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 away from —McKinsey the traditional banking system, the results will be
SM DESIGN • TRANSFORM • RUN LEAN DIGITAL GENPACT | Whitepaper | 4 historical. This would possibly be the first time in an opportunity as new entrants design a fresh centuries that the financial component of many compliance response from the ground up that is business transactions doesn’t require a bank as an tailored to specific focus areas. intermediary. The payments sector has been one of the first services disrupted due to its relationship to However, not just where banks create revenue but technology and regulation. Technology is fundamental how they conduct their operations is exposing the to the payments processing function. For retail industry to disruption. In many cases, disruptors have banks, technology is critical to deliver the mobile leveraged digital technologies to circumvent the functionality their customers desire, while commercial challenges of legacy systems and operations. The banks are relying on technology to offer the enhanced result is dramatically improved efficiency ratios that security options their customers demand. On the even the best incumbents can’t match under their regulatory side, the payments space also presents current operating models (see Figure 2).
Braintree, Mozido, Square, Wave, Justworks, Payments Ayden, Stripe, Transferwise, Worldremit
Arm, Bill Guard, Bills.com, Credit Karma, Fundera, Zuora, Nerd Wallet, Lendio, Justworks, Lending Robot, Prosper, Wave, Market data Chain.com, Kensho, Money.net, Xignite
Avant, Common Bond, Prosper, Lending Club, Atom Bank, Moven, Lending and Number26, Bond Street, Lending Robot, Can Capital, Privio, Behalf, OnDeck, Kabbage, Sofi, Simple, Lend Up, Asset Avenue, Lending deposits Home, Upstart, Fundbox, Fundera
Capital Can Capital, Bond Street, OnDeck, Blue Vine, C2FO, Circleup raising
Wealth Acorns, Covestor, Betterment, FutureAdvisor, SIGFIG, Wealthfront, management Learnvest, Wise Banyan, Motif Investing, Personal Capital, Kapitall, Robinhood
Figure 1: Some of the digitally enabled challengers entering the industry
SM DESIGN • TRANSFORM • RUN LEAN DIGITAL GENPACT | Whitepaper | 5 Examples of digital impact can also build a clean set of data structures that can help reconcile data between chief Digital-native enterprises built on these financial officers (CFOs) and chief risk officers, principles run at unprecedented levels of for less cumbersome fulfillment of regulatory efficiency and effectiveness. The best digital duties. The latter point is particularly important retail lending institutions have efficiency ratios because many financial services executives ranging between 20% and 35%, compared to initially discounted the ability of new players to the top banks’ 55%–60%. Emerging market scale in the face of regulatory and risk scrutiny disruptors, like China’s WEBank and marketplace that large banks attract. This scrutiny forces lender Lending Club, exhibit even more polarized large financial institutions to devote significant economics through models that are less capital resources to reconciling and modeling data just intensive, something an entity such as Facebook to comply with the rules. It is highly likely that can also demonstrate. Disruptors such as emerging competitors will reach the critical these can reimagine operational processes and mass that attracts regulators’ attention soon, but eliminate many of the constraints of traditional competitors will address those challenges in a players’ legacy operations. These disruptors leaner manner.1
Disruptive business models have shown significantly better eciency ratios Best in class eciency ratios among comparable businesses
Example: business model driving lower cost Depository partners 20-25% for leading disruptors Operated as an online marketplace, LendingClub shows opex of ~21% Pure online banks 30-35% compared to traditional lender opex of 5-71%
Two large drivers of cost Top commercial saving come from lack of 55-60% banks branch infrastructure & reserve requirements
Average retail banking sector eciency ratio was 68.66% in Q4, 2014
Figure 2: Digital business models are showing a significant shift in operating costs
SM DESIGN • TRANSFORM • RUN LEAN DIGITAL GENPACT | Whitepaper | 6 Leveraging the new cost-to-serve 80 70 75% The movement to digital banking, and in particular 69% the operational cost benefits it can provide, presents 60 65% 65% a significant opportunity for industry incumbents. 50 JPMorgan estimates that the cost of serving a 40 fully digital account is 70% less than a traditional 30 28% account, while retention rates for mobile banking are 20 26% 33% higher than non-mobile banking. In the cards 18% 10 13% % business, the improved metrics are also significant at 0 2 30% and 35%, respectively. In the mortgages space, 18-24 25-34 35-44 45-54 estimates indicate that a digital approach across At a bank (face-to-face or using matchines) Online (website or mobile app) the front and back offices could potentially reduce mortgage origination costs by more than two thirds. Figure 4: Most preferred method of banking by age group Even simpler transactions are estimated to have significant cost advantages when delivered digitally. One such estimate pegs the average cost of a mobile transaction at 10 cents compared to 20 cents for online banking and $1.25 for ATM transactions.3 Digitizing broken operations: A similar study reveals that mobile transactions A classic conundrum typically cost less than 2% of the per-transaction cost Most customers prefer to communicate with associated with branch transactions.4 their banks via the web than by other means, and younger customers prefer mobile, a channel that didn’t exist 10 years ago. Yet despite the sleek Threats user interface they are likely to encounter, people • Innovative business models • Margin Compression buying financial products or conducting more 30%-40% • Operational risk from significant bank transactions are often surprised transformation how uninformed their banks are about them.
The typical cause is the morass of legacy systems across the middle and back offices that Opportunities are tasked with keeping records and managing 40%-50% • New products risk but were built over decades in silos. Recently, • Potential to reach new these operations have grown more complicated customers • Reduced cost-to-serve by adding new layers of regulatory reporting and compliance. Collecting and combining purchase patterns, risk profiles, interaction preferences, Figure 3: Banks can increase net profit as a result of digital, but and other data to enhance the customer business models will see significant changes experience can quickly turn into a massive (and expensive) change management exercise. The However, banks are still conflicted, in part because process frequently gets stranded on database consumer preferences are still varied when it comes conversion, privacy, and other technical or 5 to channels. Although most customers gravitate process issues. Such challenges aren’t solvable toward digital channels such as web and mobile, a by simply layering advanced digital tools on top significant number of customers still prefer branch- based interactions. Part of the problem is that of an existing business process landscape. for many customers, certain types of high-touch
SM DESIGN • TRANSFORM • RUN LEAN DIGITAL GENPACT | Whitepaper | 7 100% 3% 5% 5 - Exceeding expected bene ts 8% 19% 4 11% 25% 3 - Seeing some bene ts 80% 33%
14% 2 1 - Not at all
60% I don't know 50%
42% 46% BFSI/CM have the 40% 45% highest percentage of respondents saying they are exceeding the benefits of digital 11% technologies and 20% 3% 16% analytics. Overall, 6% 8% however, other sectors 3% are realizing at least 19% 3% 14% some benefit more often 9% 8% than BFSI/CM. 0% BFSI/CM - digital Other sectors - digital BFSI/CM - analytics Other sectors - analytics technologies technologies
Figure 5: Is your organization realizing the expected business outcomes from digital technologies? BFSI/CM vs other sectors
transactions may be better suited to the branch. billion yearly, and as much as two thirds of that For example, many banks estimate that more than spend delivers an insufficient ROI.6 Although this two thirds of customers visit one of their branches figure is an approximation, it should give banking on—at least—a quarterly basis. In some situations, leaders pause—and the figure doesn’t even include the branch may in fact be the optimal channel for the the opportunity cost of business benefits that will customer to have their needs met and for the bank not accrue to enterprises because of those less-than- to create a cross-selling opportunity. However, the effective efforts. branch is no longer a viable delivery mechanism for daily, transactional services that are better suited A recent Genpact poll of operations executives across for digital channels. The key is how a bank sets up its industries indicates that more than half of decision branches of the future. Branches must be focused on makers see, at best, only “some benefits” from digital 7 high-touch activities that not only provide consumers technologies implemented until this point. For the with an excellent experience but also enable the banking, financial services, and capital markets bank to benefit from spending time directly with sectors, the response suggests that a subset of their customers. The critical point is that customers executives, approximately the top quartile, is seeing don’t want technology inserted into the customer their digital initiatives outperform expectations, experience just because it is available; the but the bulk of respondents are seeing only some technology must provide a tangible benefit. benefit or aren’t able to determine the benefit of their investments. This indicates that some banks have begun to crack the code on how to maximize the The ROI challenge return on their digital investments. However, for the For banks, just investing in digital technologies is industry as a whole to improve digital ROI, banks must not enough to realize the expected benefits to the be able to recognize where they are struggling the business. Genpact estimates that across all industries, most. When asked, here is what operations executives all current digital efforts worldwide cost about $593 say (Figure 6):
SM DESIGN • TRANSFORM • RUN LEAN DIGITAL GENPACT | Whitepaper | 8 Clearly, legacy system integration is a challenge to maximize their return on investment. When for digital technology and analytics initiatives, Genpact asked about alignment of technology and which comes as no great surprise. However, change analytics initiatives to business outcomes, only management and budgeting are also causing 30% of respondents indicated they were doing it significant struggles for digital technologies while well or extremely well. In the absence of properly limited access to talent is holding back analytics aligning technology or analytics decisions to business initiatives. Another issue is that many banks are outcomes, banks greatly reduce their ability to fully not properly aligning technology and analytics capture the benefits of their digital investments. initiatives with their business outcomes in order
Where does your organization struggle most?
People/change management Budget/ROI Technology
Digital technology Analytics
Legacy systems 45% Systems are not integrated 45% Change management 36% We lack business intelligence tools 33% Insufficient budget 33% Access to analytics talent 33% Poor communication between IT and 30% business Our processes and systems do not capture 32% the required data Internal users slow to adopt 25% technologies Analytics tools are not applied uniformly 28% Many technology ideas aren’t 23% practical for us Internal users slow to adopt analytics tools 22% Not aware of the most relevant 22% technologies Insufficient change management to drive 21% action from results Management divided on technology 20% use Can't get the business insights that inform 13% decisions Unable to measure ROI 13% Insufficient budget 11% External users slow to adopt 5% technologies
Genpact surveyed over 100 senior executives responsible for business operations. 71% of companies participating have annual revenues of over $1billion.
Figure 6: Where does your organization struggle most?
39%
25%
14%
5% 5%
Poorly Fairly Adequately Well Extremely well
Figure 7: How well does your company align technology and analytics to business outcomes to maximize ROI?
SM DESIGN • TRANSFORM • RUN LEAN DIGITAL GENPACT | Whitepaper | 9 Compliance and risk come into focus counterparts in other functions such as finance To gain insights into the focus of bank C-level and risk executives (CXOs), Genpact polled 201 The ability to deliver future impact in each respondents who provide retail banking services banking function depends in part on the existing and 206 involved in commercial services. level of maturity but also on the preparedness to The top challenges were generally consistent further evolve each function. Banking operations across retail and commercial banks and across executives were asked for their opinions about functions, including operations, finance, and risk, each function’s maturity and preparedness to with compliance and risk management listed mature further. In retail banking, for instance, as the top challenges. The results showed the anti-money laundering and payment-processing following: functions were seen as most mature, with 94% • Ensuring compliance with regulations was and 90% of respondents, respectively, rating cited most often, pointed out by 72% of banking these functions as mature or very mature. This executives as one of their top three challenges contrasts with retirement services, which only 61% of retail banking executives rated as mature • Managing risk ranked close behind, at 71%, or very mature. Similarly, 98% of operational followed by increasing customer satisfaction at executives said that anti-money laundering 58% is well positioned to continue maturing, and 86% saw the same potential in the payment- • Operations executives in retail and commercial processing function.8 banks faced similar challenges as their
Ensure compliance Increase customer Reduce capital and Manage to regulations satisfaction asset intensity risk Increase growth and Enable company’s Enable agility and Reduce scalability innovation adaptability costs
% of respondents from various functions stating challenge as among the "Top 3" for their company
0 10 20 30 40 50 60 70 80
Overall
Finance
Operations
Risk
n=201 executives from retail only as well as commercial/retail banks from a survey conducted by LinkedIn commissioned by Genpact
Figure 8: Compliance and risk are the most important challenges across retail banking functions, client satisfaction ranks third
SM DESIGN • TRANSFORM • RUN LEAN DIGITAL GENPACT | Whitepaper | 10 DIRECTIONAL
% of respondents assessing maturity and preparedness k e ons o st s
ri s c ion t e e r
c a o f f
plian c ure y s i s rea s ure regulat i anage Magnitude of educe o m a t u st o m e s a t o n c uri t M En s c t I s R 1 c
challenge m a t o pro c Prepared t 72 71 59 44 M
Payments processing 5438 57 90 61 40
c an Account set-up and servicing 37 57 86 57
Mortgage servicing 5153 54 72 27 57 9 un cti on f
add ressin g
g 4 77 38 89 14 26 Anti-money laundering 0 ti n on
st a Mortgage origination 4932 54 69 5222 pa ct ts
i m 4 l Retail brokerage 34 40 59 37 26
a 3 r i onde n t e e 239 20 83 35
a Multi-channel customer 40 8 res p m
en g management f
e 5 3 17 23 69 3652 Retirement services 3 4 % o ha v c ha l Very mature or mature Fully prepared or prepared Somewhat mature or immature Somewhat prepared or not prepared
1 % of respondents from retail only as well as commercial/retail across all n=48 retail banking operations executives from a survey conducted by functions (n=201) stating it is one of the top 3 challenges in their company an independent research rm commissioned by Genpact
Figure 9: AML most mature and prepared to evolve, while retirement services is an opportunity to mature for retail banking
The new regulatory regime requirements through more stringent asset to equity and debt to equity ratios. In addition, new, stricter Compliance is creating new costs and changing the requirements for anti-money laundering (AML) business model for banks as they exit certain business and know-your-customer (KYC) checks have led to lines and double down on others all while trying to significant fines and exploding compliance costs. navigate a new regulatory regime. As the world’s banks are still struggling to react to Reducing leverage and redirecting revenue streams these new rules, new entrants are entering with more are critical tasks being undertaken across the agile operations and a more proactive regulatory industry. As businesses such as proprietary trading stance in the most attractive businesses. Although give way to other areas that require different digital disruption is aiding these disruptors, their operational capabilities such as wealth management, lean footprints are enabling them to sidestep the banks must also gear up their operations to face off areas with the most stringent regulations. This is a with smaller, more agile competitors. Incumbents benefit that new entrants, including the technology must learn to operate with reduced leverage as major giants, will continue to leverage and even defend as regulations take effect aimed at increasing capital evidenced by heightened lobbying efforts, such as
SM DESIGN • TRANSFORM • RUN LEAN DIGITAL GENPACT | Whitepaper | 11 Financial Innovation Now, a lobbying group based The effects of scale in a dynamic in Washington, DC, supported by Apple, Amazon, Google, Intuit, and PayPal. regulatory environment The impact of the new regulatory regime is being felt Although the banking industry is also no stranger differently depending on the scale of the players. to political lobbying, one thing that is clear is the traditional retail and commercial banks are spending In the US market, for example, the designation of significantly more time focusing on compliance and systematically important financial institutions (SIFIs) risk management; see Compliance and risk come has had a dramatic effect on the financial services into focus on page 10. The focus on compliance is landscape. Some of the seemingly most entrenched critical; however, the result is that banks are leaving incumbents are making difficult decisions about the door open for disruptors that are focused almost the viability of their business models under the new exclusively on the customer experience. regulatory regime, and, in some cases, are exiting
Less leverage Large fines and restricted and trading cause compliance High Global drag on cost, but t topline SIFI benefit from scale more than others impa c Some risky Some fines and Lack of scale products Domestic significant means restricted SIFI investment, disproportionate Medium non-bank SIFIs enue s exiting fixed cost burden e v
of r Product Very simple portfolio portfolio less scrutinized, low Mid-Tier
it y less structural leverage Digitally enabled to affected e r Low comply natively (e.g. v data structures allow
S e faster reporting) and Digital learn faster operations designed to comply Low Medium High
Size of bubble indicates total group assets: Global-$6.5 trillion | Domestic-$3.4 trillion | Mid-Tier-$3.8 trillion | Severity of cost impact Digital-N/A (not typically holding assets)
Figure 10: Both business models and operating models are changing, lenders that can best adapt their core businesses and operating models will prosper
SM DESIGN • TRANSFORM • RUN LEAN DIGITAL GENPACT | Whitepaper | 12 business lines entirely. Even those that have avoided some smaller domestic SIFIs) are still attempting the extra regulatory burden that comes with being to have certain rules changed in order to better a SIFI are still under intense pressure, as their own bear the cost burden. asset bases aren’t large enough to cope with the host of other regulations that have been introduced over • Digital disruptors, which broadly include the the last several years. An analysis across the major payment services and P2P lenders, among others, categories of scale shows that: have been able to quickly move into select areas of the market as incumbents have turned • Global SIFIs are most affected by the loss of their focus from the customer to the regulator. higher risk/return businesses and their ability to The disruptors have also felt fewer burdens add leverage that has most noticeably caused a of compliance as they design their operations decline in ROE. Many have focused on other fee- specifically based on the new rules or avoid the based activities (such as wealth management) most heavily regulated business lines entirely. as a result. On the cost side, these banks have the greatest ability to scale in order to cope with Digital disruptors are at an advantage as they are able additional compliance costs, but their operations to capture new revenue opportunities by designing are complex. In addition, the barriers to entry to their offerings for the new business environment becoming a universal bank are now significantly and don’t have the same cost of compliance burden higher, and the existing universal banks control the that traditional competitors do as a result of their lion’s share of assets. legacy systems and operations. However, this is not an excuse for banks to avoid taking a more proactive • Domestic SIFIs in the North American market stance on their regulatory initiatives. As the disruptors have also been restricted from certain risky grow, so will their regulatory burden, and incumbent activities, causing a drag on the top line, but many banks that have smartly upgraded their middle and of these activities (such as proprietary trading) back offices to meet current and future regulatory were less important to the banks’ business demands will have a significant advantage. models. Costs are significant, but most banks have found the ability to scale, while non-banks are Although the digital and regulatory forces are having now exiting in part due to the added cost burden. different effects on the banking industry, they are In the North American market, about two dozen similar in that they put many incumbents at an initial domestic SIFIs control approximately $4 trillion disadvantage while making the industry especially in assets. susceptible to rapid disruption. As a result, the bank of the future will be the one that most effectively • Mid-tier banks, ranging from $300 million to harnesses digital technologies to meet customer $100 billion in assets, are least affected on the demands in the front office, while ensuring their top line since much of their revenues were not middle and back offices are more effective and can derived from now-restricted activities, but the better manage costs, risks, and regulations while also costs are a challenge. Many mid-tier banks (and supporting growth.
SM DESIGN • TRANSFORM • RUN LEAN DIGITAL GENPACT | Whitepaper | 13 Part 2 The scope for advanced operations
Although the banking industry is at a crossroads better technologies and talent, there can be little due to significant technological and regulatory doubt that more mature shared services and, in megatrends, there is clearly an opportunity to some cases, offshoring are appealing as cost-cutting adapt and thrive. Banks must look across the front, initiatives. However, the industry needs a more middle, and back offices in order to create an optimal holistic solution beyond simple cost-cutting and operating model that relies on three key pillars: labor arbitrage. The pressure on firms to move to technology, process, and organization. This may seem a more variable cost model may be a catalyst for obvious; however, we have observed that most efforts a greater focus on moving some core functions to are focused on the front office, don’t solve end to end a shared services environment going forward. For from front to back, or narrow the scope of intervention example, when asked specifically which industry- to either technology, process, or organization—but specific functions could benefit from new operating don’t effectively use those three levers jointly. models, banking respondents indicated areas such as transaction processing as well as servicing of loan, Over many years supporting banking transformations, 9 we have been studying this theme in detail. Banks are mortgage, and cards products were all in scope. clearly prioritizing process standardization followed by consolidation through advanced operating The front office models that will enable easier implementation of Looking at the front office over the next few years, new processes and technologies to better connect the business lines most likely to be impacted in with customers, apply advanced analytics, and the banking sector include payments, lending and gain the flexibility to scale operations based on deposits, market data, capital markets, and wealth business demands. Regarding the challenges management. These areas can accommodate involving technology, new regulatory requirements, business models that are platform-based and data- changing customer preferences (such as multi- intensive and don’t require huge amounts of capital. channel retail banking), and the lack of standardized and consolidated operations are making the Incumbents must choose how to measure their implementation of new technologies too cumbersome. response and may partner with, or even acquire, As for talent, the nearly universal focus on big data disruptors when appropriate. and analytics across all industries has left commercial and retail lenders, especially those operating at the The global financial technology revolution is being regional level, unable to acquire and retain the driven by end consumers, many of whom have grown right staff. to expect the benefits of digital offerings that are virtually universally accepted in other industries. In Given the concerns over more stringent regulations, addition, the burgeoning Internet of Things is further macroeconomic factors (such as softening labor pushing banks to consider how they can leverage data markets and low interest rates), and the need for to better serve their customers.10
SM DESIGN • TRANSFORM • RUN LEAN DIGITAL GENPACT | Whitepaper | 14 Deutsche Bank to spend over $1 billion on digital projects in next 5 years and will be launching three innovation labs, partnering with Microsoft in Berlin, HCL in London and IBM in Silicon Valley) to create its own fintech.
Citi established a venture capital fund Wells Fargo is backing a series of Barclays Accelerator and has been very startups through its accelerator, one operates in two active, investments include wealth example is a platform for financial countries, in part thanks to management start-up Betterment and institutions providing clients virtual TechStars' management the payment company Square — both personal assistants expertise of which are entirely outside of Citi
Goldman Sachs backing Square as well as a market data analytics firm Kensho, as well as its own Bank of America sponsoring tech accelerators in blockchain, SETLcoin New York, London and Charlotte
Santander dedicated $100 million fund to invest in fintech startups and Capital One created partnered with mobile payment specialist Monitise to build and scale an accelerator called fintech businesses Capital One Labs
• R3CEV over 2 dozen major banks partnering to utilize blockchain within the industry • Goldman, Bank of America and Bloomberg investing in machine-learning company Context Relevant • Goldman and others investing in companies Perzo and Symphony which aim to provide instant messaging and access to research, in a bid to disrupt Bloomberg’s dominance in providing information and financial technology to banks
Figure 11: Ripped from the headlines: Banks are aggressively investing or co-creating with industry disruptors to move into the digital age
In many cases, banks realize they have no choice but Technology and the customer to innovate or partner in order to more effectively In many ways, technology in the front office is profile their customers based on demographics, getting the most attention from both disruptors and spend, transactions, and social behavior, so they can incumbents. This is for good reason, as it is now clear offer customized products relevant for a particular that front-end technology is what wins the hearts segment, instead of applying a “one size fits all” and minds of end customers. This is the area where approach. Banks are also working to identify which banks have thus far been most aggressively investing channels are appropriate to reach out to different in or co-creating with startups in order to deliver segments and provide a seamless and integrated the digitized customer experience that consumers experience across channels. Experience shows that experience in other segments such as entertainment, a well-designed omni-channel system, integrated hospitality, and transportation. across the front, middle, and back offices, can reduce operating costs by 10%–15%, reduce contacts One of the most critical areas of focus for bank requiring human intervention by 20%, improve first technology is mobility. There is a correlation between contact resolution 15%–20%, and reduce average mobile banking and customer retention. In addition, representative interaction time 30%–40%. However, with a clear cost advantage over traditional channels, in a siloed structure, none of this is possible, and plus the growing demand from customers for mobile a more holistic approach is required to profile and services, the potential for an excellent return on segment customers through data analytics. For investment for banks investing in the technology example, building a unified enterprise-wide analytics required to deliver mobile services is high. In fact, center of excellence and heavy lifting “factory” a recent study by Forrester indicates that the ROI designed to leverage the three pillars of technology, on mobile banking could be greater than 15%.12 This process, and organizational models can assist banks estimate takes into account the reduced cost to serve in decision-making and provide better integrated through the mobile channel, potential cross-selling solutions to customers.11 opportunities, and customer service.
SM DESIGN • TRANSFORM • RUN LEAN DIGITAL GENPACT | Whitepaper | 15 80%
76% 70% 75% 70% 60%
50% 54%
40%
30%
20%
10%
0% US UK Germany Netherlands
% who used mobile Satisfaction with mobile (of those who use it) Figure 12: Customer satisfaction rates of mobile banking customers
The Genpact Research Institute’s studies of the digitizing their customer channels as part of an habits of retail banking customers around the world overall omni-channel strategy. For many banks, this support the idea that mobility as a channel, while will mean closing branches, an expensive endeavor still not as commonly used as traditional channels, given the amount of investment they represent and does not negatively impact customer satisfaction. customers’ desire to have access to them, even if A recent survey of 7,152 retail bank customers only on a limited basis. For the branch networks that across the United States, the United Kingdom (UK), remain, banks will also need to digitize them so that Australia and Europe indicated that about half of even if customers arrive for transactional activities, the respondents had significant interactions with they are served via digital methods. their primary banking institution through the mobile channel. In some regions, the percentage of mobile users across the general population was significantly higher, such as in the United States (60%), as “We’re piloting smart branches: building opposed to others like Germany (37%), indicating new branches that are, in many cases, just that mobility as a channel is still far from ubiquitous, 700 square feet, no counters, a couple and thus has room to grow. Of the respondents who of automated cash machines, lending were users of the mobile channels, 71% indicated machines. I fully expect over time that that they were either very satisfied or satisfied with we’re going to continue to see, as an their mobile banking interactions. This satisfaction industry, a reduction in terms of physical- rate was in line with other channels, including branch, branch footprint.” telephone, and web.13 Given the significant cost advantages of mobile over traditional channels such —Michael Corbat, CEO, Citigroup as the branch, it is clear that banks must continue
SM DESIGN • TRANSFORM • RUN LEAN DIGITAL GENPACT | Whitepaper | 16 The Digitized Bank user interfaces in the absence of deliberate cross-channel orchestration. Commercial Retail banks are among the biggest potential lenders’ front-end sales forces can approve new beneficiaries of digital transformation thanks clients’ capital equipment leases in record time to the inherently digital nature of their services. by obtaining a small set of key data points from They now have the ability to orient client traffic the client during a person-to-person interaction toward the most effective client channels using agile workflows that globally connect based on the client preference insight derived experts (the middle office) who can sanction from interactions with similar clients. By doing that approval swiftly. so, retail banks can optimize the customer experience and the cost of the transaction at This is particularly important when the sale aims scale in a way that would have been impossible at dislodging an incumbent competitor at lease for the traditional front end and even for digital renewal.14
However, to deliver on rising customer expectations, The battle will most likely be fought among licensed banks need more than just technology. For example, banks, since they control the capital and banking retail banks offering an omni-channel experience must infrastructure that all front-end offerings, including have optimized processes in place to ensure that the those from the digital disruptors, utilize. However, customer experience is uninterrupted. Banks must as is happening in the front office, if banks don’t act also ensure that they choose the best organizational quickly to holistically reimagine their middle and back models to deliver optimal service to their customers. offices to support a superior customer journey, new In some cases, that may mean joint ventures with competitors will eventually find a way to enter the digital disruptors that own the front-end customer market and overcome the infrastructure advantage relationship but require the banks’ infrastructure. currently held by traditional banks. These digital In other cases, banks will need to realign their staff disruptor/bank hybrids, complete with a banking so that those who are most likely to interact with license, could potentially not only offer a digitized customers, such as branch personnel in the case of front office to consumers but also maintain the a retail bank, focus on high-value, non-transactional banking infrastructure that digital disruptors rely on activities. For all other customer interactions, other today. If the incumbents themselves don’t change more efficient models that leverage a combination their operations to meet this threat, they will be of technology and shared services or third-party unable to complete in the marketplace. outsourcing should be utilized. However, regardless of how a particular bank is digitizing the front office, it is impossible to deliver an effective digital service to the customer without close coordination in the middle and back offices. “With financial leverage gone, the only thing you’ve got is old-fashioned The middle and back offices operating leverage, automating things, While bank executives will continue to have their workflow efficiencies.” hands full with digital disruptors vying to capture —Martin Chavez, CIO, Goldman Sachs the customer relationship, a different battle will continue to escalate in the middle and back offices.
SM DESIGN • TRANSFORM • RUN LEAN DIGITAL GENPACT | Whitepaper | 17 However, despite the clear need to do so, the path to upgrading the middle and back offices to keep pace with the advances in the front office is difficult. A uniform and practical approach Genpact estimates that the banking sector has been to digital enablement not only no more effective than any other sector in achieving an acceptable ROI when it comes to digital initiatives. can productively harness digital With banks spending between 15% and 25% of their technologies and analytics but also overall IT budgets on digital initiatives, possibly as help the industry construct advanced much as $120 billion in 2015, there is certainly no shortage of capital to make this upgrade.15 However, organizational models and leverage results are mixed at best, with a strong possibility them to deliver a more rapidly that much of this investment may be wasted. The lack attainable, yet scalable and cost- of results is even more startling when compared to effective, business process platform estimates that put total fintech investments at 10% to 20% of the total digital spend by the industry during the same time period.
Example: retail financial product
FRONT OFFICE MIDDLE OFFICE BACK OFFICE Now enabled with Hamstrung with reliance on Fragmented and reliant on old digital front end disparate data sources systems
Figure 13: The root of many suboptimal digital efforts: lack of attention to middle and back office, no end to end solution
SM DESIGN • TRANSFORM • RUN LEAN DIGITAL GENPACT | Whitepaper | 18 The primary reason for this waste is that many banks capture the benefits of operating as a Lean digital don’t take a truly end-to-end view from the front enterprise. This approach can help banks do what the to the back office. Disparate and fragmented data Lean startup movement has done for fast-growing sources and operating systems are causing digital challengers: harness digital’s revolutionary power in investments in the back end to deliver poor ROI, an agile way. It will also help prevent the digitization which, in turn, makes banks less likely to invest in of broken processes, can simplify interventions, future projects, creating a vicious circle. In order to and can discourage the bias towards small, tactical avoid this, banks must adopt a different mentality to improvements that some Lean management digital investment, one that is leaner and more in line practitioners have. Perhaps most important, these with that of a startup that is forced to invest efficiently or perish. methods harness digital’s power to completely reimagine the middle and back offices, thus By using a combination of Lean principles, advanced unlocking disproportionate client value. Ultimately, digital technologies, and design thinking across the the emergence of Lean digital practices can help middle and back offices, banks can more effectively many generate material impact through the latest harness the power of the digital revolution and technology, faster.16
ILLUSTRATIVE FRONT OFFICE MIDDLE OFFICE BACK OFFICE Full understanding of Aligned interventions, streamlined process, augmented by agile sources of value technology, actionable analytics, global delivery, continuous intelligent operations learning COO
Continuous CFO learning
CRO
Figure 14: A Lean Digital enterprise: Reimagining the middle and back office through Lean principles, advanced digital technology, and design thinking
SM DESIGN • TRANSFORM • RUN LEAN DIGITAL GENPACT | Whitepaper | 19 Where are banks focusing on same time preparing for future uncertainty by operational improvements? ensuring revenue growth, customer satisfaction, innovation, and agility. Genpact commissioned an independent survey to examine the potential of advanced operating The research makes clear that indiscriminate models—including radically improved uses of application of new technology is not the answer, technology—to address strategic enterprise as many respondents did not rate technology but challenges across the banking and financial instead cited advanced organizational structures services sector. As part of this research, as the key material lever for improving critical interviews were conducted with more than functional areas. The responses indicated the 200 senior executives. enterprises’ ability to reimagine how processes are run at scale matters most to banks today. A Although digital technology will profoundly holistic architecture that harnesses technology, change how businesses operate in the future, our process redesign, and advanced organizational research indicates that key enterprise priorities structures, such as outsourcing and shared at every step in that evolution will continue to services, and caters to process-specific be very much focused on today’s challenges— differences will ultimately determine whether e.g., managing risk, ensuring compliance, new technology enables banks to achieve and optimizing cost structure—while at the strategic enterprise goals.
% of respondents stating the initiative can have a material impact on the functional area
Top 3 functional Risk and Radically Business Advanced areas by industry compliance improved use of process organizational impact index* the technology re-engineering structures
Anti-money laundering 82 40 33 42
Risk management 72 51 46 34
Know your customer 38 (KYC) 72 45 41
Figure 15
SM DESIGN • TRANSFORM • RUN LEAN DIGITAL GENPACT | Whitepaper | 20 What are “core” operations? The strategic importance. The accompanying chart is a non-exhaustive example of the types of processes definition is changing for banks banks should be reconsidering in terms of how they Banks must spend their time and capital on approach operational execution. transforming their channels, products, and customer view, while also optimizing their back office and In most cases, banks have already streamlined the support operations. Are these requirements most commoditized and less strategic functions fundamentally irreconcilable? The answer lies with a across the middle and back offices. Although bank’s ability to effectively allocate their management continuing investment to further digitize these resources across the business model while at the traditional candidates is important, the potential same time partnering to pursue a more industrialized impact is muted by the fact that these functions target operating model. Even in an industry such already leverage better technology, processes, and as banking that has already widely adopted captive organizational structures. The greater potential lies and outsource-based models, more than $60 billion in the emerging candidates. These functions, due is still spent annually on operations that have not to their lack of standardization, their high strategic achieved their optimal operating model.17 Thus, the critical question for banks is, what are the true “core” importance, or a combination of the two, have processes that will require a Lean digital approach? often not been tapped as candidates for digital transformation. Although not every function in this The first step in identifying the functions that list of emerging candidates should be transformed are most likely to benefit from better technology, at every bank, an analysis should be conducted as to process, and organization is to map them based on how advanced technology, process, and organizational their current level of commoditization versus their levers may deliver a positive benefit.
Expertise/consultative Emerging Routine, front o ce “high touch” services candidates services ac t CRM, multi-channel contact Customer channel analytics on t customer analytics c Risk r Predictive analytics Customer care management Account open/closure/servicing Financial Customer segmentation planning & analytics Managing social media Traditional
, c ustom e Regulatory reporting Legal candidates Risk modelling nc e Routine, repetitive, a back o ce services
por t Product control i m Reconciliation and Operational reporting exception management
gi c Finance and accounting Compliance Infrastructure
trat e Help desk S L1 application support
Commoditization, standardization
Figure 16: Banks increase the efficiency of existing shared service centers by adding more business processes
SM DESIGN • TRANSFORM • RUN LEAN DIGITAL GENPACT | Whitepaper | 21 Technology in the middle and Moreover, advanced digital technologies, such as cognitive computing, natural language processing, back offices machine learning, intelligent augmentation, and Risk management and analytics have been the focus distributed ledgers (blockchain), all have the potential of technology-driven transformations over the last to dramatically improve operations across the middle several years, and for good reason. The amount of and back offices. data available to banks may be their greatest asset, as long as they are able to leverage it effectively. In some cases, a few leading banks have already started The introductions of cryptocurrencies, such as redesigning their operations based on services such as bitcoin, as well as the underlying distributed customer-channel analytics, customer segmentation, retention offer analytics, and managing social media. ledgers such as blockchain, are proving to be However, the use of prescriptive analytics to make disruptive forces as well. For example, if the source bank operations smarter is still in its early stages. of trust in payments is wrung away from the The more commonly used descriptive and predictive traditional banking system, it could be the first analytics has been used to great effect by banks time in centuries that the financial component of for some time now, but the true power of business many business transactions doesn’t require a bank analytics for banks will lie in its ability to direct as an intermediary decisions across the organization.
Advanced technology Cognitive computing, natural language processing, algorithmic processing, Digital machine learning, advanced service orchestration, virtual data technologies warehousing, autonomic computing, intelligence augmentation
Platform-centric Process-centric Advanced visualization, big data analytics, robotic process automation Maturity technologies of digital Cloud/SaaS mobility dynamic workflows Legacy tech Maturity of digital technologies
Figure 17: The maturation of digital technologies
SM DESIGN • TRANSFORM • RUN LEAN DIGITAL GENPACT | Whitepaper | 22 Blockchain and the back office • New credit scoring models based on transactions that are made visible on While major disruptive technologies focused the blockchain on mobility and payments have dominated the front office, the rise of distributed ledgers (or • Cross-border payments blockchain) has the potential to make an equally momentous impact on the back office. The Capital markets benefits of distributed ledgers are numerous. • Document registries, identity management as They are cheaper, reduce settlement times, part of the KYC process remove the need for post-trade reconciliation, reduce operational risk, and offer a powerful • Improving audit functions by capturing countermeasure to cyberattacks. information from multiple sources in a strong, immutable audit trail that shows a point in The Challenges: For many industry incumbents, time snapshot of these sources and digitizes the move from a centralized model to a them decentralized one will require a significant effort. For example, for distributed ledgers to become • Simplifying back-office operations by encoding structured notes and other truly effective, terminologies, transaction derivative contracts as bilateral smart models, protocol interaction, infrastructure, contracts identity management, and wallet infrastructure for cryptographic (crypto) keys must be • Improve the efficiency of settlement standardized. An industry initiative may be the processes across non-standardized asset best way to speed the process as opposed to classes individual efforts by industry participants. The Impact on Operations: Many processes The Use Cases: The list of use cases continues will be compressed as the friction of interaction to grow to include areas such as currency between parties can be minimized with shared exchange, trading and clearing, payments, data contracts and ledgers. Operations will focus on storage, authentication (including AML and transaction execution and not the peripheral KYC), asset registries, and regulatory reporting. activities involved with intermediation. For Some specific examples include the following: capital markets participants, reconciliation processes will contract significantly if there is Retail and commercial banking a single replicated version of truth. Industry • Leasing and lending – agreements and efforts will focus on operational control and collateral that is digitized can be tracked retooling audit functions, and regulatory filings and managed may require fewer resources if regulators can • Trade finance – a document registry with directly access a transparent distributed ledger. traceability, plus a smart LOC, provenance, In addition, banks’ cyber security programs release of funds on delivery, and will benefit from the more secure nature of escrow services distributed ledgers.
SM DESIGN • TRANSFORM • RUN LEAN DIGITAL GENPACT | Whitepaper | 23 While some banks are just beginning to scratch 2. Then, after receiving a call on a unified omni- the surface when it comes to the usage of digital channel platform with speech analytics, the agent technology and others are farther along on the can proceed to establish right party contact (RPC) journey, it is helpful to look at a few examples of how specific retail banking functions can benefit from a 3. Express scripts can once again be used to make very tightly connected, holistic front to back collection in order to decrease time to closure. office operation. Throughout the entire process, digitally advanced banks can use an omni-channel customer experience platform as well as a process Customer service insights engine, as well as a more intelligent 1. When customers call, chances are they are digitally enabled collection tool to improve the reaching some form of interactive voice response overall process (IVR). The immediate step for banks is to implement an effective IVR optimization process. Fraud early warning For banks further along in the process, there 1. Social media listening can be used to detect should be some form of auto-authentication and, suspicious activity for the most advanced, a movement toward a visual IVR system 2. Then, if an exception is raised with the customer, an unblocking mechanism can be made available 2. After the customer reaches an agent, a directly to the customer bank should immediately employ speech analytics to improve customer service, identify 3. However, if the customer calls and reaches an cross-sell opportunities, and reduce attrition. agent through IVR, the same omni-channel After that, banks should focus on ensuring the platform with speech analytics can be utilized call goes through an omni-channel customer followed by express scripts once the customer’s service platform identity is confirmed
3. Once the agent understands the nature of the 4. Agents can then utilize digital fraud analytics query, express scripts should be available to tools to perform a risk assessment and take speed time to resolution the appropriate action. Like the previous two examples, this process will also benefit from an 4. After resolution, banks should utilize breakage omni-channel customer experience platform, as analytics to understand the root causes of the well as a process insights engine issue. Throughout the process, banks should also be listening to social media and, for the more Experience dictates that digital tools and technologies advanced, utilizing an omni-channel customer such as these can best enable banks to streamline experience platform, as well as a process insights and transform their paper-based manual processes, engine that delivers prescriptive analytics to connecting multiple, discrete silos of data sources and legacy systems by using a thin, agile digital layer improve the entire process to provide a system of engagement. By doing so, banks can ensure that their operations across the Collections front, middle, and back offices work together as one 1. Similarly to the customer service process, customer-centric banking operation. Doing so drives banks should utilize IVR optimization, auto- transformation more efficiently and can lower the cost authentication, and, finally, visual IVR of operations for certain processes by 30% to 40%.
SM DESIGN • TRANSFORM • RUN LEAN DIGITAL GENPACT | Whitepaper | 24 Using operation network analytics Communication matrices were constructed to change the Bank across multiple entities to identify and analyze key influencers and their respective behaviors. A major APAC bank with a complex portfolio SNA metrics were calculated for individuals and of brands and business units, as well as a groups across key parameters such as frequency history of M&As, had initiated numerous of interaction, creativity, responsiveness, critical transformation initiatives. However, contribution, and overall sentiment. management lacked visibility into how effectively teams collaborated among themselves and with Business impact delivered customers and partners. This had a significant The results shed light on otherwise invisible impact on organizational productivity and communication behavior within the client made the diagnosis of problems very complex, organization that transcended the fixed thus potentially jeopardizing the success of the workflow. The analysis revealed patterns greater transformation effort. between different units at a steady state, as opposed to those in transformations. It By implementing operational network analytics helped senior management drive operational (ONA), the bank combined proprietary data transformation by providing insights into sets related to performance and effectiveness the following: with social network analytics (SNA) metrics developed at MIT’s Center for Collective • How different groups in the network operate Intelligence. ONA leverages interaction traces and how effectively they are interconnected (typically email, excluding email body for • The extent to which different entities in the privacy but also possibly other sources such as network exercise leadership and use the calendars and other communication tools). organizational network to foster innovation This was applied within the client organization to help answer several key questions. Who are • The ease of information flow and accessibility the key influencers in the network, and how of knowledge across key people do they behave? Do they contribute to the This enabled the bank to address targeted discussions or filter them? Do they regiment coaching needs for individuals and groups work or assume a collegial/creative work as well as design communication style? Do they respond quickly, and what is the environments for greater change management sentiment of their conversations? collaboration. The bank also eliminated unnecessary touch points and simplified Ultimately, the goal was to determine if the operations leading to more proactive and actual behaviors and structures in place are effective governance of globally distributed appropriate for what the operations are trying teams across organizational boundaries. to achieve.
SM DESIGN • TRANSFORM • RUN LEAN DIGITAL GENPACT | Whitepaper | 25 Taking process operations to goals aimed toward customer impact. This situation doesn’t occur in large projects: For instance, in a the next level recent poll, only 30% of executives across industries Process operations can be the cornerstone of declared their companies could successfully align a superior and economically viable customer digital interventions with business outcomes. The engagement model. core Lean principle is (a) maximizing customer value while (b) minimizing, not eliminating, waste. Both Although banks have come a long way in terms are particularly useful for large enterprises such as of how they perceive and streamline processes, global banks. An example of the common operations there is still room for improvement. At the root of agile and Lean startup methods is a comparatively archetype for continuous improvements in an classic set of concepts derived from manufacturing area such as collections can be seen in the practices pioneered by Toyota and General Electric accompanying chart. (GE). That is, Lean manufacturing—or simply Lean. Lean initially proved itself in complex manufacturing By realigning processes to focus on customer value, environments and then in equally complex service banks can illuminate the true north often lost in the delivery organizations. Part of the system’s maze of organizational layers and the overly complex effectiveness stems from its relentless attempts to and idiosyncratic end-to-end processes that result. simplify and weed out unnecessary work. Lean does Seeking the minimization of waste provides a practical so by focusing teams, across functions, on what really lens to reduce the displacement of existing legacy matters to achieve a pre-established, finite set of processes and systems.18
ILLUSTRATIVE SIMPLIFIED
Past-due % Consolidate, Report Correct Strategy Revise strategy by and Targets segment
Analyze Gather feedback Refine analytical models A EXE CU T CTIONS Collections events
Implement E Measure Agent and client data
Improve tech, MDM
Change process Operate Agents make calls guided by IT systems
Figure 18: Common operations archetype (collections example)
SM DESIGN • TRANSFORM • RUN LEAN DIGITAL GENPACT | Whitepaper | 26 Organizational models—all the technology. In addition, banks will continue using advanced operating models in order to counter a way to industry utilities dynamic and disrupted business environment. As the banking sector changes with the dynamic macroeconomic, regulatory, and digital environment, Banks can organize their operations in multiple ways. the standard banking organizational models also must Some banks may use a more federated model that change in order to better leverage advances in robotic promotes silos along product or geographic lines. automation, analytics, and risk management. In a Other banks may have outsourced or offshored recent survey, more than a quarter of the banking and certain processes so some are shared across business capital markets respondents indicated the need to units. Still others may have moved to a full-fledged “increase offshoring/nearshoring” was one of their internal shared services model that leverages top three priorities. Given the cost concerns over onshore and offshore delivery and dedicated centers more stringent regulations, increased competition, of excellence. Industry utilities, although not as and the need for better technologies and talent, there common in the banking sector, involve the pooling can be little doubt that more mature offshoring is of resources across banks with a central service appealing as a cost-cutting initiative. However, other managing the processes for all participants. process- and technology-focused initiatives were more frequently cited, indicating that the industry Federated. A bank in this stage typically uses a is looking at a more holistic solution beyond simple siloed approach that opens up the organization as a cost-cutting and labor arbitrage.19 Although banks whole to the possibility of redundant processes and will continue to look to organizational models that infrastructure as well as a lack of information-sharing utilize global delivery, pure labor arbitrage won’t be across regions and business units. Although cost by the driving force in where banks choose to set up business unit may appear to be efficient, process and their operations. Decisions will be made increasingly technology redundancies lead to the inefficient use of about measures such as access to expertise and resources across the bank.
Industry utility Advanced operations Client Shared
service Business Client Central Client Federated Unit service
Business Unit Captive/ + Offshore Client Business Business Business Business Shared Unit Unit Service Unit Unit Business Unit Business Business Unit Unit
Figure 19: Multiple ways of banking operation
SM DESIGN • TRANSFORM • RUN LEAN DIGITAL GENPACT | Whitepaper | 27 Shared service. Many firms that have offshored or Advanced operations. These banks use outsourcing outsourced part of their technology and operations and data vendors on a large scale and may have find themselves in between an entirely federated built centers in near-shore or offshore locations to model and a more advanced shared operating model. oversee certain banking functions. These banks are These firms see value in combining certain back- typically in the early stages of global policies and office functions, leveraging low-cost geographies, data standards. The delivery of these operations and realizing some level of standardization. Although typically occurs through a bank-owned captive, a the ownership of the function may continue to exist service provider–owned center of excellence, or a joint by business unit or geography, portions have been venture between the two. centralized. However, data duplication and multi-point client outreach issues remain along with a limited Industry utilities. Many banking functions in the ability to further standardize processes and policies. middle and back offices are rapidly becoming
Utilities as a way forward for bank policy owners, creating the right kind of client onboarding client impact, enacting change management across business, operations, technology, and At what point does the cost of onboarding compliance functions, and gauging the true cost a client outweigh the benefits? As the and potential risks associated with adopting a requirements for people, data, and technology new KYC process. Many banks are currently needed to on-board and conduct institutional conducting their KYC process through varied know-your-customer (KYC) due diligence operating models with some approaching KYC continue to grow each year, and margins continue to compress, banks must implement at the business unit level while others move a more agile and cost-effective industry-level toward an internal shared service. The key is service. to implement a solution that is not only robust but also flexible enough to make sense for any KYC and client onboarding bank regardless of where they are in their KYC Different banks and their business units request, evolution. process, and store the same information from the same clients over and over each year leading The Journey ahead to higher costs and lower customer satisfaction Today, there are concrete options for banks to levels. In addition, the complex, rigid, and non- pursue in order to arrive at a long-term solution standardized processes and structures currently to KYC and client onboarding without saddling in place impede the reduction of operating, the organization with additional complexity and credit, and regulatory risk. cost. The optimal solution rests on capitalizing the collective industry experience of those most The challenge familiar with KYC processes and combining that The benefits of an industry-level service are experience with better processes, technologies, clear; however, achieving that goal requires and an optimal operating model that shares that certain hurdles be addressed, including redundant activities across the industry in order satisfying the needs of regulators and internal to enable a cost-effective and practical solution.
SM DESIGN • TRANSFORM • RUN LEAN DIGITAL GENPACT | Whitepaper | 28 commoditized, and now, banks compete primarily However, experience shows that, in many cases, the on the cost of providing these services, not on their root cause of poor returns on digital investments quality. Traditional cost-efficiency levers such as was attempting to fit new technologies into old process optimization, traditional outsourcing, and processes or adding a layer onto legacy systems. application simplification may not provide the best These issues are amplified when solutions do possible solution. A utility can be formed when a not take into account the effects across the front, group of banks comes together to share the cost of middle, and back offices. To ensure a greater operations using a common technology platform, ROI delivered in transformational investments, by joining forces in a true shared services program banks have to ensure that they are implementing run by a neutral non-bank partner. This reduces the solutions in tandem with each other in a business average cost to operate in stable conditions but, context, instead ofin isolation. To improve customer more importantly, helps banks cope with increases in experience and business service transformation volatility. For example, by linking the cost of services through these newer technologies, banks must received to transaction volumes, an industry utility consider a holistic solution that balances the needs could enable banks to make their fixed cost base of the customer, the regulator, and the more variable. bank itself.
The operating architecture In many cases, banks undergoing digital transformations today will benefit, thanks to better of the future process design and transformation practices, as Investing to address digital and regulatory disruption well as from more agile technologies coming from entails a certain level of risk for banks. Looking back the fintech movement. The challenge then becomes at attempts at transformation paints a less-than-rosy how in practice banks can most effectively use picture as efforts at large-scale enterprise resource their existing budgets to make the best digital planning (ERP)engagement have often delivered a investments. By capturing the value delivered by disappointing ROI. Bank executives are, and should digital solutions, banks can open up new avenues of continue to be, wary of making significant financial growth, transform customer interactions, and more investments in new technology, processes, and effectively provide innovative new offerings tailor- operating models. made for customers of the digital age.
SM DESIGN • TRANSFORM • RUN LEAN DIGITAL GENPACT | Whitepaper | 29 Part 3 What impact can be achieved?
In many ways, the bank of the future is not as well as support functions such as Finance and something that is limited to a certain set of activities Accounting (F&A), are all undergoing transformative or timelines. Banks will continue to evolve amid the changes. Figure 20 offers just a sampling of some digital and regulatory backdrop, and in many cases, of the digitally-enabled solutions that banks and that evolution has already begun. Key business financial services firms are implementing today, as areas such as wealth management, retail banking, well as their corresponding impacts. mortgages, and commercial lending and leasing,
Wealth Commercial Retail banking Mortgages F&A Insurance management lending & leasing
Cloud based Rapid automation Integrated multi- Commercial All-in-one wealth Mortgage loan solution for F&A solution channel customer lending and leasing management originations management originations
Solutions platform platform solution platform Stat. and Reg. Rule based workflow reporting solution
Integrated solution Automated front to Differentiated of technology, Business process back office solution workflow and Unique lending Productivity gains analytics and best practices transaction processes that operations support diversified Goal oriented automation Reduced cost of lending products Cloud computing strategies for claims Consistent customer customers Process Impact experience End-to-end, real Simplified standardization Improved time technology deployment Simplified key throughput Reduced cost of platforms approach operational tasks Productivity gain operations
Figure 20: Typical solutions integrated across service lines
SM DESIGN • TRANSFORM • RUN LEAN DIGITAL GENPACT | Whitepaper | 30 Regardless of which area a bank is focusing its digital scalable and cost-effective, business process platform efforts, almost all banks are facing common drivers that lets banks more easily adapt. to some degree, including complex legacy systems and processes, skillgaps, fragmented efforts, and To gain further insight into how banks are leveraging unclear prioritization. In short, banks don’t always more intelligent operating models, Genpact polled 201 respondents who provide retail banking services and know where to start. However, there is a pattern in the 206 involved in commercial services (see Figures 22 changes occurring across their operations. A uniform and 23). The results clearly indicate that operations and practical approach to digital enablement not can be materially improved through the improved use only can productively harness digital technologies and of technology, process reengineering, and outsourcing analytics but also can help banks construct advanced or shared services. However, not all functions will organizational models and leverage them to deliver experience the same benefits, which makes the enterprise-wide impact. The resulting intelligent question of prioritization, or WHAT banks transform operations constitute a more rapidly attainable, yet first, even more critical.
FROM: Traditional operations TO: Intelligent operations
Heuristics, Descriptive Analytics predictions, prescribes
Accounting, experience Statistics, domain
Resources under one roof Flexible resourcing
Largely fixed cost Variable cost
ERP, SOP, long development, 5-7 Agile, workflows, cloud, APIs, mobile, years ROI 1-2 years ROI
Analog Digital
IT or org dev or analytics Integrated IT / org dev / analytics
Fragmented End to end
Last Adapt
Figure 21: Intelligent operations are built differently
SM DESIGN • TRANSFORM • RUN LEAN DIGITAL GENPACT | Whitepaper | 31 % of respondents stating the initiative can have a material impact on the function DIRECTIONAL
Radically Business BPO or improved process SSC or use of re-engineering hybrid1 technology
Payments processing 48 40 58
Mortgage servicing 35 46 44
Account set-up and servicing 54 56 48
Mortgage origination 29 42 42
Anti-money laundering 40 33 42
Multi-channel customer management 48 52 48
Retail brokerage 25 19 33
Retirement services 21 19 46
* Function Impact Index combining stated importance of challenges and stated ability of a function to address them 1 BPO –Business Process Outsourcing, SSC –Shared Services
Figure 22: Advanced organizational models have material impact, but the perception varies across functions
% of respondents stating the initiative can have a material impact on the function DIRECTIONAL
Business Radically BPO or SSC process improved or hybrid1 use of re-engineering technology
Business banking 51 54 60 origination and servicing
Risk management 51 46 34
Equipment finance 20 20 31
Auto finance 11 17 23
* Function Impact Index combining stated importance of challenges and stated ability of a function to address them 1 BPO –Business Process Outsourcing, SSC –Shared Services
Figure 23: Many commercial bankers believe advanced organizational structures have impact across functions
SM DESIGN • TRANSFORM • RUN LEAN DIGITAL GENPACT | Whitepaper | 32 What are banks transforming? Growing profitably without Banks are transforming front-office offerings and sacrificing client experience middle and back office support functions in a Increasingly sophisticated clients are driving the substantial way. These transformations across demand for new products and features, such as areas such as wealth management, retail banking, house-holding, tax-loss harvesting, and account mortgages, commercial lending and leasing, F&A, and aggregation. Wealth managers need to meet these risk management are enabling banks to evolve their demands, but must do so against a backdrop of overarching business models for success in the future. more competition and the emergence of robo advisors, which have driven fees down. Legacy Wealth management systems are too inefficient to meet the dual Growing profitably with outdated technology and challenge of rising digital expectations and tighter increased client expectations is a challenge for all cost controls, which is why banks are moving to wealth managers. centralized and consolidated systems that can scale without disrupting day-to-day business. For Next-generation investors are embracing the digital example, when a bank implemented a managed age, while their parents still look for traditional account platform that provided advisors the channels. This creates a complex situation, especially when factoring in the digital upstarts, such as robo ability to manage the entire investor lifecycle, advisors, attempting to disrupt the traditional advisor productivity increased, and the bank grew advisor/client relationship. Technology, applied assets under management (AUM) with a five- as part of a digitally enabled operating model, is year compound annual growth rate (CAGR) of helping banks and wealth managers deliver revenue 76%. The streamlined operations also enhanced opportunities and reduce costs while improving the risk management and alerts-based compliance client experience. monitoring across all advisor activities.
D-I-Y Hybrid Advisor directed
Common middle and back oce infrastructure
Figure 24: Individual investors or household relationship
SM DESIGN • TRANSFORM • RUN LEAN DIGITAL GENPACT | Whitepaper | 33 Moving beyond legacy systems digital technologies so that they empower advisors, as opposed to replacing them. For example, when an Fragmented legacy platforms create highly inefficient established wealth manager leveraged a common operating environments and limit top-line capacity. infrastructure, the firm offered a balance of physical After decades of bolted-on solutions, disparate and digital advice. The firm’s customers benefit from systems cannot provide a streamlined customer experience, are difficult to use, and are costly to run. account aggregation while seamlessly accessing In some cases, disparate systems can even hinder advice at the level that best suits their needs. talent recruitment and retention. When faced with these issues, a rapidly expanding wealth manager Putting it together moved its retail and institutional programs to a The critical changes for banks and wealth managers is single platform and standardized processes across that they are now utilizing design thinking to integrate geographies, practices, and products. As a result, technology, process reimagination, and organizational the firm lowered its total operating costs while also models to increase scale and reduce costs at the same improving its staff on-boarding processes. With more time. A well-designed end-to-end operation also advisors onboard, the firm’s AUM doubled within the reduces manual activities by advisors and allows them first year of the operational transformation. to focus more on the client experience (see Figure 25).
Avoiding being replaced by Retail banking automated solutions such as Retail banks must deliver a superior omni-channel robo advisors experience and cut costs. Customers now interact with Integrating physical and digital channels to provide banks in all kinds of ways. These different channels will full service to customers is key for wealth managers, only increase as advanced digital technology becomes but it requires reframing the approach to advanced more widespread.
Complete end to end capabilities for wealth management
Market Lead RFI/RFP Front o ce research generation
Document Client Cash Pre trade/ Post trade Contact Middle & management onboarding management Trade Services services management back o ce Account Corporate Risk and Security master Investment Asset servicing servicing actions compliance set up research
Finance & Reporting Investment Reconciliations Tax services accounting and billing accounting
Platform Account Portfolio Re- Tax Comp- Performance Proposal Order Billing Reporting services opening construct balance optimize management liance analytics
Development Middle office Technology Hosting/Infrastructure Operations Back office Connectivity + HO, FA, Investor, Reg. reporting
Figure 25
SM DESIGN • TRANSFORM • RUN LEAN DIGITAL GENPACT | Whitepaper | 34 The key to building cost-effective channel- and shifting calls to alternative channels. As a result, agnostic services is to use design thinking and Lean the bank experienced a one-time $9 million cost principles to minimize ongoing investment in legacy reduction and an ongoing 30% reduction in call center systems. Intelligent customer analytics, process operating costs. transformation, and embedded agile technology are critical for maximizing value in omni-channel banking Creating channel-agnostic capabilities services, while minimizing costs. and architecture Channel processes and technologies still exist in silos Design for the customer, not the bank today, with each channel having a siloed organization, Whether it’s researching and applying for a loan, process hierarchy, and application stack. This opening an account, or disputing a credit card makes it difficult—and sometimes impossible—to transaction, customers often initiate a process in one deliver experiences that span channels. Silos also channel only to continue or conclude the process in create significant cost inefficiencies due to a lack another. They expect banks to know exactly where of standardization and the duplication of channel they are in this journey regardless of the touch point business logic, such as transaction messaging. they are using, which means the way a process is To overcome these issues, a bank decided to designed must be channel-agnostic and navigated centralize its widget-based framework and introduce seamlessly, based on preference and suitability. generalized reusable components and modules. The bank also adopted a user interface (UI) that In practice, a leading bank decided to migrate to a new was more responsive and adaptive through touch- customer relationship management (CRM) platform enabled technology. This resulted in a unified end- in order to integrate chat and social media into its user experience that allowed customers to access support services. The bank started by putting the right all relevant information on a single screen. It also technology into place and cross-training associates introduced developer and client integration support, so they could support and drive simple and complex along with advanced cache management and error processes across channels. The resultant impact management modules. As a result, the bank saw was a 20% reduction in calls and a 37% reduction in improvements in customer productivity, unified average handle time, and first-call resolution rates multiple devices across the customer experience, and improved to 69%. improved error notification and response times.
Migrate to self-service without Commercial lending and leasing impacting service levels Commercial banks are not immune to Genpact’s own research into the habits of retail bank customers indicates that 71% of customers who use digitization lower-cost digital channels, such as mobile banking, Commercial lenders and equipment financiers must are satisfied, which is in line with other non-digital balance growth and operational streamlining. Finding channels, such as the branch. However, in some the optimal balance lies in a target operating model: regions, up to 60% indicate they have not used their one that blends customer service, risk management, banks’ existing digital channels.20 Many transactions, and collections processes while remaining a such as balance inquiries, are still handled in costly scalable and agile process. Smarter operating human-assisted channels. Banks must migrate these models, intelligent customer analytics, process transactions to more efficient channels without transformation, and agile technology can help add unsettling their customers. A global bank did so by value, mitigate pressure on margins, and drive growth reducing its internal transfers, optimizing call routing, through diversification.
SM DESIGN • TRANSFORM • RUN LEAN DIGITAL GENPACT | Whitepaper | 35 Leveraging technology Over time, the operating environments across Wringing out customer many commercial lenders have devolved into a morass of disconnected legacy systems, leading service costs without to inefficient credit decisions and slow loan sacrificing service management processes. This sub-par environment with an inordinate amount of manual work causes The challenge poor customer satisfaction, cost overruns, reduced A leading global financial institution productivity, and inaccurate compliance reporting. needed to improve operational For one leading commercial lender, the solution began efficiency within its customer service with a thorough analysis of the end-to-end processes. organization across multiple business With the primary focus on customer satisfaction and lines. The bank also lacked visibility audit compliance capabilities, the bank analyzed its disparate systems, security and data compliance into the performance of its contact processes, business process workflows, manual center and technology usage and was hand-offs, paper-driven dependencies, and efficiency unable to identify and implement an leakage points. The bank then moved its operations to optimized solution due to a lack of a a fully integrated, straight-through, end-to-end loan business case with concrete ROI. processing model by implementing a cloud-based commercial loan origination platform. This enabled Solution the bank to assimilate front- and middle-office functions, such as lead generation, credit analysis, Using a proof of concept that credit decision, exposure management, pricing demonstrated how analytics would configuration, document management, and advanced transform the customer service reporting, on one platform and center of excellence. organization, the bank moved the The platform transformed the financial services firm’s project forward. More than 55 small business loan process, reducing the turnaround measures were developed to map time by 88% (from nine days to one day) and and baseline processes. This allowed significantly enhancing customer experience. the bank to reduce costs and improve operational efficiency. A data hub for Standardization improves margins customer service operations provided Competition is increasing as bigger lessors, banks, actionable analytics, giving the bank and more agile local players fight for market share. a better mechanism to make ongoing Combined with a growing regulatory burden, this competition is stressing corporate structures and decisions across business lines. cost models to the breaking point. Responses to this challenge focus on standardizing technology Business impact platforms, transforming process, and redefining Enhanced performance and working operating models. For a leading equipment financier capital management led to reductions that was receiving more than half of its payments as in agent handling times, inbound checks, the solution was greater automation. By using contacts, and total operating costs. process improvement techniques to yield higher auto cash application rates, the firm reduced rejection rates and costs through automated cash processing of $96 million in payments annually.
SM DESIGN • TRANSFORM • RUN LEAN DIGITAL GENPACT | Whitepaper | 36 Differentiate in a fiercely Scalable operations: Grow with competitive market the customer Commercial banks are pursuing growth through a In the equipment leasing industry, original equipment diversified product mix. They are also optimizing manufacturers (OEMs) are growing by accessing originations and credit processes, and introducing customers in new geographies, and commercial technology that engages customers in account lenders are following suit. Lessors are also finding management and invoice generation. New disruptive opportunities in the move toward more usage-based, players are reframing services and employing smarter pay-as-you-go models. In one example, the financial technology while alternate lending models, such arm of a leading equipment manufacturer wanted to as peer-to-peer, are gaining ground. A global bank quickly deploy new cost-effective, end-to-end leasing realized it had inefficiencies in its origination process, operations to accommodate growing demand. A leading to deal attrition and higher costs. After the holistic operating model created a globally scalable bank standardized its processes across the end-to- leasing operation that was 50% cheaper to implement end originations cycle through an integrated operating than non-end-to-end solutions. model, the deal conversion rate improved by 15%, and the firm saw a $100 million increase in originations.
Standardizing a commercial while a centralized operating model was implemented for clear and transparent financier’s operations improves process metrics. originations, servicing, and collections metrics while Business impact cutting annual costs by $60 The consolidated commercial finance million operations enabled the group to be more competitive through significant process The challenge improvements and a $60 million reduction Acquisitions across the commercial finance in annual costs. In addition, the key functions division of a bank led to a complicated achieved the following: network of systems and locations with no standardized performance metrics. The goal • Origination– Cash and booking accuracy was to reduce the number of legacy systems, rose above 95% through clear workflows, consolidate operations into a single delivery simplified documentation, and a strong audit mechanism center, and improve booking accuracy in order to decrease rework and mitigate the risk • Servicing– Unapplied cash was reduced by of downstream losses. more than $80 million using specialized research tools and a time-bound Solution resolution matrix The bank redesigned the technologies used • Collections– Greater than 30-day by each business line and consolidated delinquencies dropped to less than 2% the processes into a unified operating through collection analytics that model. Existing platforms were migrated enabled the team to transform the to a single commercial banking system collections process
SM DESIGN • TRANSFORM • RUN LEAN DIGITAL GENPACT | Whitepaper | 37 Finance and Accounting (F&A) function can lead to a 30% increase in transactional productivity and a 20% reduction in F&A operating Regulatory compliance, risk costs and closing and reporting cycle times. Bank management, and cost reduction CFOs also have the ability to unlock capacity and are the biggest worries confronting resources to support the business in strategic banking CFOs decision-making and lead the continuing integration between finance and risk groups across the bank. Timely and accurate reporting of data is no longer enough; now, the expectation is that finance groups Improvements in FP&A and MDM will improve business performance. For most financial institutions, this means transforming operations to are critical deliver actionable business intelligence derived from Financial Planning and Analysis (FP&A) and master data in order to gain insight into the business and data management (MDM) have emerged as two the market. key areas to watch. In a survey of 157 global finance executives, FP&A (64%) and MDM (49%) were far Bank CFOs and other senior finance executives believe more frequently cited as having a material impact on that the finance function has a key role to play in the risk management than any of the other finance sub- future of banking. However, the function’s ability to functions. Although FP&A has the most impact, MDM impact these challenges depends on the levels of deserves special attention because it is less mature maturity and preparedness, which vary widely across and not all companies are well-prepared to make the industry. Experience dictates that a better finance it evolve (see Figure 26).
ty % of respondents assessing
l i ns b i
growth maturity and preparedness ti o risk
costs
l a
Magnitude of anc e cal a f challenge1 to eas e s eg u duc e sure o r Increase customer satisfaction E n compl i t R e Inc r an d Manage urity o ure 56 48 48 42 42 Ma t process Prepared ma t
Overall F&A 58 58 21 43 64
O2C 23 43 37 18 17
R2R 50 32 18 22 35
P2P 25 53 27 9 22
FP&A 34 53 20 62 64
MDM 49 38 27 40 49 % of respondents stating function can have material impact on addressing challenge
Very mature or mature Fully prepared or prepared Somewhat mature or immature Somewhat prepared or not prepared
Figure 26: Importance of the challenge (% of respondent in specific functions across industries stating that the challenge in among the ‘Top 3’ for their company
SM DESIGN • TRANSFORM • RUN LEAN DIGITAL GENPACT | Whitepaper | 38 Radically improved use of technology Risk management is expected to generate the largest Driving integrated and proactive monetary impact risk management The research also showed that (when applicable) the In a new age of compliance, banks are balancing improved use of technology is believed to provide current risk management priorities against the need the greatest monetary impact on F&A processes, to embrace increased digitization in the future. With especially for mature organizations. Leveraging now- varying levels of maturity across risk operations, mature “system of engagement” technologies that banks must optimize and scale their risk management complement “system of record” technologies is the processes in order to meet business and first step forward for banking finance functions. For regulatory demands. the controllers’ reconciliation group at a large bank, this translated into the implementation of an industry- leading technology solution to improve accuracy Meeting current compliance needs and reduced timelines for more than 5,000 balance while preparing for the future sheet reconciliation processes for each of the bank’s Banks need to focus on five key imperatives for their primary businesses. risk management programs:
Advanced organizational structures 1. Ongoing emphasis on changing regulations have the greatest impact in mature F&A 2. Balancing cost with time to compliance sub-functions For every F&A sub-function, the proportion of 3. Integration of finance and risk functions financial executives who rate advanced organizational structures as having material impact is significantly 4. Building an enhanced data governance and higher among organizations with mature functions. risk reporting culture This contrasts with radically improved use of technology and business process reengineering in 5. Building strong model management which there is little difference in impact among firms capabilities, driven by technology, partner with mature and immature sub-functions. When ecosystem, and in-house teams a leading APAC bank determined that many F&A processes were fragmented and sub-optimal, the Layering technology on legacy systems, a lack of risk bank decided to redesign and transform its finance talent, and delayed returns from digital investments business services to create a true shared model. all blunt the usefulness of risk management programs. By reengineering all of the finance processes in New tools and industrialized operations can deliver a multiple phases, the bank achieved a 30% increase more intelligent risk management function but can’t in transactional productivity, simplified the structure be implemented at the expense of current operations. of its shared services center, and freed up capacity When a global bank with $1 trillion in assets faced a to focus on continuous improvements. In addition, an similar challenge, the bank leveraged a global risk automated reporting tool and scheduler rationalized talent pool along with an end-to-end regulatory the number of reports by 70% and reduced time spent solution in order to keep its model risk management data gathering by 40%. In another case, a global bank functions validated across its consumer, commercial, holding company redesigned its end-to-end reporting and traded books. The process covered models for process and took advantage of increased offshore Comprehensive Capital Analysis and Review delivery. The resulting impact was a reduction in the (CCAR), Basel, and Allowance for Loan and Lease earnings release date by seven working days. Losses (ALLL).
SM DESIGN • TRANSFORM • RUN LEAN DIGITAL GENPACT | Whitepaper | 39 Using data analytics remediation in its cards, auto finance, and banking portfolios. The COE was set up within eight weeks All global banks recognize the value of accurate, and now manages multiple sanction screening, alert centralized data in improving portfolio control remediation, and transaction monitoring functions. and reporting, optimizing decision-making, and enabling a comprehensive risk data governance The bank realized a 20% boost in productivity and program. Successful models usually combine a well- best-in-class 97% adherence to service levels along documented and fully functional data dictionary, with a reduction in customer onboarding time. data quality engine, data governance infrastructure, and data security system. This was the case for a Using financial spreading to predict top US bank looking to improve data governance. probability of default and manage By implementing a Basel-compliant metadata portfolio credit risk program, data repository, data lineage, data quality, Changing regulations necessitate standardized and mitigation function, along with a reporting and processes to ensure accurate and consistent monitoring dashboard, the bank improved compliance probability of default assessment across a bank’s andrealized efficiencies across its BCBS 239 Spreading of borrower financials risk controls. portfolio. provides key outputs for risk analysis, borrower risk ratings, loss estimation, and capital planning. Historically, Expanding capacity in alert financial spreading has faced challenges regarding remediation and transaction multiple templates, non-standardized operating monitoring functions definitions, and inconsistent treatment of line Know Your Customer (KYC) and Anti-Money items and exceptions. Accurate, standardized, and Laundering (AML) regulations are changing to consistent spreading of borrower financials is a address new rules for legal entity identifier, risk- critical component of the overall credit risk function. based screening and due diligence, comprehensive For a large global financial institution, the financial documentation, and additional screening needs. spreading function needed to be centralized and For banks, transforming these processes creates standardized. After a well-documented and thorough challenges such as too many false positives, transition with appropriate oversight and governance, limited and non-standardized efforts, and manually the new model delivered a 40% up-front cost intensive processes. A large US bank overcame reduction and a 10% gain in productivity year on year. these challenges by implementing a center of In addition, the overall processing time was reduced excellence (COE) organizational model for AML alert by 40%.
SM DESIGN • TRANSFORM • RUN LEAN DIGITAL GENPACT | Whitepaper | 40 Conclusion
Over the past two decades, the banking industry has entrants have set out to do, and in some cases with been able to successfully navigate digital innovation great success. However, delivering on the promise starting with the emergence of e-banking, followed of the next generation of digitally enabled customer by multi-channel and now omni-channel engagement engagement will hinge on how new-comers and models. Now banks are being pushed to take the incumbents alike approach their middle and back next step in the digital journey towards things like office operations. artificial intelligence and the Internet of Things without ever having been able to truly reset their As the barriers to entry into the financial system systems and operations from the last evolution. The continue to come down, the banking industry must exponential advances in technology resulting from the start getting serious about improving its operating digital revolution, coupled with the loss of financial leverage. Banks, and those seeking to disrupt them, leverage brought about by a new regulatory regime, will continue to experiment, fail, and invest across have left the industry in a state of flux. As banks have products and channels. Much of this will happen in the scrambled to keep up with the more rapid changes halls of agile start-ups, experience (and capital) laden in their business environment, the result has been an bank innovation centers, or as a result of partnerships industry with a digitized business model supported between the two. However, regardless of where the by an analog operating model. As a result, banks next big ideas for digital banking come from, it will are missing opportunities to delight their customers be those that reimagine how the business executes and the industry is more open to disruption than across the front, middle, and back offices that will ever before. While capturing the hearts and minds of realize the greatest returns on their investment and customers is no easy task, that is exactly what new become true innovators in the industry.
SM DESIGN • TRANSFORM • RUN LEAN DIGITAL GENPACT | Whitepaper | 41 1 Putting Digital to Work: The Lean Digital Way, http:// 11 Industrialized Operations for Retail Banking: The www.genpact.com/leandigital/ Foundation for Defense and Offense in Volatile Market Conditions, http://www.genpact.com/ 2 JPMorgan Form 8-K, http://investor.shareholder.com/ insight/industrialized-operations-for-retail-banking- jpmorganchase/secfiling.cfm?filingID=19617-13-223 the-foundation-for-defense-and-offense-in-volatile- market-conditions 3 Lenders Place Their Bets on Mobile Banking,http:// www.wsj.com/articles/SB100014240527023038478 12 What’s the ROI of Mobile Banking? 15.7%, 04579481811781070456 Forrester Says,http://www.americanbanker.com/ bulletins/-1037534-1.html 4 A New Era of Branch Wars at Nation’s Big Banks,http://www.cnbc.com/id/100627815 13 Based on a Genpact survey of 7,152 retail banking customers in the US, UK, Germany, Australia, and the 5 Results from a Genpact survey of 2,241 adults who Netherlands. have a current account with a bank. 14 Putting Digital to Work: The Lean Digital Way, http:// 6 Based on the triangulation of two data sets: first, the www.genpact.com/leandigital/ size of IT spend globally (around US$4 billion in 2015 dollars according to Gartner), of which 28% is related 15 Based on the amount of global banking IT spend to new projects (as opposed to pure maintenance (around $486 billion in 2015 according to Gartner), of projects, according to Forrester). We assumed that which Genpact research shows that 15–25% is related digital (collaboration, social, cloud, mobile, analytics to digital investments (collaboration, social, cloud, tools, and technologies) represented a similar mobile, analytics tools, and technologies). proportion of the total IT spend, given that (a) most of the new projects have digital components and (b) 16 Putting Digital to Work: The Lean Digital Way,http:// some maintenance has digital components (e.g., new www.genpact.com/docs/default-source/resource-/ cybersecurity, infrastructure); second, recent research putting-digital-to-work-the-lean-digital-way from the Everest Research Institute, “North American Digital Adoption Survey.” 17 Industrialized Operations for Retail Banking: The Foundation for Defense and Offense in Volatile 7 Results shared by 110 executives of shared service Market Conditions, http://www.genpact.com/ operations across industries, polled Q2 2015. insight/industrialized-operations-for-retail-banking- the-foundation-for-defense-and-offense-in-volatile- 8 Transforming Banking Operations through Advanced market-conditions Operating Models,http://www.genpact.com/insight/ transforming-banking-operations-through-advanced- 18 Putting Digital to Work: The Lean Digital Way, http:// operating-models www.genpact.com/leandigital/
9 Advancing Operating Models in the Banking and 19 Advancing Operating Models in the Banking and Capital Markets Industries, http://www.genpact.com/ Capital Markets Industries, http://www.genpact.com/ insight/advancing-operating-models-in-the-banking- insight/advancing-operating-models-in-the-banking- and-capital-markets-industries and-capital-markets-industries
10 The World Economic Forum, The Future of Financial 20 Based on a Genpact survey of 7,152 retail banking Services: How Disruptive Innovations Are Reshaping customers in the US, UK, Germany, Australia, and the the Way Financial Services Are Structured, Provisioned Netherlands. and Consumed
SM DESIGN • TRANSFORM • RUN LEAN DIGITAL GENPACT | Whitepaper | 42 About Genpact Genpact (NYSE: G) stands for “generating business impact.” We are a global leader in digitally-powered business process management and services. Our Lean DigitalSM approach and patented Smart Enterprise ProcessesSM framework reimagine our clients’ operating models end-to- end, including the middle and back offices – to deliver growth, efficiency, and business agility. First as a part of GE and later as an independent company, we have been passionately serving strategic client relationships including approximately one-fifth of the Fortune Global 500, and have grown to over 70,000 people. The resulting domain expertise and experience running complex operations are unique and help us drive choices across technology, analytics, and organizational design. For additional information, contact, [email protected] and visit, www.genpact.com/home/industries/banking-financial-services Follow Genpact on Twitter, Facebook, LinkedIn, and YouTube. © 2016 Copyright Genpact. All Rights Reserved.
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