Accenture: Three hats, two speeds, one goals - Edwin Van der Ouderaa
All traditional banks - and all big new entrants into the financial services space - know that they must focus on developing cutting-edge digital services. For the old guard, the transition to the digital arena is complex and potentially expensive, but the head of Accenture's digital financial services team, Edwin Van der Ouderaa, believes that there is a way to stay at the cutting edge of innovation while reworking a bank's legacy IT infrastructure.
Customers now expect fully seamless service from their banks across all channels, but the banks themselves are often working with complex core IT systems that are stuck in the last century and are not well adapted to the digital era. Revamping those core systems is a lengthy and expensive process that banks must grapple with while trying to remain competitive with new entrants and responding to a rising tide of regulation. How can banks slip the shackles of legacy systems and keep up with the more nimble new entrants?
Edwin Van der Ouderaa, managing director of financial services digital and analytics EALA at Accenture, may have many of the answers. His job is to help banks gain momentum in their push into the digital arena. He has seen a big change come about in the attitudes of traditional banks as they jostle for position on digital frontiers such as mobile banking.
"All banks see their strategy as digital. Strategy and digital services are the same, but things are changing fast. Everybody in the industry now knows that digital is coming and they now know what it means. There is a perfect storm. Banks see customer behaviour changing radically, and regulatory pressure is increasing and it has pushed up the cost of capital," says Van der Ouderaa.
As a leading systems integrator and business consultancy, Accenture is helping many banks to formulate and implement their digital strategies. The focus is on defining customer journeys to identify when and how individuals or businesses need financial services and, as a result, how banks can ensure they are there to provide the right services in a smooth and seamless way. More and more of those customer journeys begin with a mobile device.
"I have spoken a lot about developing an omnichannel strategy, but that has moved on now. The need for real-time integration of all multichannel services has shifted across the world. Everywhere, the shift of customers to mobile has grown faster than expected. All other channels are now auxiliary to mobile, real-time, paperless, straight-through processes. People will try a transaction through mobile first and if it doesn't work then they need to talk to someone - probably through FaceTime or another video link, then perhaps in person. The speed of the shift to mobile means that branches are emptying faster than expected," says Van der Ouderaa.
"Banks should be focusing on making the back-end into a paperless, straight-through-processing (STP), real-time environment to match the mobile front end, which will require massive re-engineering. It could mean robotic solutions to improve the speed of manual operations while the back-office is reworked, as they could handle 95% of the tasks and leave the 5% that are exceptions to be handled by specialists. The change model now is 'three hats, two speeds'."
Wearing three hats at once
In large, established banks, the branch network and back-office infrastructure require huge change programmes that may take three to five years to complete. These banks cannot wait that long if they are to keep pace with the new, more agile entrants to the financial space and stay in tune with customers' expectations. The big challenge, therefore, is to move fast into the digital space while taking time to make the fundamental large-scale changes to systems infrastructure in the background.
"Banks need to ensure digital capability by forming a group of business and IT people, with support from other teams such as marketing, who are focused on the digital space to implement fast initiatives. Simultaneously, banks should be working on transforming the core of their systems," says Van der Ouderaa.
These teams need to wear three different hats. The first is the banking hat, under which the focus is on ensuring business viability and strong financial performance, and also creating the conditions for the two-speed transformation. The second hat is digital intelligence, where the aim is to understand and anticipate customer needs, analyse disruptive technologies, building digital capabilities and focus on user experience. The third is the technology hat, which signifies the implementation of more scalable, flexible, open technologies, while supporting and incorporating innovations, and helping the bank to realise the value of its data.
"Banks need these three teams to ensure they don't end up simply offering traditional banking services in the digital space with the same classic processes," says Van der Ouderaa.
In a bank where the core systems infrastructure does not pose too many problems and the distribution capability for products is in good shape, there is an opportunity to concentrate on a gradual transfer of existing processes based on the main customer journeys and to drive best practice.
"If the core is really ugly then it is probably the case that the previous changes in the past 15 years have not been successful, though they were probably very expensive. So, let's not do that again. Instead, create a greenfield bank that is radically different. It is best to start from a blank piece of paper, though you can use some existing components," Van der Ouderaa suggests.
"In this case, the old bank is operated as a run-off business as people are migrated - invisibly - to the new environment. So, you keep the lights on in the old bank while you invest in the new bank. This is an industry in transition and banks must stay on the innovation curve. Innovation is not necessarily expensive because reducing legacy costs improves the cost-income ratio. Digital innovation can lead to a fundamental transformation of the cost structure."
The branch is dead, long live the branch
In light of the growing regulatory burden and the challenge of new entrants to the financial services space there is a pressing need for banks to bring down their cost-income ratio, which is often around 70% for a retail bank and 35-50% for a wholesale bank, according to Van der Ouderaa. Branches would seem to be the obvious victim of any cost-cutting strategy.
"In a digital bank with no branches, the ratio is around 35%. This is a historic opportunity. Digital transformation is the only way to drastically bring down the cost-income ratio. Everything is becoming mobile, so there is less need for branches. Distribution is 60% of a bank's cost, but this could be halved if there were no branches. 25% of cost is the back office, but this could be halved with robotics and STP. So, a bank could quickly get its cost-income ratio down to 40-45%," he explains.
"Having said that, while some banks are getting rid of branches, we actually defend the branch. The banks that started as purely digital banks are now opening branches because it gives them important shelf space on the high street. It is about brand presence. Unaided awareness of a brand is very important for banks and the internet is a lonely place. Branches also give a bank a personal relationship with customers. Even if a bank is aiming to make 98% of its interactions paperless there is still that 2% that requires a person and is not necessarily suited to a videoconference."
The type of branch that Van der Ouderaa is defending, however, has no tellers and possibly no cash. It may, in fact, be a pop-up branch with a sofa, a cubicle and a shared screen. It is enough to provide a comfortable and private environment for a personal interaction.
"It just has to be the essence of a branch. It doesn't need a lot of bricks and mortar. Pop-ups can be very successful. We have analysed customer loyalty and found that it no longer exists in the traditional sense. A loyal customer is just one who has not left yet. A bank has to approach loyalty very differently now. Trust has to be earned by giving customers what they need and being reliable in order to remain first choice. It is about having the right products at the right price and giving the customer the right experience, which is partly why branches are still relevant," he remarks.
"Digital disruptors are having a strong effect and a front-end that operates across customers' accounts held at different banks could disintermediate banks to the level of mere utilities. The more digital a bank becomes, the more it must focus on personal relationships. It seems like a paradox, but it isn't. The personal relationship is the endgame when digital processes take away all the friction. The only thing left to fight for is the personal relationship in front of those processes."