What a Core Transformation Offers Your Bank

Transcription

1 What a Core Transformation Offers Your Bank

2 Current State of the Banking Industry The banking industry as a whole continues to struggle as sources of new revenue remain elusive. With revenue growth challenges in both non interest and interest income, financial institutions continue to cut costs wherever possible. Independent cost reduction efforts will only reduce expenses to a point. For meaningful, sustainable efficiency improvements, banking executives need to consider transformative initiatives. These efforts stand to deliver the maximum benefit when the foundation of the project is built around an institution s primary technology platform. Thus the case for a core banking platform transformation can make much sense to many organizations facing today s profitability challenges. The BAI s director of research stated the dilemma this way: With no clear sources of near-term revenue growth, where does a bank turn to make a profit? This profitability challenge is highlighted in the banking industry s rise in efficiency ratios. In 2014, according to FDIC data, the overall industry efficiency ratio continued a rising trend starting in With fee income evaporating due to pressure on non interest income, the focus placed on banks is to do more with less. Many fail that challenge FIS and/or its subsidiaries. All Rights Reserved. 2

3 The problem becomes further exacerbated in both the smaller banks and very large banks as shown in the second graphic above. According to FDIC data, the cumulative efficiency ratio for banks with assets between $500 million and $1 billion is close to the efficiency ratio of 65.8 percent for banks about $200 billion in assets. Size may no longer offer an easy means to increase productivity. The key to making significant efficiency gains lies in transforming both a bank s technology and business processes. Why Core Transformation? As banks confront the necessity of becoming more efficient, many will be forced to replace their core banking systems. They will seek reductions in compliance expenditures, an increase in speed-to-market of new product offerings, the leveraging of new technologies such as mobile banking and remote deposit capture, and seamless integration with ancillary banking products. Replacing core systems should not become a simple swap-over effort. To deliver substantial efficiency gains available in new technology platforms, innovative business processes must accompany new systems. Best practices and finely tuned staffing models can be applied to ensure maximum value becomes created, starting even before the actual conversion event. Implementing best practices along while simultaneously re-engineering business processes can help solve efficiency challenges, but the new processes should also improve sales and service performance. Process improvements also have great impact on customer-facing activities such as: 2015 FIS and/or its subsidiaries. All Rights Reserved. 3

4 Sales referrals Sales and incentive management Account opening and loan origination Exception handling Customer and account servicing Not only are efficiencies gained, but revenue can also grow through new revenue opportunities identified and implemented during the core transformation initiative. Trend toward External Services Core transformations require close partnerships with core processing providers and third-party technology vendors. According to research from Celent, banks are dedicating additional funding to engage external firms in areas such as mobile banking payments, branch banking and analytics solutions. 1 The change in the bank IT spending mix is shown below. 1 IT Spending in Banking A North American Perspective, Celent, January FIS and/or its subsidiaries. All Rights Reserved. 4

5 As part of the transformation, banks are evaluating hosted core banking systems (in which the vendor runs the financial institution s hardware/software environment) versus a licensed environment. The drivers for this analysis include: The evolution of core technology Changing mindsets within the financial institution The impact of new regulations What Is Core Transformation? Whether a transition to a new banking platform is hosted or licensed, any core transformation must focus on business processes. A business process is a set of related and interdependent activities that transform an input to a system to an output with added value to a customer. It is the transformation of people, money, materials or information that is the value-added work of a bank. Core transformation and business process improvement are tightly intertwined. Accelerating the realization of key financial benefits and achieving greater scalability motivate core system transformations at financial institutions. The transformation toolkit that ensures these goals must include: A group of business process experts with a combination of extensive financial industry best practice insights and knowledge of the most effective core platform best practices in order to optimize performance A proven integration team led by a senior program manager that deals with the unique requirements of transformation projects A third party to facilitate and accelerate development of new business processes that match a bank s strategic objectives with the appropriate people and technology Solution architecture and design services to ensure the new technology aligns with a well-defined future-state environment The following graphic depicts the relationship between the major activities driving a core transformation. The business process improvement and conversion activities are closely intertwined FIS and/or its subsidiaries. All Rights Reserved. 5

6 The critical combination of a business process transformation team tightly coupled with core platform technology experts unleashes the forces that drive significant financial improvement. The program manager leading this team updates an executive steering committee on the initiative s progress and resolves issues and concerns as they arise. How to Perform a Core Transformation Core transformation initiatives are comprehensive projects that involve all areas of the financial institution. Subject matter experts from the functional areas provide the impetus for action teams that identify, develop and implement the new business processes coupled with the new technology. Technology experts attached to the action teams recommend best practices and offer guidance on the feasibility of proposed solutions. A collaborative, structured process that guides the action teams focuses on drawing out the best ideas in the shortest time frame possible. The following graphic depicts the three phases typical in a core transformation project. Typical time estimates are provided in the first two stages, indicating it does not take long for a bank s action teams to identify and develop the transformation plans so critical to delivering the value from the implementation of a new core platform FIS and/or its subsidiaries. All Rights Reserved. 6

7 Core Transformation Approach Discovery (1-2 weeks) Development (10 14 weeks) Implementation (TBD) Benchmark performance data Review business plans Interview executives Document opportunities Agree on Phase II initiatives Facilitate priority setting Develop project plans Brief bank project Action Teams Organize bank Action Team Complete detailed analyses Conduct competitive research Brief teams re: Findings Facilitate Action Teams Support business case creation Assist with executive briefings Provide project admin. support Develop roll-out plans Provide SME as needed Track and measure results Program management support Ongoing coaching for teams Project risk mitigation Problem resolution support Within this three-phase process, the action teams must first understand the current environment and the strategic plan of the bank as it relates to their respective functional areas. Outside facilitators not only add technology expertise, they can also manage the overall initiative and keep the individual work streams on track. With much at stake in a core transformation program, it becomes imperative to seek advisory services from experts. Results from Discovery Efforts As shown in the above graphic, a discovery phase launches the core transformation process. The financial benefits of the core transformation surface and plans to obtain them are documented. Readily obtainable goals and objectives (lowhanging fruit) are quickly reached. The identified cost savings and revenue enhancements provide a rational and beneficial yardstick for the overall conversion effort. The following brief case studies (drawn from recent projects at real financial institutions) highlight the significant financial benefit identified in the discovery phase of core transformations. Bank A This bank realized that in order to significantly change, they needed to demonstrate management support and ensure cross-functional teams worked together to align new core technology with new business processes. The FIS Consulting team leveraged the Helix methodology to enable process teams to focus on driving maximum financial benefit for the bank. The discovery effort uncovered $2.9 to $4 million in annual savings at this $8 billion institution. In addition to the financial 2015 FIS and/or its subsidiaries. All Rights Reserved. 7

8 benefit, the bank implemented recommendations from the discovery effort in their retail, treasury management and reporting areas. This delivered the following benefits: Anticipated reduction of deposit origination time from 45 minutes to 20 minutes Reduced third-party vendors by 35 percent Transitioned 60 percent of sales management work to point of customer contact Bank B For this institution, the scope of the core transformation covered both their commercial and retail banking operations. The operational review identified enhancements to improve efficiency and effectiveness of changes enabled by the conversion team within the bank s new technology platform. In addition, FIS Consulting identified other business practices to enhance service levels while reducing costs. This $2.1 billion institution identified 105 individual opportunities for improvement, which created $1.51 million in annualized financial benefit. The discovery effort also identified the following broader areas for operational improvement: Strategy and approach for consumer loan underwriting Item processing capture Decision making around non sufficient funds/overdraft accounts Enhancements to marketing and sales management processes Bank C This $2.8 billion regional bank was planning an acquisition and wanted to ensure the merged institutions were optimized for efficiency when operating on one consolidated technology platform. The discovery phase included the following areas: All customer channels Deposit acquisitions Commercial lending and loan operations Consumer lending and loan operations Mortgage lending and servicing The review of these functions and operations uncovered efficiency savings ranging from $3 to $5 million on an annualized basis. Bank D This $12 billion Midwestern financial institution wanted a thorough review within the discovery phase that would cover: Commercial lending Consumer lending Branch sales and service delivery 2015 FIS and/or its subsidiaries. All Rights Reserved. 8

9 Deposit operations and item processing Treasury management Call centers Internet banking The discovery effort identified a significant range of savings with a midpoint of $8 million on an annualized basis. The savings were categorized within six major initiatives to raise bank revenue and reduce expenses. The initiatives ranged from improving processes in lending operations to creating new revenue streams in treasury management. Bank E A well-established bank in the eastern United States was faced with the situation of their core processing provider sunsetting their banking system. This $8 billion institution then decided that if they had to convert, they would gain maximum financial benefit in the process. The bank engaged FIS Consulting in a core transformation discovery, which identified a range of $2 to $5 million in efficiency savings. In addition, the discovery effort reviewed the effectiveness of the bank s 126 branches and uncovered an additional $12 million in savings and revenue gains available to the institution if they obtained their fair share within the markets they operated. Overall, 70 new opportunities surfaced from the review of the following areas: Branch network Deposit operations Commercial lending Consumer lending Mortgage lending Loan operations Summary As bankers address efficiency challenges with a survival-of-the-fittest mentality, they must take a hard look at the performance of their technology platforms. The return on a core transformation project makes undertaking such reviews critical and, in many cases, a matter of long-term survival. Contact Us For information about FIS Consulting Services, call or visit FIS and/or its subsidiaries. All Rights Reserved. 9