How Do Banks Work? The Struggle to Optimize a Motley Weave Of Data Systems & Infrastructure

|SYNOPSIS | Bank deployment of technology solutions is under scrutiny by many quarters. What’s keeping financial services companies from better leveraging their investments? Complex, fragmented processes, siloed decision-making and short-term horizons are among the issues identified by IBM, EDS, Microsoft and others.

Whether in research report, white paper or survey form, a slew of recent analyses have come to the same overall conclusion: Today’s banks work at a disadvantage in large part because of their crazy-quilt implementation of technology.

Are these the perennial grousings of pundits or does the convergence point to a critical dysfunction? Banking has suffered from “terribly fragmented core processes” for the last two decades, according to Virginia Garcia, senior analyst with TowerGroup, Needham, Mass. She says the current focus reflects an “impetus” provided by regulators who increasingly expect to see enterprise-wide management of risk and data and processes.

The industry, Garcia says, is realizing that it will “spend fortunes” complying with regultory initiatives unless banks begin to leverage their investing across business silos. And, there’s no sugarcoating from long-time Financial Insights’ analyst Bill Bradway on the importance of getting the technology right: “Banks that don’t do a good job, to be blunt, become road kill. They’re taken out of the mix.”

In such a charged environment and in an era when other companies routinely use technology for strategic advantage, what goes awry between the time a financial services company recognizes a problem, identifies a technology solution, makes a purchasing decision and proceeds with an implementation? What can be done to address it? Here are the views of technology providers — those who have a stake in making that next technology sale.

Next up: Watch for our July/August issue, in which we convene a roundtable of bank technology leaders.

TIME TO SIMPLIFY

Accenture
Scott Forbes, Partner

Over the past two decades, the world’s leading banks have invested heavily to build a foundation for success. They have differentiated by introducing new business models, creating new products and offering products in new channels. Then they better targeted these new product and service offerings using more refined customer segmentation.

However, in their continuous drive for differentiation and speed-to-market, many banks cobbled together solutions using a combination of off-the-shelf products and in-house development, supplemented by process workarounds and staff expansion. The results are rife with duplication and inefficiencies. For many banks, this strategy has resulted in a legacy of complexity — products, processes, operations and technology — leaving many banks with stagnating efficiency ratios and inhibiting their ability to deploy new products and services to the market, thus constraining their efforts to differentiate.

It is true that banks have managed complexity issues for years. In the past, favorable market conditions have enabled them to bear this cost. We are now at the beginning of a new cycle, in which conditions will be much more challenging. To be successful in the new environment, banks have no choice but to address this complexity.

The next generation of high performing banks will need to be more differentiated than competitors in the marketplace — yet, paradoxically more simplified in their operating models — and outstanding at execution, both strategically and in day-to-day operations. Banks that are able to disentangle and simplify this patchwork approach will be well-placed as tomorrow’s high performers.

The auto industry has faced a similar challenge. However, a modular platform strategy has enabled auto companies to simplify on the inside while still being able to differentiate on the outside. No doubt, it will be an extremely challenging journey, for even the best of banks.

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FOCUSING ON THE REVENUE GAINS

Carreker Corporation
Suzette Massie, President, Global Payments Consulting:

Often the greatest obstacle for banks in leveraging their technology is the lack of an integrated view of business objectives at the enterprise level. Many have razor-sharp clarity at the individual line-of-business level, but they are challenged to maximize the synergies or balance the potential competing priorities from a technology and business-process perspective across the enterprise.

When you see a bank succeed in this challenge, it is usually because they have that powerful quality of mastering both the clarity of business objectives across their lines of business and a well-formulated, enterprise point of view of customer servicing and business processes that allows them to best leverage their technology.

John Carreker, President, Global Payments Technology:

While many organizations have built core competencies around the selection and deployment of new technology, it is less common to find similar focus and skill related to the ongoing use and performance of technology. Perhaps one of the most cost-effective disciplines a bank can adopt is to conduct periodic technology audits to review whether its organization is fully exploiting — from a functionality and a performance standpoint — those assets they already own. The right partnership with a technology vendor creates shared accountability and interest in such an exercise.

Banks have to be sure they are using technology as a fulfillment mechanism — and not a substitute — for clear, innovative business thinking. An interesting question to ask within any organization is the extent to which technology investments can be mapped to real market advantage. Large infrastructure initiatives often overshadow the smaller and more differentiating technology projects that most affect the end customers’ experience. It’s always easier to postulate a dollar of cost savings through new technology than a dollar of new revenue. The winners are often those who place appropriate emphasis on the latter.

Suzette Massie: Assessing an organization’s capacity to absorb change gets to the heart of the culture of an institution. We look at some very clear criteria, such as change history, learning environment, maturity of business processes, appetite for innovation, customer change tolerance, level of management support, risk tolerance and other factors, to create a profile of a bank’s change capacity. We use the insight gained from this type of examination, and the direction of the bank’s leadership, to determine an appropriate pace of change for that institution and its customers.

Can we have too much of a good thing?

Of course, there are situations of redundancy, excess capacity and times when business needs change and a bank may have a flavor of “too much:” too complex, too many, too big (not appropriate for business value delivered), or inefficient for an evolving business process. Analytical models can help banks identify, monitor and manage the levers in a business environment, better predicting when they are getting to a tipping point of “too much.”

An organization with a cultural passion for learning and pride in innovation is often very adept and exciting to work with on change initiatives.

In situations where organizations don’t have clear expectations for desired results or hesitate to invest appropriately in employee training or customer awareness around a change, the results of an initiative can be disappointing.

Questions or comments about this article? Post them at the Banking Strategies blog.

NUMB TO THE PAIN

Teradata, A Division Of NCR
Bill Bishop, Senior Industry Consultant for Professional Services

The issues are generally more cultural than technical. To fully leverage technology, banks must make technology decisions more strategically. All too often, we see individual business silos embracing “point solutions” for the short term that could be very problematic if the bank tries to integrate them with the rest of the enterprise. Unless top IT and business executives get involved in these one-off decisions, they will never be able to achieve their complete visions.

Organizations that understand that customer relationships — not products and services — drive value are taking a holistic approach to managing information assets, and viewing technology investments in the context of overall information strategy. The best cultures understand that what might make financial sense in a departmental business silo, for example, might also be increasing the complexity of overall information management, driving up enterprise costs and lost opportunities. These organizations have a broad view of technology investment.

The clearest sign that a bank is ready for more technology investment is when they have a “pain” that they can easily articulate (e.g., queries that never finish, large blocks of system down time). Too often, however, banks have become numb to their pain: business people have stopped asking important questions because they know that IT will never be able to answer them. They lower their expectations of what decision support analysis could be and therefore limit the value that they can bring to their stakeholders. This is more difficult to determine, but very significant. And yes — a bank can absolutely have too much technology. If the people and processes within the bank are not capable of leveraging that technology, it has no value.

Technology solutions providers can help assure that “incremental value” projections are achievable, given culture and process considerations. This places a governor on investment and creates a reasonable path to incremental value sooner than later, ideally with payback in less than 18 months. Future enhancements can be funded with expected incremental value, increasing the chance to transform new information assets into competitive advantage.

Questions or comments about this article? Post them at the Banking Strategies blog.

OPTIMIZE THE TOUCHPOINTS

EDS
Rob Sadeckas, Director, Global Card Strategies

Financial services companies see technology as an expense instead of as an investment, consequently they look for ways to reduce its cost rather than increase its effectiveness. In addition, banks’ siloed approach to products, often accompanied by operational fiefdoms, can inhibit the sharing of operational best practices and technological advances and can result in functional redundancies. Most banks have too short of a view on profit, taking tactical approaches where bigger picture strategic initiatives would be more appropriate. In the absence of an overall vision, along with a roadmap for reaching that goal, considerable resources can be diverted to evaluate the opportunity du jour instead of building the leveraged organization and infrastructure to exploit the opportunities of tomorrow.

Unfortunately, some technology vendors prey on these tendencies, enhancing their own revenue instead of helping banks leverage what they already have. Technology providers have the responsibility to help their clients see beyond the morass of everyday operations to bigger picture opportunities. Often clients consume considerable energy and resources addressing symptoms of operational problems, instead of targeting fundamental issues. As a result, technology can be underutilized.

Vendors need to understand not only the specifics of their technology, but how that technology has been applied across a range of industries and operational environments. This view needs to reach beyond cost, to encompass top-line revenue-growth opportunities.

By helping financial services companies break down their product siloes and become more market driven, vendors will enhance the bank’s ability to assess the customers’ appetite for new technology.

The focus needs to change from how a technology can help deliver a specific product or service to how a consumer can utilize the technology to take advantage of more bank services. With such an approach, the shift changes from fostering customer technology adoption to adding value to technologies with which the consumer is already familiar.

The next-generation bank customer has been raised in an interactive environment of video games and time-shifted entertainment incongruous with banks’ traditional linear approach to investment and payment products. Banks have an envious advantage over other industries in the frequency with which they communicate with their customers. Unfortunately the effectiveness of those touch points is not always optimal.

Questions or comments about this article? Post them at the Banking Strategies blog.

MISALIGNMENT IMPEDES SUCCESS

Fincentric Corporation
David Fleming, Vice President, Products and Services

A financial institution’s ability to better leverage technology is governed by (or is dependent on) the alignment of business strategy, operations and technology strategy. Having heard from many of our credit union and community bank customers, unless all three are clearly understood and aligned, an organization will be challenged to see business improvements from new or existing technology investments.

As retail banking becomes more of a top priority for banks, alignment between business and technology is also becoming more relevant, especially in the area of branch renewal. The classic goal of getting the right information to the right people at the right time is difficult or impossible to accomplish at the branch with many of the information systems in place today. One important reason that institutions have been unsuccessful generating leads at the front line is that branch employees are often compromised by the message they are asked to deliver, leading them to disengage from the process altogether. Too often, these messages are stale, repetitive, generic or not relevant for the customer by the time they reach the point-of-service interaction.

Banks not only need to understand how to synchronize interrelated systems but they need to be able to collect and present information in a way that makes individual sense for marketing, services and sales. Accomplishing this goal allows marketing to be confident that their messages are being delivered to the right people, the front line to be confident that the messages they deliver are valid and relevant, and the sales professional receiving the leads to be confident that they are of high quality and worth following up.

Without business and IT working together to define what is needed of the infrastructure, systems, storage and data, and how these components all add value in serving the customer, misalignment between business, operations and technology will remain the biggest barrier to success.

Questions or comments about this article? Post them at the Banking Strategies blog.

Technology Drives Integration

Fiserv, Inc.
Norm Balthasar, Senior Executive Vice, President and Chief Operating Officer

Technology doesn’t exist for its own sake, but to improve a financial institution’s service to customers. Banks that fail to see the inherent capabilities technology provides to build the necessary bridges to those customers may not have them for very long.

Demand for technology and the sophistication of the solutions technology offers are increasing faster than ever before. With this explosion, though, comes a demand to make all the systems work together in a way that enables a financial institution to minimize its own challenges while simultaneously finding better ways to serve customers.

We’ve heard repeatedly that “bleeding edge” solutions are not the best way for an institution to grow its technology capabilities. Systems have become too complex and, at the same time, too interdependent to support a variety of stand-alone technology alternatives. The organizations able to maintain their future market leadership will be those that take advantage of integration technologies.

Questions or comments about this article? Post them at the Banking Strategies blog.

ADOPT A PORTFOLIO APPROACH

IBM Business Consulting Services
Daniel W. Latimore, Partner, IBM
Executive Director, Institute for Business Value

While banks are usually good at evaluating and prioritizing business cases, few financial institutions develop structured risk assessments or determine the possible effectiveness or cost of risk-mitigation measures prior to executing IT projects. Even fewer use risk assessment to evaluate business cases and determine priorities.

A new IBM Business Consulting Services study of IT investment in the financial services sector reveals that almost 70% of the time banks are unable to quantify benefits of IT investments because they lack data and metrics. The study, which looked at 165 large IT projects at leading European financial services companies, found that, for a variety of reasons, one-third of projects run over time, one-fifth run over budget and one-fifth fall short of planned functionality.

Financial services firms are heavily dependent on information technology, spending over $310 billion on IT globally, according to TowerGroup Inc., representing — for large banks — 15% to 22% of their overall non-interest expense. Unfortunately their investments too often fail to generate anticipated returns — and worse, many firms do not even know which are paying dividends and which are losing money.

Financial services CIOs need to learn from portfolio management if they are to improve IT project performance. For decades, financial services firms have applied portfolio management concepts to reduce risk and improve returns on invested assets. More recently, progressive firms have turned to those same basic concepts to significantly enhance the performance of their IT portfolios, particularly important with the spotlight Basel II has put on returns and efficiency.

IT portfolio management takes a holistic view of IT projects across the enterprise, evaluating proposals against the firm’s strategic objectives. CIOs can focus on strategic business initiatives, consolidate risks and reduce overall risks of IT projects, make more efficient use of capital and resources, and manage risks more transparently.

Questions or comments about this article? Post them at the Banking Strategies blog.

COMPLEXITY IS CONSTRAINING

Microsoft
Warren Lewis, Managing Director, Banking Industry Financial Services Group

Complexity of the typical bank environment is a major constraint for organizations seeking to better leverage technology. Siloed, legacy core application systems developed more than 25 years ago were not planned with cross-channel integration in mind. These applications assumed one channel — branch offices. They also assumed a simple product set — traditional DDA, passbook savings and time certificates coupled with installment loans. The industry has since layered new products, such as MMAs, statement savings accounts and bank cards. Complexity is added as these products are accessed and serviced through more and more delivery channels, including call centers, ATM, Internet and even mobile phone.

A second issue is organizational silos within the banking organization. Most notable is in the payments arena, where leading banks have recognized the need to create a payment czar to look for synergy opportunities company-wide. The same is true for banking delivery channels. Leading banks have created strategic roles that look across all the channels.

The real test in using technology is that it must support business objectives and strategies and that there must be a road map tying the technology together. Technology should not be pursued for its own sake. Leading banks will also build a business/economic case for adding or upgrading technology, providing a solid filter for supporting strategic alignment. Larger banks may also set aside portions of their IT budget and other resources to explore emerging technologies, allowing them to move up the learning curve and position themselves for accelerated adoption when the time is right. Mobile services and proximity payments are examples of technologies such organizations are beginning to explore today.

Questions or comments about this article? Post them at the Banking Strategies blog.

THE VALUE OF INTEGRATION

SAS
Ellen Joyner, Global Industry Strategist, Financial Services

Many institutions have searched for the quick fix with technology, as opposed to really understanding what processes are best supported through their currently implemented technology. In many cases, investments are made with promises of increased profits and sales, and new systems are put in place without a true understanding of how they will work with current core banking systems.

In addition, there may be little emphasis on providing the effort and resources for the real value of data and analytical integration to be realized. A lack of focus on restructuring current organizational processes and employee skill levels to support new customer-focused business models may be at fault. Treat the technology as if you were managing a portfolio of investments. Look to implement an architecture that adapts to changing business models and allows for companies to measure performance and profitability.

Technology for the sake of keeping up with the competition is definitely a sign that there is too much technology, and probably also a sign that investment returns are not being tracked or measured. CIO and IT managers today have a real opportunity to prove their value and deliver the results of technology investments in the boardroom. With tightened regulatory requirements, CEOs and CFOs have taken a necessary interest in technology investment and whether it is helping them address compliance needs. They need to ensure the necessary technology systems are in place, and that these systems are intertwined with operational processes so that integrity and confidence in their internal controls can be assured.

Questions or comments about this article? Post them at the Banking Strategies blog.

A SINGLE CUSTOMER VIEW

NCR Payment Solutions
Joe Knicely, Vice President, America’s Region

Financial services companies buy technology-based solutions to improve customer services, generate new revenue and lower costs. These purchases are always based upon a value proposition with an attractive payback. The key is how to further improve the return on investment by leveraging existing systems within an enterprise-wide infrastructure, minimizing redundant purchases and leveraging technology standards.

Historically, financial services companies have purchased technology-based solutions that addressed an immediate need of a department or business unit within the bank, without having an overall vision of how technology could be used across the bank enterprise. This decision-making process created “system silos” that make it difficult to share data and information between systems. Thus, when one of their customers buys multiple products, that bank can’t see a single view of the overall customer relationship. As a result, that bank cannot calculate the profitability of the customer and what products to cross sell. Additionally, because the bank can’t see a single view of how their customers touch the bank, it becomes difficult to offer improved banking convenience.

Proof-of-concept and pilot systems can help prove a solution concept in a limited production environment, without having to disrupt mission critical production systems. Such an approach can help verify that the technology works, is stable and supportable, delivers the expected result from a feature function perspective and that the business case and justification is valid.

We see the retail industry, along with transportation and communications, using data and information more aggressively, to better understand the relationships they have with their customers. These industries have done a better job of establishing a single view of their customers, and these industries appear to apply new technology sooner to get an edge on competition.

Questions or comments about this article? Post them at the Banking Strategies blog.

Copyright © 2005 by Banking Strategies, published by BAI.

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