Our banking customers tell us that they are struggling to deliver yields in the current banking environment of low growth. Even with high profits, ROE is usually below 10%. In short, capital returns are inadequate.
They are wrestling with a ‘perfect storm’ of challenges: slowing revenue growth, disruption of traditional value chains, and embedded structural costs.
Todays marketplace is really tough for banks
Lending has long been the primary revenue engine but regulatory intervention and concern over residential property prices has slowed growth in the Retail domain.
Many banks are focused on strengthening their business lending, particularly in the SME segment where margins remain strong, but retail banking customers can have unrealistic expectations of growth and banks are struggling to match these goals.
The challenges banks are facing in 2017 are a “perfect storm” of:
1. Slowing revenue growth
2. Disruptive non traditional banking apps and web enabled
3. Increasing Regulatory Controls
4. Increased Regulatory compliance
5. Disruptions such as Pay Pal, Allibaba, Aquare to name a few
6. Operational costs of effecting change in the technology
In this era of rapidly evolving technology customers want their banks to deliver them the most compelling customer experience. Think of the disruption caused by PayPal, Square or Alibaba who are establishing themselves as vital components to the banking ecosystem because of their ability to facilitate commerce.
An end to end digital strategy is the first step to success
Banks are aware of this need to innovate but concerns over the speed of implementing change and navigating the complexity of legacy environments continue to be the biggest internal hurdles they have to overcome. Many Banks we work with embrace the concept of needing to change, but this requires overturning entrenched cultures and requires effort, perseverance, and executive commitment to achieve.
The operational complexity which has been built up over many years is a source of stubborn structural costs. Despite many cost cutting programs over the last 10 years cost-income ratios remain in the mid –low 40’s.
Regulation is here to stay with banks forced to employ vast numbers of people to stay on top of compliance. One leading global bank that IBM consults for, for exampl employs 40,0000 people for routine compliance work.
Banks recognise that becoming a ‘digital bank’ means digitising the operational processes as well as having the great digital front end.
What has stopped some financial organisations from implementing solutions that could solve these problems? Is it cost? Manpower?
Cost would be the first concern. Banks have tightened management of expenses to deliver bottom line results. With around 30% of discretionary spend needing to be directed to regulatory compliance, scrutiny on investment return is high and investment decisions will often be skewed to customer facing initiatives that drive customer satisfaction and revenue growth/retention, at the expense of structural cost reduction.
Management bandwidth also remains a challenge. Banks are arguably facing more change, at a faster pace, than any time in recent history. Bank’s leaders understand that they need to do a few things well. Which is why they are coming to IBM with the view to exploring how we can assist in resolving these challenges.
Key skills such as Agile and Cognitive/Artificial Intelligence (AI) are highly sought after with too few practitioners to meet the booming demand. The shifts many banks are undertaking is demanding a new culture and way of working. This will create a demand for new and/or enhanced skills across a very large workforce. A number of banks have already made senior appointments from parallel industries to introduce these changes, the challenge is now to infuse the entire enterprise with them.
Which of IBM’s offerings seems to be the most popular and why do you think this is?
We are seeing pervasive themes coming in where clients are asking for help with a particular emphasis on Cognitive processing and leveraging the Cloud.
The industry accepts that AI will play a major role in the future and most banks are undertaking small projects to trial Cognitive/AI in point areas. A common question we get is ‘how to exploit this capability at scale’?
Most banks now have established a Cloud Strategy and are putting workloads into the Cloud, particularly for non-production. Regardless of who’s Cloud, this remains today predominantly a mechanism for virtualising and variabilising infrastructure.
The real power of Cloud comes when this is combined with the capabilities associated with Agile development and DevOps which are necessary to fully leverage the power of Cloud. Harvesting the power of Cloud beyond simply an infrastructure utility requires migrating legacy applications to the Cloud, or develop new Cloud native applications with contemporary software development tools and practices. We are working with a number of clients to establish these development capabilities.
What do you think banks should exploring and why?
There are 4 steps for Banks to explore in order to win.
1. To win against FinTechs, banks must embrace a complete digital reinvention strategy with an omni channel approach and a mobile solution. All frontend application must be supported by a heavy duty CAI capability on the back end.
2. API’s and micro services are fundamental building blocks for a bank implementing a digital reinvention, enabling clients to leverage and scape the appropriate API from a library to create the desired customer journey
3. Banks must employ end to end process digtalisation, incorporating automation, robotics and security.
4. Banks must be serious about their data repositories – building their data, storing it in the right form, in the right place and leveraging the right cognitive solution to enable the mining of insights that will enable them to grow.
Many banks still have their core capabilities on legacy platforms and have implemented business function APIs to facilitate the integration from ‘Systems of Engagement’ back into these ‘Systems of Record’.
Building out Micro Services to support functionality to expose banking products and services securely into the cloud is a different challenge and skillset which Banks need to master. We have developed dedicated capabilities leveraging both IBM’s Bluemix platforms and other Open Source based solutions to help Banks deliver these critical components of the cloud agenda.
Visit www.ibm.com/au-en for more details.