Opportunities for Action in Financial Services Transforming Retail Banking Processes
Transforming Retail Banking Processes The retail banking environment is undergoing major change. Retail banking customers are much more active than they were a decade ago. Over the past decade, third-party distributors such as mortgage brokers and independent financial advisers have secured a larger role in distributing retail banking products. And retail banking customers are demanding more customized products and services. These changes impose significant new demands on retail banks if they are to stay competitive. The answer lies in reconfiguring their business processes specifically, redesigning, automating, integrating, and standardizing. For many banks, incremental improvements to endto-end processes in business silos will be insufficient. What s often required is a more comprehensive transformation that can be achieved by turning to modular, standardized process models. This proposed modular, standardized approach is a critical departure from the traditional end-to-end, product-based process-and-system architecture, which encompassed the full value chain (service, product-administration, and customerdata-repository tasks) for each product. Such a transition is especially helpful for scalable products such as credit cards, simple loans, and other vanilla banking products. But it may not be suitable for all players in all circumstances. It is particularly valuable for retail banks seeking to drive radical improvements in overall performance. A few leading banks have already adopted modular, standardized processes and are now enjoying improved efficiencies and lower costs.
The Size of the Prize The benefits of increasing operational efficiency are enormous. For example, right now in several major markets, banks must sell three to four times as many mortgages as they did ten years ago just to maintain their profit margins. (See Banking s Changing Dynamics, BCG Opportunities for Action in Financial Services, August 2003.) If a bank effectively transforms its processes, it can reduce its unit costs between 20 and 40 percent, completely changing its competitive position. In addition, financial services business is increasingly originated by third parties. In an environment in which banks make less and less of what they sell to their customers, they need to work more closely with external partners to succeed in cross-selling and capturing that business. To do so, banks must ease process integration and data flow (such as customer information) with their external partners. Banks need more flexible and more integrated processes to provide the targeted product and service offerings that their customers seek. For instance, customers now look for more varied mortgage offerings such as mortgages linked to current accounts (to reduce interest expense) and reverse mortgages (to provide cash during retirement). To maintain and build competitive advantage, banks need to improve flexibility and reduce costs. If they don t, specialist providers are likely to pick apart their best businesses. Going Modular Traditionally, retail banks have organized their operations by product line such as loans, deposits, and investments in individual business silos, each of
which has used different process models. Retail banks still tend to manage most of these various processes from customer acquisition to product service inhouse. Now that they need to cooperate more with external partners, banks have to rethink those old silos and processes. To make the transition to modular structures, a bank should take its traditional endto-end silo organization back to first principles and then assemble individual modules. (See Exhibit 1.) This involves peeling processes back to individual building blocks and then putting them together in the most efficient way possible frequently across product lines. In the back office, this often involves building scale. In the middle office, it means consolidating separate processes into shared utilities. However, for some players it may be preferable to run a separate platform for a particular product such as specialist mortgages or current accounts with special features when the potential scale benefits of one central platform are insufficient to warrant the complexities of merging that product s business processes into the central platform. There are two guiding principles in the transition to a modular structure: Modularity: Grouping similar types of tasks and defining functional building blocks consistently across different products or channels. Commonality: Treating similar modules as one and considering one common, standard solution. Applying modularity creates interchangeable process blocks. For instance, scoring the risk of customer default is a task conducted for multiple products. Therefore, it is more efficient to treat this task as an integrated module rather than having it hard-wired
Exhibit 1. The Old and the New: Evolving Process Models Integrated process model built around silos profile application delivery service /Channel A address /Channel B income securities features address income securities features /Channel C address features income securities Risk assessment 1 Similar tasks have 2 Common tasks are different scope exclusively specified Modular, standardized process model profile application delivery service /Channel A address income securities features /Channel B features /Channel C features SOURCE: BCG case experience. 1 Similarly scoped, 2 Standardized yet specific modules common tasks
into any one particular product or process (such as credit card origination). Commonality drives consistency and reduces inefficiencies due to redundancies. For instance, one software program can originate various products. Commonality could, for example, include using one standard method for capturing information about customers assets and income. Up and Down or Sideways Retail banks are using different approaches to modularize and standardize their processes. For example, we have encountered four distinct process models in our retail banking work. (See Exhibit 2.) Horizontally Organized. Traditionally, most retail banks have employed a horizontally organized model, in which individual platforms support processes for one product only (such as home loans). Subprocesses such as risk rating, security valuation, and customer-specific data generally are not shared with other products and product platforms. In this model, platforms also can be channel specific. We expect this model to be attractive only for monoline product providers or for highly specialized products. Vertically Organized. In a vertically organized model, functionality is provided across all products. For instance, one large North American bank now seeks to consolidate all its customer information and needs in a customer-capture tier as it builds common origination and servicing processes across all its retailbanking products. Predominantly Horizontally Organized. A predominantly horizontally organized model has some modu-
Exhibit 2. Four Modular Process Models Are Emerging Horizontally organized capture Originate specific Home loans Personal loans Credit cards Vertically organized capture Originate Service Close Predominantly horizontally organized capture + origination Home loans Specific services specific Outsourced Personal loans Credit cards capture + origination Predominantly vertically organized Common services specific Home loans Personal loans Credit cards SOURCE: BCG case experience. larization within a product-oriented framework. One large bank, for example, has a product-specific lending architecture and horizontally dedicated front-end, service, and product systems. For mortgages, the bank is combining the front end with other services to ensure seamless integration with outsourced product delivery and maintenance. Predominantly Vertically Organized. Some banks have adopted a hybrid model that is predominantly vertically organized. For instance, one large commercial bank in the Southern Hemisphere consolidates frontend origination and provides common services (such as risk scoring and pricing) to its various products, channels, and product-specific systems. All retail products share the same origination and service platform, allowing consistency in communication with customers.
All four models achieve a certain degree of modularity and standardization, but none of them meets all the different needs of all banks (that is, there is no one-size-fits-all solution). They have to be adapted to an individual bank s needs and circumstances. In choosing and shaping process models, banks may confront hurdles in several key areas: IT Legacy Environment. Often the effort to disentangle a bank s proprietary systems in order to modularize them or to integrate them with other modules is prohibitively expensive. Legislation. In some markets, legislation may prevent consolidation across products or channels. For example, sharing customer data outside the context of the original product or transaction may be prohibited in some countries. Lack of External Catalysts. Some markets may lack the external catalysts to drive modularization. For instance, the lack of a common standard (data exchange) for integrating third-party brokers origination processes undermines the benefit of providing a standardized plug-in module. A Bank s Internal Organizational Structure. If a bank s internal organizational structure is based on product or customer segments, sharing common functionality and customer data may create governance conflicts and interfere with accountability. If banks can overcome these hurdles, they can capture significant business opportunities. Look at how the automotive industry benefited when it introduced the platform strategy using the same components (such as drive train parts) for multiple automobile
models. By reducing duplication in products and processes, automobile manufacturers improved operational efficiency, increased overall flexibility, and profited from integration with specialized suppliers. The retail origination process provides another example of the benefits of moving to a modular approach. Designing a bank s retail-origination-process model according to the principles of modularity and commonality creates opportunities within the organization and beyond. (See Exhibit 3.) By supporting just one IT environment, a bank can reduce duplication of development and maintenance efforts. And by pooling resources, it can capitalize on scale effects. Standardizing common tasks also promotes consistency in the customer-bank relationship and maintains the integrity and accessibility of customer data. Introducing a modular, standardized process structure also creates opportunities for cooperation with external players. It enables a bank to plug in thirdparty providers with ease. Scale and scope advantages also can be achieved. For example, three German Exhibit 3. The Benefits of Modular, Standardized Process Models in the Origination Process Specialized players 1 Dock on specialized players (such as mortgage brokers) application 2 Consolidate with utility providers (such as mortgage companies) Retail banks profile application delivery service Other institutions Consolidation players profile application delivery delivery service SOURCE: BCG case experience.
banks consolidated their home-loan-processing entities into one unit to drive down costs and improve efficiencies. Building the Model When a bank builds a modular, standardized process model, it is critical to align the IT architecture properly. To do so, the bank must consider six central elements of the IT platform and design them to be consistent with its chosen business-process model. (See Exhibit 4.) Information Platform. This is the information database that provides frontline staff and customers with up-to-date information for example, on how a customer connects with and uses accounts and product holdings as well as on how the customer interacts with the bank s relationship managers. Exhibit 4. Organizing the Six Central Elements of the IT Platform profile application delivery service Front-end origination Specific services systems Risk assessment Account maintenance data capture Exposure data capture Loan details Security data capture Servicing test Security validation feature + pricing suite Data repositories Statements data repository accounts SOURCE: BCG case experience. Process support Workflow Document management (imaging) Document generation
Origination System. Consolidating front-end systems to support the origination of different products (such as home and personal loans) provides significant opportunity. The customer information platform and the origination system need to be closely integrated or delivered as one solution since customer-related data are essential to product innovations. Specific Services. Individual system components should provide specific functionality. For instance, risk assessment, which may differ by customer segment, is best provided by a dedicated module. Data Repositories. It is essential to separate customer data from product data so that valuable customer information can be shared across products. Process Support. Tools that support process execution should not be customer or product specific. They should be provided as independent building blocks. Systems. Systems designed to maintain the products that the bank originates must be highly scalable (able to ramp up volumes rapidly). Making informed decisions about these six key elements should allow the bank to move toward a more modular and standardized approach, bringing substantial efficiencies and cost savings. Seven Key Steps As retail banks seek to modularize and standardize their process models, they should take seven key steps: Group similar process steps within individual product end-to-end processes. Be sure to cut these groups similarly in terms of scope and task.
Assess commonality among these groups of process steps. To what extent are the underlying processes similar across products, across channels, and along the end-to-end process? Drive to standardize business rules for common tasks. Question the relevance of differences. Often differences are the result of arbitrary decisions and have no specific business justification. Combine the groups into process modules and clearly define input, output, and processing for these modules. Assess strategic, operational relevance for each module. Does that module need to be accessible to or does it need to integrate with external players? Is that module a utility service and therefore not a basis for competitive differentiation? Understand your IT, legal, and regulatory constraints. Designate specific IT tools to support each process module. * * * In summary, modular, standardized business-process models offer retail banks the chance to achieve greater efficiencies and to team more effectively with outside players. They are a new and considerable source of advantage in a consolidating and increasingly competitive industry. While modularization can lead to overstandardization and, if it reduces the number of systems, to bottlenecks, banks that succeed in making the transition can achieve considerable improvements. Banks that master modular, standardized business models can
substantially improve their unit costs, significantly upgrade customer service, and create the flexibility needed to introduce new products and services. Two North American banks, for example, have experienced marked increases in customer satisfaction as a direct result of embedding modular process capabilities into their products (specifically mortgages and consumer loans). Modular processes also can halve the time to get new products to market. Banks that ignore modular, standardized processes may be overtaken by their rivals. Thomas Reichert Andy Maguire Michael Spellacy Guido Kuehnelt Thomas Reichert is a vice president and director in the Sydney office of The Boston Consulting Group. Andy Maguire is a vice president and director in the firm s London office. Michael Spellacy is a manager in BCG s New York office. Guido Kuehnelt is a project leader in the firm s Sydney office. You may contact the authors by e-mail at: reichert.thomas@bcg.com maguire.andy@bcg.com spellacy.michael@bcg.com kuehnelt.guido@bcg.com To receive future publications in electronic form about this topic or others, please visit our subscription Web site at www.bcg.com/subscribe. The Boston Consulting Group, Inc. 2004. All rights reserved.
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