The future of banking is digital. Yet despite the rapidly growing demand for online products and services, many U.S. and European retail banks have struggled to fund the projects necessary to modernize all front- and back-office operations. It’s not just about digitizing loan applications to speed up the approval process. Transitioning from legacy systems at individual bank branches to one digital system spanning the entire organization has proven especially difficult.
Across Europe, banks have digitized only 20 to 40 percent of their processes, focusing mostly on basic customer transactions, according to McKinsey. Ninety percent of European banks invest less than 0.5 percent of annual spending on digital projects.
U.S. banks are even further behind, says Mike Baxter, head, Americas financial services practice, Bain & Co., New York, New York, USA. “Asian banks are the furthest ahead, followed by European banks, and the U.S. banks have been the slowest to adapt,” says Mr. Baxter. He attributes the slow rate of digitization to factors including the recent financial crisis, mergers and acquisitions across the industry, and fears about the cost and complexity of projects.
Funding for digitization projects at retail banks is often crowded out by back-office technology operations, which account for roughly 45 percent of banks’ IT spending, according to Bain. Banks that have recently grown through a merger or acquisition, for example, must execute costly projects to integrate new brick-and-mortar assets into the existing technology infrastructure. “That’s an expensive process,” Mr. Baxter says.
Worldwide, just 5 percent to 10 percent of banks’ IT spending is focused on deploying technology projects designed to change the way customers interact with their bank. If banks want to stay relevant, that’s got to change, says Mr. Baxter: “In the banks that are most advanced on digital, the balance of IT resource allocation is radically shifting.”
For example, Royal Bank of Scotland last June announced £1 billion in digital technology investments in response to research forecasting that 50 percent of all retail transactions will be conducted via mobile devices by 2017. Projects include developing mobile apps, abolishing data silos to provide a single view of each customer, upgrading the bank’s ATM network and launching in-branch Wi-Fi to support personal devices.
Meanwhile, new all-digital organizations don’t have to spend money on bringing legacy infrastructure into the 21st century. “New banks by definition don’t have legacy systems, so we can work with all the best-of-breed software currently available,” says Keith Aird, head of information security, Atom, Durham, England. “A lot of the large banks have mainframe systems and multiple platforms that make it difficult and very expensive to do any new projects.”
Set to become the U.K.’s first online-only bank in 2015, Atom relies entirely on software-as-a-service, or cloud-based, solutions. That has dramatically lowered Atom’s cost of entry to the market, which in turn allows it to develop cutting-edge customer interfaces that use biometrics for face and voice recognition. The security of a cloud-based banking system doesn’t concern the new organization. “There are many layers of authorization and protection,” Mr. Aird says. In at least one way, Atom will be more secure than a brick-and-mortar bank branch: “Nothing can be walked away with.”
That’s not to say all-digital banks face no project risks, says Edward Twiddy, chief operating and innovation officer, Atom. They have to prove themselves to customers and regulators with flawless interfaces and rigorous security. To that end, Atom works closely with its technology suppliers to ensure everyone is committed to meeting the quality and security goals of each project, as well as all regulatory requirements.
“Good project management is fundamental to this process,” Mr. Twiddy says. That includes good governance to ensure all projects are running smoothly in tandem. “We’ve got to get the customer experience correct, while keeping regulators happy and maintaining respect for the data.”
For older retail banks with brick-and-mortar branches, transitioning to the digital future will be far more difficult. The vast majority has begun creating a digital customer experience, allowing accounts to be accessed online and through mobile devices. But the transition is slow-going because bigger digitization projects to overhaul core infrastructure tend to have a lot of risks and a long projected return on investment.
Expensive, Multiyear Projects
For example, one of the first projects most traditional banks need to complete is replacing outdated batch processing systems (which manage transactions in daily batches) with a real-time digital system. They also need to replace the core data management engine and integrate disparate on-premise data systems in order to create a single view of customers. This involves a vast program of projects to upgrade back-office systems and roll out new digital tools and interfaces, while simultaneously phasing out branch operations and decommissioning legacy systems to cut costs and reallocate resources.
If banks don’t upgrade, they will eventually lose customers and volume. But the new technology itself won’t generate new business.
“The benefits of these projects are about avoiding downside, avoiding a loss of customers, especially younger ones, and building customers’ affinity,” Mr. Baxter says. “That’s a difficult business case to make to a board of directors who expect executives to meet quarterly earnings goals.”
Yet there’s no getting around the fact that the transition to digital banking will require expensive, multiyear projects. They are worth it, says Mr. Baxter: “If banks are willing to rebuild their business through the smart use of digital technologies, they will emerge even stronger.” —Sarah Fister Gale