Responsiveness in Retail Banking

A general theme for this blog is how organisations are having to become more responsive, whether to customers, competition, regulation or to squeeze further operational efficiencies out of processes. I want to talk about some of the likely areas of innovation in retail and wholesale banking that will make these organisations more responsive.

Regulation is one obvious area where banks, over a multi-year period, are going to have to become more adept at dealing with change. The implications of the Dodd-Frank legislation in the US is still being understood and, in the UK, banks may be facing an almost existential threat if one gives credence to the rhetoric currently coming out from government and regulators.

Regulation and compliance with regulation is only going to become more and more important. This is being recognised by non-banking institutions that work in financial services. Thomson Reuters, for example, recently announced the formation of a Governance, Risk and Compliance division to deliver information solutions to those needing to comply with regulation. Useful certainly, but regulation will always manifest itself in different ways in different banks. The processes that support regulation must be able to change on a frequent basis. Applications set in concrete only allow this to occur slowly and expensively. The method of building applications needs to be responsive itself and needs to focus around dealing with complex events, business rules, workflow and user interfaces, not around programming language coding.

As an example, a bank, now a customer of Progress Software, had to deal with complying with new regulatory requirements in a matter of weeks. This was not just a box-ticking exercise – the regulator wanted visible demonstration of the systems that had been put in place. The bank’s existing application was simply too inflexible to be changed for reasonable cost and in the time required. An alternative approach, based on Business Process Management and event processing technology was selected which allowed the compliance process flow to evolve and change over time in a much more dynamic way and which could be tailored to meet the bank’s own unique combination of circumstances.

Regulation isn’t a nice to have or something aspirational. It’s a must-have – the risk of legal sanction makes it so.

Another focus for this year will be customer experience. Generally speaking, banks have been behind other industries in getting more responsive to customers’ individual needs and how they’re actually interacting with their bank. A recent US survey, by the industry analyst firm AITE, found that only 22% of small businesses were “extremely” satisfied with their bank and that 65% of larger corporates believed that banks did a bad job of understanding their needs.

A personal anecdote will illustrate a wider point. Recently, I moved money from a savings account with my usual bank to one paying a higher rate of interest with a competitor. The first bank finally contacted me about why I wasn’t using my savings account, but only after all the money had exited the account. By then it was simply too late. Banks still haven’t got sophisticated enough about monitoring how their customers are interacting with their accounts, online, by telephone etc., and sensitively interpreting what these actions might mean and responding in a timely fashion. Again, a watchword here is responsiveness.

Customer onboarding, the process of dealing with a customer’s application for a loan, credit card etc., has got some attention, both to improve the customer’s experience but also to increase the operational efficiency of the bank’s processes.  Some banks have now a real-time view of these processes and can determine immediately whether a high-value business loan should be treated as a greater priority than a car loan or whether a number of card applications have been spending too long receiving credit checks. By knowing this kind of information now (rather than often days or weeks hence) is vital to spotting exceptions quickly and re-prioritizing resources.

One of the core services that a bank performs is payments, whether these payments are executed using cards, direct bank transfer, cheque or otherwise. This year might see some significant innovations in payments processing which will require banks to respond in a way they’ve not been forced to previously. A key tipping point may be Apple introducing a near field communications (NFC) chip into the next iPhone, expected to be released about mid-year. This will allow an iPhone to be swiped across a store terminal to pay for goods. This isn’t that new. Particularly in Japan, NFC chips have been built into mobile phones for some time. However, Apple has a current habit of energising markets and it doesn’t just have the iPhone. There are 160m iTunes accounts which already handle payments. Google and Paypal are also considering offering NFC services. The question is, will this really disrupt existing payment systems which still, even in Paypal’s case, rely upon the core payment infrastructure provided by, primarily, banks? We should hope so. Banks have been hopelessly slow at innovating in payments. It took a diktat from the UK regulator to introduce “faster payments” into the UK. Still too many payments take 3 days, which, in today’s world is very slow for any kind of transaction. Cross-border payments in Europe are still slow and expensive.

If new technology does force payments innovation, banks will be forced to keep up by increasing the flexibility and speed of their own infrastructures to deal with, potentially, many more smaller payments. Guess what? They will need to make them more responsive. If they’re not able to move quickly banks may end up simply being sending round the larger aggregated payments resulting from all the transactions occurring using more modern platforms. Cost pressures will also be present. A recent Boston Consulting Group report indicates that payments providers need to reduce costs by between 10% and 35% by 2012 to keep cost-income ratios stable.

Retail and wholesale banking may often move slowly, but, through regulation, customer pressure and new-entrant innovation, expect some significant changes this year. As Chris Skinner, omnipresent observer of all things banking has recently said on his blog, banks will have to learn “how to be real-time nimble in a world of change”.

(This first appeared as an opinion column in cio.co.uk)