Modernizing transaction banking
Service externalization and the right technology portfolio
Regulatory burdens, disruptive technologies, changing customer expectations, and innovative banking competitors are signs that the industry needs to modernize transaction banking. Service externalization and the right mix of technology can help banks retain transaction banking profits and empower customers.
Service externalization in transaction banking
Transaction banking has for years been a reliable, stable source of revenues. But regulatory expectations, disruptive technologies, changing customer expectations, and the rise of new competitors are potential signs that the industry may need to modernize with a greater sense of urgency.
A more modern, agile, and profitable transaction banking business likely won’t come about by simply automating existing processes. Instead, banks should seize a new opportunity to rethink how work is done and empower clients to gain more control of service delivery. This new model, which we call service externalization, enables customers to fill many of their needs exactly how and when they want to.
Service externalization has four components, which together can form a potentially powerful portfolio of innovations:
- A digital front end designed for maximum user-friendliness and efficacy
- A core infrastructure built for agility and resilience
- Cognitive technologies for intelligent automation and scalability
- APIs (application programming interfaces) to expand banks’ strong connections with the ecosystem
These four components often work best when implemented together, not in silos or increments. A digital front end needs cognitive technologies to meet customers’ needs; it should connect with APIs to customers, counterparties, and vendors for speed and responsiveness; and it typically needs a robust backend to support these technologies and the performance that customers demand.
This modernized transaction banking infrastructure may not only increase customer satisfaction but also create a new competitive advantage. And since customers will likely own many processes that banks currently do internally, banks’ costs and risks may fall. This paradigm could also work with counterparties and vendors.
This paper will look at the challenges in the transaction banking space, explore the approach that can empower banks to overcome these challenges, and offer examples of success.
Transaction banking businesses should go beyond incremental automation and suboptimal technology upgrades to keep their competitive edge. By using the service externalization model to reimagine how work is done, they can operate at a lower cost while also enhancing the customer experience.
This model, which has little in common with traditional outsourcing, requires the right technology portfolio—a modern core infrastructure augmented with new technologies—to be truly effective.
A profitable business, under threat
It’s been said that no good thing can last forever. Most banks have enjoyed resilient revenues from transaction banking, as figure 1 shows, but they shouldn’t rest on their laurels. Here are some of the challenges that many face:
- The regulatory climate. The pendulum in the US is swinging toward a lighter touch, but requirements persist in know your customer (KYC), anti-money laundering (AML), the European Market Infrastructure Regulation (EMIR), single euro payments area (SEPA), Basel III and the Foreign Account Tax Compliance Act (FATCA), among other areas. Nearly 45 percent of corporate banking respondents consider meeting regulatory demands as one of the top three business challenges, according to 2016 Ovum ICT Enterprise Insights data.
- Infrastructure is often outdated and poorly integrated. Manual processes, siloed systems, batch-based processing, and other obsolete infrastructure can perpetuate inefficiencies. Many banks spend enormous resources on additional controls and on remediating errors through rekeying and queries. This old technology also often inhibits the real-time, holistic view of clients and transactions that is so valuable to banks.
- Too many clients barely worth the cost. The Pareto Principle, also known as the 80/20 Rule wherein 20 percent of the invested input yields 80 percent of the output, applies: a small number of clients produce most of the revenue.3 For the rest, costs and the need for risk management often eat up a large chunk of profit. Efforts to “de-risk” the customer base mostly haven’t gone far enough.
- Digital clients typically expect digital bankers. Transaction banking clients are increasingly sophisticated. Corporate treasurers, for example, often use customer analytics (360-degree counterparty analysis) and automated fraud management. Supply chains are digitizing using blockchain and the Internet of Things (IoT). Yet many banks are still shuffling pieces of paper around. Improving the customer experience was one of the top three challenges for 38 percent of corporate banking respondents, according to the 2016 Ovum ICT Enterprise Insights.
- New threats seem to be rising. Many fintech firms and nonfinancial companies are competing with banks more fiercely. Shipping company Maersk, for example, has begun to offer trade finance solutions to its customers. Maersk doesn’t need to ask for collateral (the shipped goods are already in its possession) and it often already has extensive data on borrowers and buyers.4 Banks appear to be taking note of this new competitive pressure. Corporate banks consider innovation, in the form of new services and payments platforms, as the strongest factor influencing payments in the long term, according to the 2016 Ovum ICT Enterprise Insights survey.
Don't just automate, eliminate: service externalization
Most transaction banks do enormous work to complete even simple transactions. Think of all the keystrokes, queries, back and forths, and do-overs that a routine payment file requires. Think of the resources reconciliation demands. And think of these inefficiencies’ consequences for timely, accurate information. When delays in accessing accurate information are great enough, they can do more than add to costs. They may impede business decisions too.
A part of the answer may lie in service externalization. It’s a different approach from traditional outsourcing, much as outsourcing will likely continue to play a useful role in many organizations.
"Service externalization isn’t about having a third-party perform the activities for the organization. On the contrary, it’s about providing customers with a digital experience that empowers them to get what they want, how they want it, and when they want it. In the process, they won’t just enjoy quick, customized service—they’ll also own much of the work that banks currently do in-house."
Service externalization means that banks aren’t simply streamlining and automating work. They’re often eliminating it altogether. The four components to this approach are a digital front end, a modern core, cognitive technologies, and APIs.
1. A digital front end: What they want, how they want it, when they want it
2. A modern core: Strengthening the back end for agility and resilience
3. Cognitive technologies: Enabling smarter decisions
4. APIs: Stronger connections with the ecosystem
Service externalization is about providing customers with a digital experience that empowers them to get what they want, how they want it, and when they want it.
Service externalization: The rewards
- Lower operating costs. Banks would no longer face endless keying in, queries, reconciliation troubles, and other issues. With service externalization, a transaction bank’s customers perform these tasks while the bank’s platform confirms, collects, monitors, and analyzes data. This efficiency can make even low-revenue clients profitable.
- Greater customer satisfaction. Customers can get the speed, data, reliability, reports, customization, and integration with their own systems that they demand.
- Reduced risk. The digital system could eliminate many errors and identify others quickly. Clients would now be responsible for many activities that previously created risks for banks.
- Easier regulatory compliance. With so much information on the bank’s digital platform, complying with regulatory requirements would become more cost-effective. It may in the future be possible to open the platform for regulators to use.
As the examples show, service externalization could offer significant benefits.
The new transaction banking: Five guidelines
Nothing can typically replace a thorough analysis of an organization’s technologies, processes, human resources, competitive context, regulatory burdens, and consumer needs, but the following five guidelines can be a good start to consider:
- Organize for the big picture. Too many banks often miss synergies because they lack a holistic view. Testing technology proofs-of-concept in silos or increments may limit their full potential. Banks should also consider how best to sequence, staff, and deploy new technologies.
- Don’t just automate work, rethink and eliminate it. Identify core strengths and which processes a bank should empower customers, counterparties, and vendors to perform.
- Keep the customer journey front and center. The goal is typically to give customers what they want, how they want, when they want it. Failing to consult with customers while building the new system may risk replicating their current frustrations.
- Partner with the fintech ecosystem. Whether through open APIs or formal agreements, take advantage of others’ innovations. Consider structuring partnerships to prevent disintermediation and manage risks to performance, reputation, and compliance.
- Refine enterprise data management capabilities. Understanding and using current data flows is key to creating and transitioning to this new operating model. Banks should upgrade abilities to gather and analyze data.
Modernizing transaction banking infrastructure may be a big investment, but if done right it doesn’t have to be daunting.
Conclusion: Are you ready for service externalization?
Service externalization is a new construct that will likely require investment and a new way of thinking. But done right and with a focus on the customer, the rewards can be substantial. Before beginning this journey, consider these questions:
- Do you have a plan to identify which processes are suited for externalization and which are core strengths that should remain in-house?
- Do you have a roadmap for modernizing your technology infrastructure that puts the customer experience journey front and center?
- Are you able to develop the necessary technology portfolio—a digital front end, new core systems, cognitive technologies, and APIs—together, not in silos and increments?
- Does your organization have the right skills and structures for this portfolio?
If the answer to any of these questions is no, then it could be time for a strategic look at how service externalization and the right portfolio of technologies can give a transaction bank a competitive edge, now and into the future.
For more information please contact Harmen Meijnen via the contact details below.