a private cloud should be the first step and then a move to a hybrid cloud.

What can clouds provide that are impossible to do with the antiquated data center?

Five key things…

1. A virtually unlimited pool of computing, storage, and network with provisioning times that run from minutes to hours as opposed to weeks to months of lead times & procurement cycles.
2. Efficiencies in application development, deployment and changes.
3. Open architectures that are not locked into any one vendor.
4. Clouds offer a panoply of software services in addition to pure computing capacity. These include Big Data, AI, Stream processing, Mobile backends as a service etc.
5. Substantial Cost savings in terms of higher hardware usage, lower system administration costs.

Change #3 Build Platforms and partner with FinTechs…

Building business platforms, as opposed to standalone applications, enable banks to orient their core capabilities better and to be able to deliver on value-added services. Once the core platform is built to a high degree of stability, APIs enable partners and other ecosystem players to plug in their capabilities. Retail Banks need to understand which parts of their value chain can benefit from the fresh technology a FinTech can bring to bear.  These potential areas of collaboration include customer onboarding, peer to peer lending, consumer loans based on non tradtional criteria, real time payments, customer service and back-office compliance around Risk/AML. Bank IT should however not sit still and ensure that the core functionality that their platform provides is the ability to integrate such services. This has the ability to benefit the bank thus creating new business models and helping the FinTech realizes a high degree of awareness. Market awareness that they lacked before and the Bank is able to deliver agile solutions that they could not do so.

E.g. Post the PSD2 regulation in the EU, innovators in the European Banking system will become a prime example of platform led business ecosystems working alongside FinTechs. A detailed discussion at the link below –

Demystifying Digital – Why Customer 360 is the Foundational Digital Capability – ..(1/3)

Change #4 Use AI to dismantle Process and Data Silos…

Leading Banks are already experimenting with services that offer their customers the highest amount of interactivity such as chatbots. However, getting these approaches to scale and to perform complex and meaningful tasks from a customer standpoint has always been a challenge. The two biggest problems have been stovepiped processes and data silos.

Let us consider why the Process & Data landscape is such a mess in Banking in general.

• Customer Account data e.g. Names, Demographics, Linked Accounts etc
• Core Banking Data going back decades
• Transaction Data which captures the low-level details of every customer transaction (e.g debit, credit, transfer, credit card usage etc)
• Wire & Payment Data
• Risk data across market, credit and operational risk
• General Ledger Data e.g AP (accounts payable), AR (accounts receivable), cash management & purchasing information etc.
• Data from other systems supporting banking reporting functions.

Retail Banking enterprise applications which create, read and archive this data are typically managed by disparate IT groups scattered across the globe. They often serve different stakeholders who seem to have broad overlapping interests but have conflicting organizational priorities for various reasons. These applications then produce and data in silos – localized by geography, department, or, the line of business, or, channels. This has resulted in multiple customer onboarding systems that perform the same essential function but are serviced completely differently.

The typical flow of data in a bank follows a familiar path –

1. Data is captured in large quantities as a result of business processes (customer onboarding, retail bank transactions, payment transactions et al). These feeds are captured using a combination of techniques – mostly ESB (Enterprise Service Bus) and Message Brokers.
2. The raw data streams then flow into respective application owned silos where over time a great amount of data movement (via copying, replication and transformation operations – the dreaded ETL) occurs using proprietary vendor-developed systems. Vendors in this space have not only developed shrink-wrapped products that make them tens of billions of dollars annually but also imposed massive human capital requirements of banks to program & maintain these data flows.
3. Once all of the relevant data has been normalized, transformed and then processed it is then copied over into business reporting systems where it is used to perform a range of functions – typically for reporting for use cases such as Customer Analytics, Risk Reporting, Business Reporting, Operational improvements etc.
4. Rinse and repeat…

Due to this old-school methodology of working with the customer, operational data, most Retail banks have no real-time data processing capabilities in place & they thus live in a largely reactive world. What that means is that their view of a given customer’s world is typically a week to 10 days old. What is needed is a unified approach to analytics, data management, and process rationalization.

References…

[1] WSJ “Banks Shutter 1,700 Branches in Fastest Decline on Record” – https://www.wsj.com/articles/banks-double-down-on-branch-cutbacks-1517826601

[2] WSJ “Next Up for Amazon: Checking Accounts”

https://www.wsj.com/articles/are-you-ready-for-an-amazon-branded-checking-account-1520251200

[3] CNBC “Amazon Could Become the Third Biggest US Bank…”

https://www.cnbc.com/2018/03/06/amazon-could-become-the-third-biggest-us-bank-if-it-wants-to-bain-study.html