Most banks invest heavily in digital transformation. As described in my previous article, they are strongly focused on customer experience. This in itself is a good thing. Banks globally invested $31billion in digital transformation. A third of that amount was dedicated to the development of mobile banking services. Nevertheless, the challenges of digital transformation within the banking sector only represent the tip of the iceberg. Retail banks can take advantage of potential opportunities beyond mere front office activities. The opportunities are linked to the dematerialisation of transactions, and the modernisation of their back-office processes and tools. Changing one’s retail network and omnichannel development only would be, in our eyes, a strategic mistake with regard to growth and competitiveness. Let us examine why the Banking back-office matters as much as front-office when it comes to digital transformation in this industry.
Modernising the Banking back-office inherited from the 70-80s
Still today, banks are still using an IT infrastructure that was deployed decades ago, in the 70-80s. Updating this complex system is very costly. However, replacing it without disturbing the flow of banking transactions is challenging. This is why most banks keep on using the same technological backbone. They only developed additional applications to provide their clients with improved user interfaces.
This, in our mind, isn’t a plausible medium/long term solution.
To begin with, it is increasingly difficult to fulfil the ever-growing customer requirements in terms of banking services’ availability, reactivity and fluidity. The obsolete technological infrastructure that banks are using is rapidly becoming a challenge. It presents an obstacle towards customer experience enhancement, despite all the efforts they are putting. Moreover, managing retail bank’s networks and developing the omnichannels are not enough to achieve reductions in their operating costs. Sooner or later, restructuring and adjusting back office processes will become mandatory. Currently, retail banks’ back office handle 300 to 800 different types of processes. These transactions are not really dematerialized, thus requiring a large number of employees. For instance, a simple mortgage loan process in the United States involves 35 manual interventions on average. TD Bank, in the US claims that the annual paper consumption per contributor is of 10,000 papers. These examples highlight the lags regarding dematerialisation and automation.
How to implement back office digital transformation in Banking?
Technology can contribute to an effective rationalisation of banks’ processes. Thus, achieving substantial savings on operating costs.
Currently, 90% of retail banks’ IT budget is dedicated to maintaining the obsolete technology infrastructure. To be able to reduce costs and processes, they need to redistribute their budget.
Capgemini suggests an interesting classification. It divides the technologies that could be put in place into three categories, based on the annual savings they help achieve, and the investment needed for their implementation.
1. Tactical solutions. This category groups the technologies that require only low investments. They could be implemented without going through an intensive restructuring of the existing IT system. They tackle basic banking operations such as account opening or credit files processing. The implementation of tactical solutions lead to decreased paper consumption, and faster handling. Among these solutions, there is Document Management System (DMS) and digital signature.
Document Management System comes hand in hand with documents’ dematerialisation. This system leads to cost reductions (i.e. labor cost, error remediation cost, distribution cost). Capgemini estimates these annual costs to decline by 6%.
The current system relies heavily on the traditional signature of documents and contracts. This comes with considerable amount of printings. Employing digital signature would simplify tasks and diminish printing costs. In France, BCPE group launched a digital signature pilot program, allowing customers to read and sign contracts using a tablet. This technological initiative could create savings reaching up to 1 billion papers per year. Digital signature also increases conversion rates.
2. Strategic solutions: (i.e. Business Process Management or BPM) that gives a bigger picture of banks’ business processes. This is done to optimize and automate them as much as possible. A BPM solution is an integrated platform combining real time process monitoring, modelling and optimisation of capabilities. Unlike the tactical solutions explained above, that are usually static, BPM operates on a different principle: continuous improvement. Thus allowing sustainable and long-term cost cutting.
In the United Kingdom, Lloyd Banking Group invested in 2011 in a 4-year digital transformation program for their back-office. This program included the deployment of a BPM application that automated and simplified the entire complex banking process. This investment allowed the Group to achieve £352 million in annual savings, and a 7% decrease in total costs. The number of unique processes dropped from 700 to only 23, reducing manual mistakes. In 2014, the aim of Lloyds Banking Group was to reach £1,7 billion in savings.
3. Transformational solutions. Although this technology requires higher investments, it also has a longer ROI. The impact of these solutions reaches all levels within a bank. It encourages product innovation as well as the development of web or mobile application. The latter are dedicated to the enhancement of customer experience, based on a back and front office integration. Being able to combine data from different streams, retail banks can finally respond to Market definition in B2B and B2C - The very notion of "market" is at the heart of any marketing approach. A market can be defined... needs and provide impeccable customer experience.
Back-office digital transformation goes beyond that of customer relationship. This transformation results in huge changes within the banking sector, that are achieved through process adjustment and automation.