The Modernization Challenges Facing Banks

By M. Isi Eromosele

The challenges that banks face today are of the highest order. Sovereign debt crises are destabilizing financial markets and the global economy. Much of the developed world is experiencing sluggish economic growth, with rising inflation and unemployment. Capital and liquidity are still not so easy to access and manage. Politicians and regulators are writing new financial regulations at a rapid rate.

Competition among financial institutions is as tough as ever. Customers are more knowledgeable and demanding. New products have to be developed, tested and launched. Delivery channels are more varied and complex.

Faced with such an array of challenges, banks need to modernize their business operating models and their technology components if they are to benefit fully from the next period of growth.

Indeed, if they do not so, they are likely to fail, not necessarily in the sense of going into liquidation, but in the sense of failing to satisfy customers, failing to maintain revenues and profits and most important of all, failing to please shareholders.

Generating Revenues And Profit

The most fundamental challenge for banks is to generate strong revenues and healthy profits. This is no easy task in the current difficult economic conditions that prevail in certain parts of the world, especially in Europe, where the sovereign debt crisis continues and where banks still face high credit risks.

Generating good revenues and profits in uncertain times is only part of the story. Most banks have ambitious expansion strategies for domestic and foreign markets, which they hope will bear fruit once economic conditions get better.

Emerging markets present the best opportunities, not just the populous, relatively sophisticated BRIC countries of Brazil, Russia, India and China, but also the smaller nations of Colombia, Indonesia, Nigeria, Vietnam, Egypt, Turkey and South Africa.

Being Customer Centered

In the aftermath of the financial crisis, retail banks around the globe are struggling to make a positive impression on customers. Differentiating on price and product innovation is becoming increasingly difficult and firms face the added complications of changing customer preferences and increasingly stringent regulations.

Delivering a positive customer experience is one of the few levers banks can use to stand out in today’s market, Other approaches that banks have relied on in the past to differentiate themselves, such as low prices and innovative products in particular are losing their ability to provide a competitive edge.

Customer centricity is a major issue for investment banks too. The four challenges they face include refocusing on client needs, maximizing client profitability, taking sustainability seriously and delivering valuable transformation.

Driven by shareholder demands and regulatory pressure, investment banks should go back to basics, shifting the emphasis from complex product innovation [and taking on risk through proprietary trading] towards increased client intimacy.

The priority now is to better align service offerings with clients’ needs, a significant challenge for the majority of banks that have neglected client service-based investments in recent years.

There are several ways for banks to become more customer-centric. They include collecting more accurate and timely customer information, and managing it better; improving operational efficiency; providing a more attentive service; integrating multiple delivery channels and bringing new products to market more rapidly.

Developing New Products And Delivery Channels

Even though customers regard quality of service as the most important aspect of their banking experience, they also value relevant, competitively priced and innovative products as well as effective delivery channels. The challenge for banks, therefore, is to keep abreast of developments in these two areas.

Despite the advent of ATMs, kiosks, plastic cards, telephone banking, online banking and now mobile banking, many customers still regard the branch as an important channel,  even the most important channel for interacting with their bank for many.

Customers increasingly view the branch as fulfilling an advisory role, though they still use the branch to carry out basic financial transactions. Product complexity and regulatory changes are pulling customers into the branch for more personalized service and advice.

To ensure the branch continues to play an efficient and valued role in an overall retail delivery strategy will require changes in four areas: branch layout and design; technology; sales and service; and staff realignment.

Effective delivery is essential in investment banking too. Servicing clients increasingly means providing a seamless front-to-back and cross-product services. However, not all banks can facilitate this because sales teams still view client service delivery as a discrete set of processes, rather than considering the end-to-end service propositions across all stages of the client life-cycle.

Client service delivery processes therefore need to be adaptable so that exceptions can be made to cater for high-value clients, while ensuring that other clients are still served efficiently.

Update Business Strategies

To meet the multitude of challenges they face, banks need to modernize their business strategies and operating models.

Eight modernization strategies have been identified below:

• Reconsider the fundamental purpose and function of banking
• Focus on businesses that generate good revenues and profits
• Become more customer-centric
• Update products and delivery channels
• Differentiate the bank from the competition
• Adjust the risk appetite, and integrate finance with risk
• Find new and affordable sources of capital and liquidity
• Concentrate on business lines that are less regulated

There are many other modernization strategies to consider: become more customer- centric; update products and channels; differentiate the bank from the competition, not just terms of service, products and channels, but also in pricing; partnerships with intermediaries, brand and image; adjust the risk appetite and integrate risk with finance.

Whichever strategies are devised and then adopted, it is essential that support for them is obtained from all stakeholders, not just the executives creating them.

The next step is execution, the success of which will depend on effective operational policies and procedures. The organization’s operating models must therefore be reviewed and modernized if the new strategic goals are to have any chance of being achieved.

M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance

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