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The drumbeat of warnings of the need for digital transformation may seem exaggerated at times. Heavy on premonitions and predictions, easy on actual results.
Studies and analyzes by two leading consulting firms confirm, however, that the transformation trend not only has long legs, but also brings with it significant differences. In addition, banking leaders are increasingly realizing that change is happening much faster and more extensively than many expected a year or two ago. Contrary to some current belief, this shift began before Covid 19 was a problem.
Some banks and credit unions are well on their way to becoming digital organizations and have begun to take advantage of the benefits – both financially and in terms of competitive advantage.
There is no turning back:
Even if Congress closes the door on non-bank intrusion into banking (unlikely), consumers won’t suddenly recall their expectations and fintechs just won’t go away.
In a new report, Accenture analysts highlight the performance improvements that digital transformation will bring. The report focuses on the operational efficiency – what the consultancy calls “operational maturity” – of financial institutions as measured by eight factors.
( Continue reading: How banks and credit unions can build an agile culture out of COVID chaos)
Digital advancement is affecting ratings
With the financial data from S&P Capital, Accenture shows that digitally focused financial institutions have already benefited significantly from the financial results. The price-to-book value ratio (P / BV) of the digital market leaders averaged 18% higher in 2019 than less digitized competitors and 27% higher in 2020.
“Digitally focused” refers to financial institutions that have fully scaled digital technologies (e.g., analytics, artificial intelligence, automation and data systems) across the enterprise, according to Manish Sharma, group chief executive, Accenture Operations. “Digitally active” banks are growing, but not yet scaling across corporate functions, Sharma said The financial brand.
The higher P / BV ratios shown above are a function of cost improvement – operational efficiency – plus revenue improvement, the report said. Digitally focused institutions increased operating income per dollar of assets from 1.22% in 2011 to 1.47% in 2019. This corresponds to 1.23% and 1.27% for digitally active institutes. Banks and credit unions that are not digitally active saw a decline in operating profit as a percentage of assets (1.11% to 1.06%) over the same period.
( Continue reading: Digital transformation is about new business models, not new technologies.
Seven operational deficits
Financial institutions have automated since before the invention of the digital computer and have been technology leaders at various times. Over the past decade, the pace and nature of change enabled by modern digital technology have challenged financial institutions to adapt.
The Accenture study found that while the maturity of the operating model is advancing in banking, it is slower in financial institutions than in other industries studied.
Operational maturity is critical as it is a measure of a financial institution’s “future readiness”, according to the company. This willingness reflects the ability to scale eight characteristics: 1. Data, 2. Analytics, 3. Leading functional practices, 4. Business-to-technology collaboration, 5. Agile workforce, 6. Advanced automation, 7. Stakeholder experience, and 8. Artificial intelligence.
Of those eight, financial institutions lead other industries in only one: the widespread availability of quality data.
The three areas where banking has the greatest operational flaw compared to other industries:
- Use of advanced automation toolsB. Robotic Process Automation (RPA), which perform repetitive rule-based tasks.
- Workforce agilityThis includes a collaborative approach not only between teams, but also between people and machines.
- Business technology cooperationthe extent to which business and IT units work in an integrated manner using a common governance model.
Regarding the abundance of data in banking, Accenture points out that the challenge is to extract the full value of the data, such as the ability to provide real-time insights to consumers and businesses. Better use of analytics, AI, and automation would make this possible, the report said.
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Improvement, but “silos” are still a problem for many
Accenture has described four distinct phases of operational maturity. These are shown below together with the classification of banking institutions into their institutions. As the percentages show, despite the shortcomings described above, the industry has made progress in moving from the earlier stages of operational maturity to “sustainable”.
The above percentages seem to suggest that among at least the 100 financial institutions featured in the survey, operational maturity is more advanced than the industry as a whole. When asked whether he thought the characterizations were optimistic, Manish Sharma replied that the optimism corresponded with the adoption of analytics and automation in the past three years and the hiring of data science specialists.
Although few bank chiefs surveyed appeared to believe that their institutions were suffering from isolated data, as shown in the graph above, other observers believe that many financial institutions are still doing so.
Accenture notes that “data has long been the focus of decision making for banks, but data sets are often fragmented across multiple silos.” More than seven in ten (71%) executives say they rely on data rather than abandon their operating models Sharma emphasizes that executives are based on experience or intuition. Nonetheless, he notes that rigid organizational structures still capture data between departments within a banking organization, creating problems for consumers such as: B. Delays in response due to the lack of a centralized database.
One of the notable skills of fintech companies is the ability to spot such customer problems and come up with a solution that is far faster than most traditional institutions (so far). This distinction can be seen graphically in the following comparison, made by digital consultancy 11: FS, showing how two fintechs – Square (which offers the Cash app) and PayPal (which is owned by Venmo) – were able to build a customer base That is equal to or greater than what JPMorgan Chase could do in a much shorter period of time.
( Continue reading: Lessons from a Bank Chief Transformation Officer)
Practices that hinder banks’ digital advancement
According to Accenture, the fixed cost structures of financial institutions and the considerable investments in legacy systems make operational “future viability” more difficult.
As a result, banks and credit unions typically take a step-by-step approach to doing business better. “With limited resources to invest in operations, they simply close the biggest hole first, and those holes are often defined by regulatory and compliance priorities rather than improving competitiveness,” the report said.
“Where executives have their own IT teams to get things done. … It creates all these different islands within an organization, which makes it impossible for the entire company to work coherently. “
– Accenture’s bank executive quoted
In its report “Rebuilding Financial Services From Within” 11: FS identifies three main problems in achieving digital growth:
- Short-term financing model: Usually a 12-month cycle, weighted on the return within a year. Financing is based on company or product line.
- Existing working methods: Large committee decisions with centralized strategy teams dealing with the complexities of silos.
- Compound “technology debt”: The state of the art within a financial institution reflects the organizational design, resulting in heavy duplication and limited reuse. The use of modern technology is limited.
Truly digital companies like most fintechs and even the big tech have much faster working methods, emphasizes 11: FS.
( Continue reading: Development of a data culture to support the digital banking transformation
What financial institutions can do to improve themselves
Accenture urges financial institutions to “think big” rather than always making incremental improvements. Specific applications that this approach applies to include the adoption of cloud integration, remote process automation, and large-scale implementation of AI, according to Manish Sharma.
In its report, 11: FS includes a pyramid-shaped diagram that includes many of the recommendations banks and credit unions are making about digital transformation “from within”.
11: FS strongly recommends that financial institutions move away from their currently unwieldy assortment of systems, technologies and processes and use small, modular components that can easily be used to manufacture products.
In addition, focusing on modules instead of products helps break down silos. “Horizontal organization leads to more knowledge sharing and dynamic allocation of people as the pressures on the company change,” states the 11: FS report. “Ops teams are better able to make decisions quickly.”
More modern processes offer regulatory advantages. For example: the risk is reduced when information is exchanged between teams in real time.
Another recommendation from 11: FS is that financial institutions should consider moving from large, all-inclusive technology providers to a selection of modern, specialized providers for greater flexibility.
Accenture describes this process as developing ecosystem relationships and emphasizes that such partnerships will help financial institutions exceed operational maturity. Such ecosystems are far more likely to force financial institutions to make decisions or to buy. That doesn’t mean banks or credit unions can’t maintain their core operational systems and processes, Sharma said. You can build on it instead.