Across the globe, traditional banks have average cost-income ratios of 55-60%, whereas the new digital-only challenger banks aspire to get below 30%. Whether they can achieve that goal in the long-term is another matter – but it is worth trying.
Furthermore, the cost models of potential entrants into financial services from the technology world such as Google, Apple and PayPal, are orders of magnitude lower than those of traditional banks, eroding their margins and market shares.
Regulators worldwide are driving innovation and competition through new standards in open banking, issuing new banking licenses to non-traditional entrants, and creating technology sandboxes for banks to collaborate with new players on innovative propositions.
Customers meanwhile continue to demand more convenience and personalization across the entire banking experience, not only in the products and services provided; hence the onus is on banks to ensure digital customer journeys are seamless, channel-agnostic and proactive.
Banks spend on average 11%3 of their revenues on IT, a percentage much higher than industries like manufacturing or oil & gas (which average 3-4% of revenues on IT) and have already industrialized their processes with the help of packaged, upgradeable software. Moreover, only 27% of banks’ IT spend is on growth and innovation; the rest is non-discretionary regulation or business-as-usual, coping with legacy systems that lead to manual processes and greater integration and maintenance efforts.
Legacy landscapes are also typically characterized by high data duplication. These seriously hinder the use of advanced analytics required to proactively understand customer needs, supply regulators with necessary information, and make informed business decisions to improve performance.
Incumbent banks still possess an enormous competitive advantage over non-traditional entrants. Their scale, connectivity, assets and unique role as custodians of consumers’ financial information put banks in a prime position to capture the future market. Being regulated means implicit state support in the shape of insured deposits and access to central bank funding, resulting in lower liquidity costs and raised barriers to entry.
Historically, this has led to increased trust between the bank and the customer. The very public challenges to banks’ reputations, such as large-scale fraud and the banking bailouts, have done little to reduce this trust.
McKinsey estimates a substantial impact on the ROE of the banking sector through digitization-driven productivity improvements ( at least a 2-5% uplift) and by building on the digital foundation to orchestrate an open banking eco-system strategy (3-6% uplift). This will happen from improving margins, acquiring new customers at lower cost, and then capturing a share of some non-banking markets through the platform model. There is tangible value to be gained if banks are able to digitally transform their businesses and move from legacy systems to modern, off-the-shelf packaged software running on the latest cloud-native, cloud-agnostic API-based platforms.
There is no doubt that higher performing banks engage digitally with more of their customers, have shorter origination times for loans, and their front office staff spend more of their time adding value to customers rather than on administrative tasks. All of these contribute to greater customer satisfaction.
These banks also spend less of their IT on keeping-the-lights-on (non-regulatory) maintenance. Temenos enables operational efficiency by providing a robust digital engagement platform to improve front office staff productivity and drive self-service, improving STP rates in the front office as well as the back office through product and process automation, use of embedded workflows, digital document and signatures, and simplification and standardization in the back office. Optimized IT landscapes with packaged configurable software lowers spend on IT maintenance and operations.
Higher performing banks have more efficient and effective risk and compliance functions with higher staff productivity, i.e. staff with lower time spent on administrative tasks and more efficient operations, i.e. lower false-positive alerts. They also successfully avoid fines and sanctions – a noticeable feat in this regulatory world!
Read more about Compliance as a Driver of Banking Performance and discover the insights from the Temenos Value Benchmark Whitepaper.