BEAT THE CORE TRANSFORMATION CONUNDRUM

By Ashwin Goyal, Group Vice President, Oracle Financial Services

Recent comments by Andrew Bailey, chief executive of the Prudential Regulation Authority have called attention to the poor health of the IT infrastructures servicing many of Britain’s banks today.  Bailey’s revelations focus on the complex nature of current core banking systems, and on how it may in fact be a false economy to avoid investing in a new infrastructure.

Many banks spend much of their money and energy navigating a challenging and constantly-evolving consumer landscape and responding to frequent regulatory developments, all while their operational expenses continue to increase. As a result, investing in an overhaul of their legacy IT systems often falls low down their list of priorities.

Beat The Core Transformation Conundrum

In reality, executives need to recognise the dramatic positive impact that robust core IT infrastructure can have on financial processes, and the potential these have to help them respond to the pressing issues they face today more efficiently, and with less effort. To add to this, modern IT systems can help banks make their businesses processes more agile so they can focus on driving profitability in an increasingly competitive market.

With core IT systems playing such an integral part of a banks’ ability to innovate and deliver next generation banking services, it’s time for bank executives to view IT as an enabler of growth rather than an additional cost. With trust in banks at an all-time low and scrutiny of their processes higher than ever, it is no surprise that there is reluctance to invest in transforming IT systems regardless of the clear long-term benefits to the business.  The risk of stagnation in an industry pushing toward modernisation can be damaging for a bank looking to meet the various needs of a diverse customer-base.  In what is a highly competitive landscape, IT is competing for investment with the development of new, more attractive services, offers, advertising and marketing – all of which are perceived to have a more direct impact on the bottom line.  IT needs to be recognised as a tool that will improve each of these disciplines while at the same time providing a platform to deliver more quick-to-market, personalised services to customers.

Waning consumer trust

Today’s consumers have little patience for technology failure in what has progressively become a more digital, always-on service culture. Social media and online channels are now the first point of call for customers to vent frustrations at service outages and failures caused by aging IT systems, so a single outage can lead to damaged reputations and PR nightmares for even the largest banks with the strongest brands. Similarly, customer loyalty to banks is in decline, and these kinds of incidents can be the final straw leading to irreparable attrition. Indeed, Ernst & Young’s Global Consumer Banking Survey 2012 revealed that 40 per cent of consumer banking customers said they are losing trust in the industry and only 22 per cent said they are gaining confidence.

With this in mind, banking executives must take the lead to modernise and build the case for business transformation.

Taking the lead with modernisation

A transformation programme will impact financial institutions in three main ways:

• Transformation can improve agility. With a successful core IT upgrade, banks can use new technology to quickly deliver new products and services. Customers will in turn benefit from a real-time and more user-friendly experience as banks are able to create more tailored services and deliver bundled service offerings. Transformation is central to a bank’s ability to innovate and respond quickly to a changing landscape and the needs of consumers, whilst simultaneously reducing costs and managing resources.
• Transformation can enable revenue growth. Banks can be empowered by transformation and use the improved access to customer data to offer more tailored and profitable services. These tailored solutions can boost customer loyalty as consumers see their bank supporting new applications and services which suit their needs, enabling banks to improve cross-selling effectiveness and unlock revenue potential within their existing customer base.
• Transformation can enable a customer centric approach. All banks want to achieve customer centricity to better retain clients and upsell services. However, according to Ernst and Young’s 2012 Global Consumer Banking Survey, less than half of customers said that their bank adapted its products and services to meet their needs. Traditionally, it has been a bank’s technology, processes, and data that have hindered the delivery of such customised experiences. Transformation enables banks to be more relevant to customers by integrating customer data into customer interaction. One-size-fits-all banking is no longer good enough for today’s discerning consumer, it must be a tailored, personalised and efficient experience.

Bold transformation for big growth

The market will only develop transformation strategies when the cost of not investing in core IT systems outweighs the cost of inaction, and many institutions are now finding themselves nearing this critical tipping point.

The decision to progress with a core transformation should not just be about cost reduction or unseating old technology. The fundamental driver behind core transformation should be business growth and the desire to be able to adapt more quickly to a rapidly changing environment.

Minimising risk for maximum benefit

While risk can never be completely eliminated from a major IT transformation initiative, it can be managed and mitigated. Careful planning, as well as using modern tools and solutions, can enable banks to embrace necessary changes and benefit from improvements at the lowest risk point.

Taking a progressive, phased approach to transformation can result in banks experiencing all of the benefits of a transformation while carefully managing resources, capital and timelines.

The message to banking executives is clear. Remain “as is” and risk stagnation and being surpassed by more forward thinking, agile competitors or take action and transform at the core. Critically, banks need to focus not just on cost cutting or overhauling old systems, but also on the value that comprehensive transformation can add. Banks and executives that act boldly will be richly rewarded.