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Sluggish growth in the global core banking arena
Financial institutions face various challenges as the prevailing market ambivalence surges around the globe. The homogenous banking industry needs unfeigned remodeling to confront the progressing nature of consumer demographics and the escalation of social media. Both the Front and Back office needs substantial transformation to engage in the current competitive environment.
In order to ameliorate response times in Banking and to disentangle the global banking arena, appreciable strategic changes have to be executed. The banking industry presently faces the most connected, informed, and sophisticated consumer in history. Banking customers now look for agility and benefits, as well as expediency on a channel and device of their selection.
The industry must address this genre of customer to get the growth wagon running. Today's customer gauges every banking interaction with reference to their experiences with industries like retail, and looks for real time service and value-adds from every involvement. Expectations are skyscraping, as universal banking trends propose that approving customer experience is greatly correlated to customer retention and trust—dissatisfied customers can change loyalties in as short a timeframe as 6 months.
Regulatory revisions have set the global financial institutions juggling with scores of regulations, which differ strikingly in nature—which in turn have resulted in exacerbating domino effect on Front and Back office operations since process mismatch has evolved on a large scale. In the United States alone the Dodd Frank regulation has altered the face of banking. Most say for the better, but the colossal regulation needs numerous implementations in both operational and legal facets of banking which demands remarkable time and resources.
The rest of the world has not even convalesced from the implications of Basel III, and partial implementations can bring about further operational and legal skepticism. Macroeconomic ambiguity has led to lethargic growth for the Euro zone as well as the United States. Even the BRIC countries have been projected by IMF to underperform with regards to growth rates.
Considering the current situation, there are a few focal complications which needs serious reconsideration, since they can help improve latency in banking operations worldwide.
Profound Regulatory Pressure Contributes to Latency in Banking Operations
Stringent capital requirements have increased the pressure on banks to revisit their operational consistency.
Compliance and regulatory pressures continue to influence the consciousness of bank executives. Three years post the Dodd-Frank Act, in 2013, the banking industry encountered a new surge of rules covering liquidity, capital, anti-money laundering (AML), risk management, and consumer protection. Basel III rules, coupled with several other regulations in the euro and the U.K. area further convoluted the universal regulatory landscape. Substantial imposition of regulations in the last year also caused additional stress, especially for large organizations, which were the key targets of concentration until recently. The Consumer Financial Protection Bureau (CFPB) has appended to this pressure with multiple new rules on credit cards, mortgages, and student loans. Additionally, the banking industry has been adapting to the new age of macroprudential lapse, apparent in regulators’ broad emphasis on systemic risk. Moving forward, the industry will probably get more accustomed to the regulations by moving past corrective issues to concentrate on establishing compliance measures across the company. In improving their risk management initiatives, banking institutions should continue reinforcing their risk governance and practices.
The scope of the combined global and national regulatory reforms can appear overwhelming. However, it is possible to categorize the reforms in two broad categories: those focused on lessening the probability of failure and those intended to reduce the severity of failure.
Reforms to address the probability of failure—in particular, capital regulation—are nearly complete at the global level and are being implemented nationally. Banks now need to assess compliance with the proposed new rules, the impact on pro-forma capital ratios and forward-looking capital planning, and the implication for changing business models.
Reforms that seek to lessen the severity of failure are generally more loosely coordinated globally, but are proceeding nationally. This can be a complex process that requires strict attention to understand the impact on the structure of banks' global operations.
Changing expectations of home and host supervisors, with the demands of the host becoming more onerous, will also influence how banks need to structure themselves.
Higher focus on capital management is eminent to ensure that a company has sufficient cash flow in order to meet its short-term debt obligations and operating expenses. This in turn will contribute towards better operating margins and give way to technological enhancements which will promote simplification of banking functions globally as well as locally.
Resilient banking economics and the impact on customer satisfaction and retention
Banks around the world face increases in funding costs that could cut profits and hit their customers as they look to refinance over US$ 7 billion on short-term debt expiring in the next three years with longer-dated bonds. Institutions seeking to reduce their reliance on short-term paper will have to pay up because interest rates are likely to rise and governments will stop supporting the financial system. This entire process is largely complex for banking institutions to analyze—and, as a result, simplification of banking practices is being overlooked.
The flood of expiring debt will hit the global banking foundation hard and could curb banks' profits or force them to charge individuals and companies more for their services. Banks play a critical role in the economy as intermediaries that channel savings into higher-yielding investments. However, recent events in financial markets have made clear that our understanding of banks' behavior as borrowers and lenders is far from complete.
An increase in funding uncertainty induces highly extended banks with high loan-to-deposit ratios to essentially reverse their strategy: they now cut back on their loan commitments, while at the same time trying to attract a stronger deposit base with higher interest rates.
This result is consistent with the behavior of many commercial banks throughout the course of the financial crisis, including widespread reductions in leverage and shrinkage of balance sheets. In the UK, for example, banks such as Royal Bank of Scotland had high loan-to-deposit ratios at the outset of the financial crisis and were heavily dependent on wholesale funding, while, in response, they have now set themselves the aim of reducing their loan-to-deposit ratios to no more than 100%.
Funding uncertainty also has surprisingly strong implications for bank profitability and consumer welfare in loan and deposit markets. In particular, increased uncertainty over funding conditions per se reduces a bank's expected profits, as measured, for example, by its average return on equity. This further downgrades the banks' opportunity to streamline their operations due to the inconsistency in funding. Operational inefficiency is one of the major reasons for lack in simplification process in banks today.
Moreover, loan-deposit synergies can lead to cross-subsidization where either its loans or its deposits business becomes a 'loss leader.
The fact that heightened funding uncertainty can account for such diverse aspects can hence be portrayed as one of the major implications thwarting positive growth in the banking industry. Lack of funding also confirms that further evolution of simpler banking process are also a distant dream and functions within banks will continue to run in the same old fashioned approach.
Uncertainty over funding conditions in the money market makes a fundamental difference to an otherwise standard model of banking due to the risk-based synergies between loans and deposits that it creates. Banking management needs to evaluate these uncertainties pertaining to funding on a regular basis and pave a new way towards risk free core banking. This can be favorable to both customers and banks in generating better mutual respect for each other. The entire proposition can help in bridging the gap of uncertainty by projecting growth and render extra funds to mitigate risks. This in turn can propagate simplification in the risk reward policy of banking products and make it look more customer friendly.
Banks worldwide need to implement these items in order to capture a considerable customer base which has been a significant yet untapped focus area. The simplification would cement customer belief post the slowdown which banks have been looking for.
Challenges associated with operational models
Banks must amend and invariably enhance their operating models in order to remain ambitious. The quintessential universal bank's cost structure displays that over 60% of the total costs dwell with the branches, comprising both distribution and fulfillment.
Since the financial crux, pressure on liquidity and capital has led banking institutions to limit their lending and to concentrate on accumulating deposits. A more dynamic regulatory schedule has also trimmed sources of income that do not generate interest and promoted an escalation in operating costs. Consequently, conventional growth measures have become more exacting.
Growth in profitability and lending, despite the much improved capital-adequacy ratios, are likely to stay resilient. Balance sheet restrictions are predicted to impact their ambitious strategies in the future. As banking institutions try to better their profitability and income, they confront some awkward choices. With more curtailed lending and improved operating costs, most banking customers have become less profitable and more expensive to serve. The long-term feasibility of the current operational model, where a typical banking institution serves several million customers, of which a sizeable percentage is unlucrative is now the standing question.
The current operational models of banks are also difficult. They are often deficient for customer segmentation and service differentiation strategy that stations the model. Many high-street banking institutions are looking to fight for the cream customer segment. Banks need to put forward a fierce competition to retain their high-end customer base in the light of ruthless competition.
The Need for Front and Back office Transformation in Banks
The global banking space is lagging in terms of growth prospects due to the lackadaisical operations and historical methodologies practiced in the banking circles worldwide. This mammoth problem has reciprocated into diminished customer interest due to nagging issues in the banking front office functions. The major talking point among customers have been the slow front office functions which take up a sizeable amount of customer time while interacting with front office employees and getting their work done accordingly.
Fundamental disputes related to back office functions
In the face of intense competition, retail banks need to reinforce their global reach and develop and differentiate financial services for increasingly demanding customers who already hold a number of different banking products, often at multiple banks. Banking is a commoditized industry and banks are focusing a lot of attention on improving the customer experience, deriving a single view of the customer and his or her transaction history, and ensuring that customer interactions with the bank are satisfactory regardless of channel. Automation of back office processes will play a key role in this evolving landscape.
Lost sales due to time spent by front office on back office functions can be mitigated easily if the bank management performs rigorous quality checks on this recurring problem. Moreover, the under-utilized frugality of scale in back office undertakings has further determined that back office functions are headed down a slippery slope. Implementation of universal and historic cost reduction strategies tend to focus on back office or enterprise layers. Hence, transforming the back office first would be a wise strategy to assert further possibilities in revamping the front office operations.
There is a fair obligation to address distribution cost structure through the effects of elevated self-service and automation. Automation will reduce the time taken while processing a back office request much faster and more efficiently and eventually help in simplifying back office operations. This can be quintessential in incorporating smoother banking for consumers—and from a banking perspective, it will be both cost effective and an ingenious move to curb back office manual processes.
Client requests in turn will go directly to back office for gratification. This will reduce front office interactions with clients, resulting in a clear shift towards profitability and better utilization of time. Modification in distribution of prioritized undertakings will evolve, which would help banking staff to prioritize tasks as per business severity and cascade it to the back office as and when required. An increased number of exception cases will be curbed since the manual aspect of core banking in back offices will be gridlocked.
More critical tasks will be transferred to the back office and it will progressively become a secondary line of adept support to front office.
An elementary approach to the simplification of the banking front office
A substantial chunk of the front office undertaking executed at the branches is production related and could be reallocated to the back office and centralized. Inadequacy of specialized proficiency in the front office further dents the growth of banks today. Banking management need to revisit operational proficiency and staff awareness regarding latest technological and process related capabilities to access their competency. If this task is done on a regular basis, it will allow banks to be more effective in analyzing their current profitability and cost structure, and provide the required impetus and leverage to enact certain methodologies to settle this dispute.
Moreover, it is binding to examine how IT can be run more efficiently—despite this, however, directives to considerably reduce IT have been brought up in banks lately due to the financial slowdown. Yet, IT efficiency is not the same as IT reduction. It requires banking senior management to prioritize the need for IT infrastructure and services accordingly and implement strategies to favor the back office. This is because the back office in banks requires the maximum exposure in terms of IT Infrastructure or personnel who will deliver faster and more efficient results to help customers stay satisfied and allow banks to build a case in terms of competitiveness in the market.
IT cost cutting and simplification of IT operations in front office can be ascertained by the fact that reduced customer facing time can in turn prove favorable in projecting economized IT cost structure of the front office in banks.
It is also paramount that escalating IT costs should be prevented in order to fortify investment to drive further cost contraction across the business. IT costs should be judiciously streamlined to furnish front office operations and not to contribute to the degradation of the same.
Forces like cost pressure, change in regulations and in customer behavior are reshaping the division between front office and back office. This should be meticulously mitigated by banking personnel worldwide in strengthening growth prospects and simplifying banking operations simultaneously.
There has been an increased pressure on banking institutions to recruit fresh breed of talent equipped with the latest banking and technological skill set. This is imperative to boost sales and revenue macros in front offices.
Diminished transaction quantity in the front office can be assimilated by effective online banking/mobile portals which will lead to reduction in the customer facing time and eventually be profitable to both customers and banks. This will result in spotlight on the advisory performance of banks. In the current global banking scenario there might be a probable shortfall of skilled advisors which every bank requires in order to impart greater customer satisfaction. Banks will need to recruit the best in the industry to construct a strong foundation of customer confidence and to reinvent the front office to suit their clients on a professional manner.
Arduous banking experiences for customers cause evolving complications
Due to the tedious customer facing banking functions the customer base of certain high profile banks have started to diminish. Customers no longer have the same level of faith or patience to wait for standard banking tasks to complete. Financial marketers should not undermine consumer demand for a smoother banking experience. Customers demand the following:
- Easy, alluring and rapid account opening process.
- Unified and responsive online and mobile customer interface.
- Perceptive account management tools.
- A highly personal and humanized communication approach that is never oppressive or pretentious.