This article is intended for senior executives responsible for IT, channel, product or segment strategy at large and/or global retail banking institutions.
A New Business Model Enabled by Technology Transformation
External factors – ranging from changing consumer behaviors to regulatory reforms and the emergence of agile nontraditional competitors – have shifted the banking landscape dramatically. Even with improved economic conditions, many banks will continue to grapple with the challenge of forging customer relationships and driving organic revenue growth at the desired pace. Today's banking landscape calls for business models that are relationship centric and allow banks to execute against customer segmentation strategies more effectively.
There are simply too many unprofitable retail banking customers in the aftermath of regulatory changes. FIS™ research of 3,000 banked consumers reveals that 20 percent of primary DDA households account for nearly all (96 percent) of a retail bank's profitability on average. The majority of customers who are unprofitable or marginally profitable hold only basic deposit relationships with their primary checking account providers. The ability to shift to a model that mitigates delivery expenses and supports efficiently extending customer relationships beyond fulfilling basic deposit needs is central to forging a stronger, more profitable relationship.
In the JP Morgan Chase & Co. 2012 Investor Day presentation, Todd Maclin, chief executive officer, Consumer & Business Banking, underscores the disproportionate impact that regulatory reform has had on the profitability of five household segments based on their deposits and investments with the bank. Maclin concludes that while the bank has limited opportunity to grow business with the mostly unprofitable customers in Segments 1 – 3, it can grow share of deposits and investments with Segments 4 and 5.
Aging Core Banking Technology Amplifies the Problem
The major hurdle in implementing a new banking model is that banks are not equipped to be relationship centric at their cores. Legacy core banking infrastructures are 30+ years old and are account-product centric. They often lack the flexibility and agility to respond quickly to changes in consumer behaviors and needs, which forces a mass market approach at product and account levels and fails to optimize relationships.
Even when banks execute creative and effective product bundling and relationship banking programs, underlying core platforms carry inefficiencies, which limit their abilities to deliver customized offerings and experiences. This exacerbates cost-of-service problems and further expands the already large pool of unprofitable customers.
Time for Technology Transformation
The technology transformation – starting with real-time core banking platforms at the account servicing and product manufacturing level all the way through the various customer-facing channel platforms – must touch all facets of the underlying infrastructure.
A true business model shift toward a segment-driven strategy requires a complete organizational commitment across all facets of people, process and technology. From a technology standpoint, customer-facing and analytic technologies must support the segmentation. But more importantly, the technology transformation – starting with real-time core banking platforms at the account servicing and product manufacturing level all the way through the various customer-facing channel platforms – must touch all facets of the underlying infrastructure. Many large banks have tried to address this issue by building a "real-time facade" to emulate the desired business model improvements, which has only added to the complexity of the underlying infrastructure and cost of servicing and often worsened the profitability problem.
Critical to executing the strategy is technology transformation that allows banks to:
- Dynamically adapt to the emerging customer interaction models
- Significantly reduce servicing costs
- Offer tailored product bundles, services and customer experiences through customers' preferred channels at the right level of profitability
- Enable interactions among channels to optimize customer relationships and maximize their value
- Effectively compete at both the high and low ends of the customer base with specialized financial services providers that have been chipping away at banks' wallet shares
Mitigating Risk Associated with Transformation
Moving to a real-time operating model to enable a segment-driven banking strategy does not have to be a high-risk, revolutionary event. Instead, an augmentation-based approach emphasizes carefully planned, evolutionary steps. Augmentation is not about adding cost to an existing cost problem. Rather, it preserves existing investments while gradually modernizing products and migrating accounts to a lower-cost, more agile platform that empowers institutions to deploy innovative banking products more rapidly. Financial institutions can begin to see the cost take-out benefits of real-time core banking optimization while accelerating relationship-centric advantages that lead to increased customer satisfaction, higher revenues and, ultimately, higher profitability. This dual and phased approach of reducing cost of service while driving new revenue growth is how banks can hasten their timeline to value.
Speeding Time to Market and Ensuring Profitability
Most legacy banking platforms are disadvantaged when it comes to creating segment-driven (both demographic and psychographic) product and service offerings to meet aggressive time-to-market goals. The complicated configuration that requires product parameters to be changed at the account level results in labor-intensive and time-consuming processes. As a result, banks cannot quickly respond to market changes or changing customer behaviors and preferences.
But a segment-driven model takes a different approach. Real-time core banking systems keep products and accounts separate. "Products" simply define a set of features that enable mixing and matching of banking services and processing attributes on the account. Features can be quickly configured and a banking solution designed based on a customer's dynamic relationship with the bank, thereby enabling time-to-market advantage and better targeting based on customer behaviors. By separating products and accounts, banks can:
- Define products based on a set of relationship-based preferences, features, services and processing attributes
- Quickly define a "class of service" and then design and deliver products based on the customer's dynamic relationship value and adjust accordingly based on rules set by the bank
- Enable rules with greater flexibility to set and manage pricing based on the total customer relationship
Reducing New Product Development Risk and Cost
More nimble product creation also helps to mitigate risk and drive account growth by enabling rapid product testing with specific market segments and thereby increasing the probability of successful product rollouts. If new product introductions are validated by strong customer conversion results, the profitable accounts they generate will further support the bank's core banking augmentation strategy by driving new revenue while delivering proportionally lower servicing costs. If new product introductions don't meet conversion objectives, banks will have spent very little compared to products developed on a legacy platform.
By combining their augmented core with more consistent cross-channel orchestration of customer interactions, banks can manage and improve sales and service across channels as well as align servicing costs with changing customer behaviors.
Proven Value Underwrites the Migration of Existing Account Base
As financial institutions begin to benefit from the incremental value and agility of a real-time and customer-centric core banking platform, they have the foundation to underwrite much larger service cost reduction opportunities. Most retail customers are lower risk with less complex needs and can be migrated from the existing legacy platform(s) to a real-time banking infrastructure, resulting in dramatic cost savings such as significant reduction of Day 2 operations, lower infrastructure and administration costs, and consolidation of multiple systems.
Mapping Out the Future – Evolution or Revolution?
Whether evolutionary or revolutionary, the path forward must be led by a segment-driven banking strategy that allows banks to significantly lower the bar for account servicing across the large base of unprofitable or marginally profitable customers.
The challenges of operating within a changing regulatory environment and evolving business models in the midst of increasing industry consolidation and shifting customer preferences are daunting. But these challenges open opportunities for banks that see this as a pivot toward the future of banking and that are flexible, embrace change and are committed to providing lasting value to customers on their terms.
A Next Generation Banking Strategy
FIS has articulated and defined a next generation banking vision that provides a path to modernization and enables real-time information management horizontally across the product, distribution and execution aspects of the value chain. This strategy is being underwritten by and enabled through a service-oriented architecture (SOA) component model approach that can coexist with and extend the functionality of current generation FIS applications or, over time, deliver SOA component-based frameworks.
Under the direct control of the Chief Technology Office, the execution against this strategy kicked off in 2012 by leveraging the breadth and depth of FIS' existing global banking assets as baseline components in our next generation banking vision. This is allowing us to extend and define the functional and process capabilities across core, channel and payments solutions to ensure the capabilities are an integral part of the FIS Domain Model based on industry- and technology-driven SOA standards. Ultimately, this will empower large and/or global financial institutions to preserve the investment in their existing banking infrastructure yet pivot to the next generation of banking, built around a new customer interaction and servicing model driven purely by customer preferences.
For more information about enabling your segment-driven banking strategy, please contact your strategic account manager or e-mail firstname.lastname@example.org.
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