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Whitepaper GENERATING BANKING & FINANCIAL SERVICES IMPACT Banks reimagine the operating model of the future There is no longer any doubt that the banking industry is facing the threat of significant disruption. Now, the critical questions are which areas, to what degree, and, most importantly, what needs to be done. Although much has been written about new models for customer engagement, in particular those championed by new, technology-focused entrants, the so-called middle and back offices with their legacy systems and processes have only just begun to come into focus. DESIGN • TRANSFORM • RUN LEAN DIGITALSM Executive Summary The convergence of three digital megatrends— regulatory regime. As a wide variety of new rules mobility, software-defined enterprise, and the and regulations go into effect, banks must find new Internet of Things—is changing the nature of ways of doing business without using one of the business. This convergence is creating innovation industry’s preferred methods for driving growth: and disruption opportunities in many industries and leverage. The challenge laid out by Main Street to the their ecosystems, and banking is at the epicenter. banking industry is clear: manage risks better while In an industry where size has often mattered more still delivering on customer expectations. Banks that than all else, the investment in legacy infrastructure are reluctant to rise to the challenge are finding that is tremendous. However, with the emergence of their customer bases are more open to disruption digital technologies, many of the industry’s economic from competitors that are better able to focus on end tenets have changed, and the infrastructure that once customer needs while implementing a more proactive served as a barrier to entry into the banking sector and agile regulatory response. is now a handicap. Dozens of new, digitally enabled competitors are now selectively attacking areas of the However, despite these significant headwinds, banking sector and proving that bigger isn’t always banking industry incumbents have an opportunity better, at least when it comes to operations that to succeed by supporting their remarkable brands, serve the client’s journey. Therefore, the discussion is talent, capital base, and client relationships, as well shifting from “How do we compete with our current as possibly their ability to comply with regulations competitors?” to “How do we set ourselves to stay at scale, with a more effective, digitally enabled competitive in the age of digital banking?” operating model. However, to do so, banks must be willing to reimagine their processes across front, In addition to navigating the digital revolution, banks middle, and back office operations in order to reap the are also trying to regain their footing under a new benefits of a digital business model. TABLE OF CONTENT Part 1: Why banks need advanced operating models? ................................................................................................... 4 • The rise of digital technologies .................................................................................................................................4 n Leveraging the new cost-to-serve.....................................................................................................................................7 n The ROI challenge .................................................................................................................................................................8 • The new regulatory regime ........................................................................................................................................9 n The effects of scale in a dynamic regulatory environment .......................................................................................11 Part 2: The scope for advanced operations ...................................................................................................................14 • The front office ......................................................................................................................................................... 14 n Technology and the customer .............................................................................................................................................. 15 • The middle and back offices .................................................................................................................................... 17 n What are “Core” operations? The definition is changing for banks .......................................................................... 21 - Technology in the middle and back offices .............................................................................................................22 - Taking process operations to the next level ............................................................................................................26 - Organizational models ..................................................................................................................................................27 • The Operating architecture of the future ...............................................................................................................29 Part 3: What impact can be achieved ........................................................................................................................... 30 • What are banks transforming? ...............................................................................................................................33 n Wealth management...............................................................................................................................................................33 n Retail banking ............................................................................................................................................................................35 n Commercial lending and leasing ......................................................................................................................................... 36 n Finance and accounting (F&A) ........................................................................................................................................... 38 n Risk management .................................................................................................................................................................... 39 Conclusion ......................................................................................................................................................................41 SM DESIGN • TRANSFORM • RUN LEAN DIGITAL GENPACT | Whitepaper | 3 Part 1 Why banks need advanced operating models? The banking industry is at an inflection point that has It has been estimated that digital disruptors may been brought on by two significant forces: the rise of capture up to a quarter of total enterprise revenue digital technologies and the new era of compliance. by 2025. Although the current impact of banking Although both forces are affecting banks in different industry disruptors is small, there is precedent for ways and for different reasons, the combined effect this type of transformation in other industries, such will have a dramatic impact on the way banks operate as retail, regarding the speed and severity at which in the future. traditional players can be overtaken. The rise of digital technologies In the banking industry, the key to disruption can be found in the unbundling strategy that new Competition is intensifying as outsiders empowered competitors are following when taking on the by digital technologies seek to enter the market while incumbents. Banks are defending a sole-provider incumbents race to upgrade systems and operations model and finding that the complexity of their current to meet customer demands and to cut costs. operations is severely limiting their ability to innovate to meet changing customer demands. The traditional bank business model is under attack from all angles. It seems as though every day a new Broadly, banks can classify the bulk of their services entrant declares war on the banking incumbents as into five main categories: payments, lending and new technology erodes the industry’s barriers to entry deposits, market data, capital raising, and wealth at an alarming pace. The sheer number of digital management. Quickly examining the ever-changing disruptors entering the banking sector has made it market landscape illustrates the wide variety of difficult to determine which firms will provide the disruptors currently vying to gain market share in greatest competition in the future. One thing is each category (see Figure 1). clear—these new entrants with their vastly different business models and cost structures are forcing Examples such as the rise of PayPal in the payments incumbents to reimagine their operations. landscape and the rapid shift to mobile technology led by firms such as Facebook and Apple illustrate massive opportunities not previously addressed by By 2025, banks could lose 60% of their the traditional banking business model. In addition, profits in consumer finance, 34% in payments the introduction of cryptocurrencies, such as and small business lending, 30% in wealth bitcoin, as well as the underlying ledger blockchain, management and 20% in mortgages. is proving to be a disruptive force unto itself. If the source of trust in payments is wrung

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