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Bain Insights

Why Banks Need to Adapt Their Operating Models

By Thomas Olsen, Joe Fielding and Niels Peder Nielsen

Many banks have recognized that they need a truly differentiated strategy as the industry’s economics have come under pressure from new technology and entrants with disruptive business models. For example, large technology firms such as Alibaba, the Internet giant in China, and Kakao, the messaging giant in South Korea, have been moving into markets such as payments, raising customers’ expectations for better digital tools and simple, convenient service. As a result, some banks have exited businesses or countries where they have operated for decades, while others are reinventing their core identity.

Just as banks have been relearning the art of strategy to build competitive advantage, they also must develop operating models uniquely suited to their strategy, rather than models based on generic industry benchmarks. Banks will have to rethink the role, structure and processes of critical functions like IT, risk and compliance. Leading banks are making inroads in five areas that allow them to build operating models that suit their strategies-in-the-making and can flex as new priorities emerge.

Put customer priorities at the center of the design. Viewing products and services from the customer’s perspective is essential for delivering an end-to-end experience that will reliably delight customers. Consider Citibank Asia, which has a strong customer loyalty position in a number of its markets, but set even more ambitious loyalty goals to counter the pressure from locally based competitors that were gaining ground. Citi changed its operating model in several ways. It modified the organizational superstructure to elevate the role of customer segment heads, giving them authority over products and channels for those segments. And it put in place a dedicated customer experience team charged with ensuring an excellent experience for each segment.

Reach outside the bank for expert partners. Many banks are plugging into an ecosystem of third-party vendors, open APIs and other banks to more effectively deliver products. JPMorgan Chase partners with the fintech OnDeck to approve and fund small business loans in as little as a day. Another fintech, PrimeRevenue, offers supply chain finance through a cloud-enabled platform to banks such as Barclays and Nordea. The platform is designed to simplify processes, increase liquidity, and provide analysis of credit and working capital for corporate customers. While more partnering is inevitable, it raises challenges for banks accustomed to working through their internal departments and now faced with less control over the people and IT involved in providing services.

Get Agile fast. Banks that have traditionally taken a year to develop products through Waterfall methods now can do so in a matter of weeks through Agile. While Agile does not work well for every activity, it can accelerate time to market for new services and adapt quickly to changes in the market environment. A leading financial services company turned to Agile to support its goal of organizing around customer experiences rather than around products. In doing so, it sharpened the focus on raising speed to market and ensuring consistently high customer loyalty scores for sales and service delivery, especially in predominantly digital channels. Agile cross-functional teams of 8 to 10 people, aligned to specific customer episodes, bring together the requisite capabilities in business, design, processes and technology. The company now is taking this approach scale across the enterprise, through waves of applied learning sessions, and is well on its way to improving productivity by three to four times.

Modernize your legacy IT. Strategy doesn’t stand still, and neither should the technology that supports it. Moving away from legacy IT is such a complex task that many banks have delayed it. In effect, they are kicking the can down the road. A few general principles will keep IT relevant: Cap legacy IT spending and reduce it wherever possible to free up funding for new IT, such as the cloud. Enable all channels with digital technology. Move to straight-through, paperless processes. Build a single smart view of the customer. And use modular systems architecture that can flex.

Find and redeploy new types of talent. As automation pervades more activities and, at the same time, banks sharpen their focus on delivering a better customer experience, their workforce must evolve. For example, Opimas, a research firm, estimates that by 2025, the rollout of artificial intelligence (AI) technology by financial institutions will reduce employment in the capital markets by 230,000 people; the asset management industry could shrink the most, with around 90,000 people being replaced by machines.

With AI spreading throughout the industry, professionals who previously performed those activities may need to retool their expertise. For banks, the greatest talent challenge may be attracting technical specialists. Banks will have to get creative in attracting and nurturing top talent, through tactics such as mobility programs for top performers in key roles, and by adapting their cultures.

Time is getting short for bank executives considering how to redesign their operating model to suit an evolving strategy. Adjusting operating models can involve getting agreement with regulators, workers councils and other stakeholders, which can easily drag out the process even when banks feel some urgency. Yet they risk being left behind by competitors that started from scratch and have the passion of insurgents. Banks that take too much time to realign or overhaul their operating models risk being left high and dry.

Thomas Olsen, Joe Fielding and Niels Peder Nielsen are partners in Bain & Company’s Financial Services practice.

 

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