The five key levers for radical transformation in financial services for digital success

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If Charles Darwin were still alive, I wonder what he would think about the evolution of banks? Once again, banks are being forced to evolve or die. And financial institutions that fail or refuse to become cognitive and digital will get left behind. It’s survival of the fittest at its finest.

Right now, survival is hiding behind a mask of profits

Are the record profits for the financial services industry because of a better economy, or because financial institutions have become better? The steady decline in the industry’s revenues-to-assets over the last decade would suggest that the latter is not true. So these profits are potentially misleading. A combination of modest economic growth, aggressive cost reduction and related monetary stimulus — quantitative easing — are more likely the answers for profits rather than better customer value propositions. Because of this misplaced confidence, many banks are delaying necessary operating model transformations. This is a big problem.

On the horizon, a mighty storm is brewing between global macroeconomic uncertainty, waning effectiveness of the quantitative easing programs, new competition from startups and other industries, more sophisticated, demanding customers and increased government regulations. Financial institutions must rise to these challenges now with a new business model based upon a combination of new capabilities: cognitive and robotic solutions, enterprise-optimized digital delivery, integrated data management and flexible/scalable infrastructure. Failure to do so or further delay of operating model transformations…well…better call Darwin.

A radical business model transformation is needed to avoid obsolescence

There are two goals that need to be accomplished for business model transformation to be successful. First, financial institutions need strategic cost savings. Second, financial institutions need a rekindling of true revenue growth per unit of their business. We suggest five key levers to achieve these two goals based on their proven success with clients:

  • Topline revenue rejuvenation
  • Operating model transformation
  • End-to-end enterprise digitization
  • Cognitive computing and advanced analytics
  • Infrastructure modernization

Topline revenue rejuvenation

The goal of topline revenue rejuvenation is to provide a tailored experience to the needs (not just banking) of each customer. To accomplish this, banks need to use the wealth of information they have about their clients to target and create offerings more effectively. Here are a few ways banks can rejuvenate topline revenue:

  • Diversifying into non-traditional, fee-based revenue sources, such as marketplace banking
  • Promoting better cross-sell/up-sell/referral business streams

Operating model transformation

From pipes to platforms, banks need to be redesigned as a set of business components in support of marketplace and digital banking. They can no longer act as pipes for siloed services such as transactional products, card services, installment loans, wealth management products and student loans. Instead, banks need to adopt a flexible, platform model where banks provide an “open banking” approach that aligns with a customer’s journey rather than just at a moment in time. Banks are achieving this operational efficiency through shared services, and operations and technology centralization.

End-to-end enterprise digitization

Digitization can help financial institutions with automation, robotics and cognitive applications. And digitization also helps implement a layered architecture where the core systems are simplified. With this layered architecture, global banks are realizing they can achieve significant value by digitizing extensively at the enterprise level. This layered architecture includes:

  • A business services layer that contains business rules and is responsible for process orchestration, complex event processing, event-based routing, security, audit and other functions.
  • An integration services layer that exposes functions from the core systems and supports the business services layer.
  • A channel integration layer that enables an omnichannel customer experience. Channels are responsible for authentication, authorization, device enablement and the user interface.
  • A master data hub comprised of customer, product and agreement data.

Cognitive computing

Cognitive computing is evolving the way computers interact with humans. There are no two ways about it. Banks are generating a competitive difference with artificial intelligence by creating deeper personalized customer experiences, driving better engagement and increasing wallet share. Using cognitive computing, banks have both improved customer cross-sell/up-sell/referrals and drastically improved customer service.

Infrastructure modernization

For banks to evolve they need to have flexible, scalable infrastructure to support growth and minimize cost. Hybrid cloud solutions can provide this type of flexible, least-cost infrastructure. It allows critical applications in a distributed environment to be run in the cloud—either on or off premises. It also facilitates modernization and enhancement of the legacy environment. Hybrid cloud provides the seamless orchestration and security for this lower cost, flexible solution to be run securely and effectively.

Combining these five levers with the proper delivery model is also very important for financial institutions looking to begin their radical transformation and business model evolution. Instead of an engineered efficiency model, banks using a natural efficiency model are experiencing a better yield. This model involves taking an enterprise approach to solution development, using third parties to create solutions in a consortium model, using outcomes-based reward structures and establishing integrative governance strategies.

Addressing these five key levers now with the proper delivery model is how banks can evolve their business and avoid an extinction level event. Learn more about radical transformation in financial services by reading the white paper. Inside the whitepaper are important cases studies that support the five levers and the appropriate delivery model based on their proven success with clients.

Global Strategy Leader; Industry Academy Member IBM Global Markets, Financial Services Sector Global Staff

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