Today’s bank transformation: moving beyond the incremental

The need for greater operational efficiency is hardly a new topic in the banking world. However, the matter has taken on new urgency as technological change has presented the industry with unprecedented challenges and opportunities.

Banks must increasingly contend with an accelerated customer shift to digital channels as financial institutions join forces with technology companies. These tech firms bring a rigorous focus to customer experience, and an openness to completely rethinking how financial services are offered and used by consumers.

This rapid emergence of novel fintech platforms and the accompanying unbundling of traditional banking functions demand a comprehensive appraisal of how banks should operate in the 21st century. They need to embrace far bolder digitization strategies, with an aim much more ambitious than a few cost savings here and there.

The true objective should be the delivery of a stellar customer experience, while simultaneously effecting a step-change in cost and striking a responsible balance between growth and stability.

Sounds like an impossible feat? It needn’t be. Here are six potential strategies well worth considering:

Have a “zero-based” mindset. You know which operations or functions are truly essential or strategically differentiating. Hold on to these, but those that don’t meet this standard should be managed through partners, allowing your slimmed-down organization to be hyper-focused on what matters.

Develop partners, not providers. Don’t just hand work over to third parties. Collaborate with them to create value, and co-design innovative solutions that address the efficiency and effectiveness of operations. Develop metrics that matter to allow for a relationship founded on measuring the partner’s ability to deliver on what’s important to you.

“Stitch to fix.” Improve processes by taking full advantage of the capabilities of multiple partners. Different partners can independently target specific sections of a process, but when their efforts are woven together, they’ll collectively improve the end-to-end customer experience. Finding the right partners — generally fintechs — is only part of the solution. Cross-partner integration and management are also vital.

Be unapologetically customer-led. Focus on delivering experiences and outcomes based on what customers need, not just on what you have to offer them. This will lead to the most innovative ideas and the most significant opportunities by, for example, removing rather than reducing steps.

Breakthrough silos. When implementing improvements, identify and address process refinements that are operationally similar across multiple product or business areas. Avoid the tendency to improve a core capability in only one silo and challenge the organization to simplify and streamline more broadly at scale.

Challenge data boundaries. Banks are sitting on a treasure trove of data that can provide valuable insights into how to build process efficiencies. Efficiency initiatives will benefit significantly if you tap into the right external data sources to learn fresh approaches.

Companies in other industries have benefited from all these strategies, improving efficiency by turning to partners for the management of areas that are neither strategic nor differentiating while using partnerships to enhance propositions that improve the customer experience. In the process, customer expectations for service, convenience, and responsiveness have hit new levels and banks need to adapt to these expectations if they want to meet the bar set by the e-commerce retail world.

A practical case study application of these principles may be seen in the residential mortgage sector. It’s an example that should be all too familiar to banks, which have long funded and serviced mortgages as part of their core operations — and are now losing that business, especially within the mass market, to fintechs and other industry disruptors that are making drastic improvements to the speed, ease and transparency of the mortgage process.

The new entrants are targeting many of the classic headaches of the mortgage process by offering streamlined application processes, faster approvals, no-fuss refinancing, and a near-total elimination of paperwork through online verification tools and digital signatures.

Banks need to act quickly to match and improve on these offerings — or risk further erosion of market share. Over the longer term, they also need to keep an eye out for the novel propositions that these outsiders are introducing into the sector, such as buying houses on behalf of customers then renting to them while simultaneously helping them save for a mortgage on the property.

Even more fundamentally, banks need to stay on top of technological changes that may, more than anything else, define the banking sector of the 21st century. These include the use of application programming interfaces (APIs) to enable information flow from new sources; predictive machine learning to improve mortgage application processes; blockchain to consolidate documents and data into secure, decentralized records, and much more.

These can seem like daunting challenges, but we’ve seen some banks achieve significant results — in terms of both efficiency and customer experience — by reevaluating their end-to-end mortgage process. Key improvements we’ve helped clients achieve include:

• 20%-30% reduction in loan-processing costs;
• 40% reduction in overall time to yes;
• 40% increase in productive hours across the underwriting team; and
• 25% reduction in customer effort.

The short-term pressures and long-term possibilities are clear, and there’s a window of opportunity for banks to address them. Those that can transform will see the short-term financial results they need. But perhaps even more importantly, as organizations that are refocused on strategic impact and ongoing innovation, banks will be in a position to deliver a better customer experience for years to come.

Hemal Nagarsheth is an Associate Partner at Kearney. In this role, he is a senior leader in the Financial Institutions Group with particular focus on the intersection of technology and innovation with banking and payments.