All Roads Lead To Digital
Banks, in these challenging times, are embracing digital and data solutions
Without a doubt, banks have endured years of challenges since the onset of the global economic crisis. And there still is no end in sight. The low interest rate environment means banks have seen their most reliable means of income evaporate. What were once extremely lucrative businesses, like fixed income trading and mortgage origination, now yield much lower returns. Ancillary revenue streams such as proprietary trading desks have all but disappeared.
So what are banks to do? Well, as it is often said: never let a good crisis go to waste. Financial services firms are filled with brilliant people. With all these smarts, it is always hard to change a corporate culture very radically. Banks tend to be conservative institutions. However, the latest set of crises facing banks have made their top executives a lot more receptive to changing the ways they do business.
As such, we're already seeing some venerable firms listening to ideas that come from outside the financial services industry altogether. The prospect of a buttoned-down bank executive studying the nimble, customer-focused strategies of a department store can be difficult to fathom. But trust me, it's already happening.
The kind of structural transformation that banks are now embracing is digital. For most of these firms, a digital transformation involves using a vast array of analytics that guides the institution towards the consumer and their expectations. Banks have historically had their customers come in and queue up to talk to a teller. But customers want just the opposite. They expect their banks to deliver seamless digital experiences over their laptops or iPads. They want to do their banking like they do their shopping: from the comfort of their own home and when it's convenient for them to do so. In areas where banks have had personalized services (wealth management, for instance), the focus is on enabling the private banker/financial adviser to do a lot more for the client and to handle a larger portfolio, aided by a stronger suite of digital and data solutions.
In this harsh and trying economic environment, controlling costs is vital. The metric to which analysts typically pay the most importance, in assessing a bank's competitiveness, is the cost to income ratio. A digital program that focuses on the consumer will also help in keeping costs under control by reducing manual exception processing and branch overhead. You can't expect to be rescued by some larger bank that wants to go on an acquisition binge. That era is over for the time being. It's time to rein in your costs for the long term with the assumption that a white knight is nowhere on the M&A horizon.
The digital journey I've touched on has other benefits besides attracting and retaining customers and managing costs. Robust front- and back-end systems help banks stay on the right course as far as regulatory pressures are concerned. Banks paid more than US $100 billion in fines in 2013 alone. Updated systems with the right technology vendors help prevent money laundering and fraud, especially in enormous global institutions that do business in every currency and continent.
Digital investments have multifaceted returns. Across the financial services sector, return on equity for most firms remains dismally low at under 5%. A digital transformation of front- and back-end systems squeezes out every efficiency inherent in global banks, while giving revenue a boost. That's why it's important to sustain long-term relationships with IT vendors who know not just the banking space, but are able to get the best customer experience and cost control ideas from across the world and across multiple industry segments.