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Thought Paper

How banks can drive future growth

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How banks can drive future growth

Customer-centricity

Ever since the financial crisis broke out in 2008, banks have been going through difficult times, with profitability taking a severe hit. They initially displayed a knee jerk reaction in the form of pink slips, pay cuts and IT budget slashes. However, since the problem was actually one of customer trust erosion, a

Customers are the raison d’être of any business and banking is no different. So rightly, banks are moving from a narrow product focus to wider customer centricity. Where formerly, banks gave due importance to customers, today, the entire banking process revolves around them. Banks have wised up to the fact that mere customer satisfaction is not enough; customers must delight in their services, indeed in the entire banking experience.

Although routine transactions form the bulk of the retail banking business, interactions classified as “moments of truth” – for instance, the manner in which banks deal with a complaint of credit card theft – can make or break customer loyalty. Then, there are the ‘wow’ interactions, like the introduction of a new channel, which positively delight the customer, resulting in stickiness. Growth-oriented banks have to focus on these and strive to enhance customer experience.

This customer-centric banking model needs to be supported by sophisticated technology and tools like analytics which provide valuable insights and enable better customer understanding. Banks can even go a step further and work on applications that track online behavior and facilitate understanding of real time customer needs. While this might involve some complications like privacy issues, once

crisis of credibility in fact, cost cutting proved clearly inadequate as a solution Banks are now trying to rejuvenate themselves and usher in business growth in various ways – customer and technology focus, new channel introduction and risk mitigation to name a few.

sorted out, they will take customer understanding to another level altogether.

However, all the good work done will come to naught if the bank staff is not customer oriented. A customer-centric mindset must be ingrained within employees through proper training. Also, in recognition of the importance of personalized service and relationship building, banks must dedicate relationship managers to serve niche customer segments, if they haven’t done so already.

Customer segmentation, better customer understanding through innovative tools, anticipation of client needs and customized product offerings, will go a long way in earning the much sought-after customer loyalty.

Meanwhile, creation of sophisticated pricing models based on customer value and profile will take care of the profitability angle. For example, banks can follow a differentiated pricing model, wherein they first gauge the importance that customers attach to a particular product and the price they are willing to pay, and charge accordingly.

Multiple channels

Thanks to technological innovations, banking customers have the choice of many channels. But having multiple channels is not the same thing as having multi-channel banking. What is

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Risk management Each stage of the banking process, from customer prospecting and conversion to transaction and communication, is fraught with risk. Banks today, cannot afford to just react to unexpected, adverse situations. They have to work out a comprehensive risk management policy, which enables them to anticipate problems and build risk-facing capabilities in advance so as to minimize damage. This does not entail risk avoidance, but rather, risk awareness and consequently, plans for measurement and mitigation.

An effective risk management framework calls for an efficient Management Information System and appropriate data warehousing solutions, which interface with the transaction and risk systems. Risk mitigation involves analyzing past data and setting them up as reference points. Here again, analytic engines and tools play a significant role.

Banks face risks of various kinds – credit, market, legal, liquidity, compliance and control, and even reputation risk, of which, credit risk is usually accorded greater importance than the rest.

Banks can undertake the following steps to alleviate credit risk:

• Set exposure limits for various kinds of borrowing and link them to capital funds.

• Have a credit review and renewal policy in place. For instance, fix benchmarks for fresh exposure and link customer privileges to their risk ratings.

• Set up an elaborate risk rating model wherein the ratings are reviewed periodically.

• Price risk scientifically by linking loan rates to expected risk.

One of the reasons why banks are unable to manage risk as efficiently as they should is because they lack a cohesive approach for handling enterprise risk. Different entities within the bank manage their risks individually, with no visibility or insight into how these risks interplay with those faced by other departments, functions or lines of business. It is imperative for banks to replace the current silo based approach with a holistic model.

required is a seamless, integrated, multi-channel offering that considerably reduces the chances of the transaction being abandoned midway due to process glitches. Banks should provide proactive assistance to overcome potential hiccups. For instance, when customers stay on one page of their website for a long time, an online chat window can pop up, providing customers the opportunity to sort out problems, if any.

With an array of channels, banks can also achieve cost efficiency as they can shift routine transactions like balance inquiries and account update requests to lower-cost channels (after ensuring their capability to handle them), giving branch staff room to attend to more valuable or complex activities.

Consistent experience across channels will lead to customer satisfaction. Moreover, a quality multi-channel offering does wonders for the brand and is key to enriching customer experience, whether through ATMs with advanced self-service capabilities or mobile banking or even social media. It also opens the doors to future cross-sell and up-sell opportunities.

That said, the success and popularity of virtual banking channels has not sounded the death knell for the branch, as predicted by many doomsayers. The oldest banking channel continues to attract customers. With administrative and most back end operations centralized, the branch is now a more productive sales center focused on providing significant value addition.

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IT can play a crucial role in enabling banks to take their customer-centric approach to foreign markets, and grow the business from a domestic operation to a multinational one. For instance, they can leverage technology to build a global operating model, which relies on global policies, regional hubs for back office operations and the services of strategic outsourcing partners.

This will call for the creation of an appropriate IT model, that can be standardized and scaled across locations, global hardware infrastructure, regional development centers and regional retail banking platforms etc.

Capital management

Integrated management of capital planning and consumption, efficient capital allocation and

Global applicationcapital management discipline are the hallmarks of new age banks, and the key to reducing the cost of funding. Banks need to know exactly how their products or lines of business consume capital in order to better manage assets (their risks) and capital.

A final word

There have been instances in the past, when banks tottering under recessionary conditions bounced back into the black not just by paring costs, but more importantly, by directing their savings towards strategic investments. This time around, banks need to innovate, engage with and win over customers and manage risks better, to regain the path of profitability and growth.

Core banking platform

A robust core banking platform is imperative for effective functioning of banks. Legacy systems have to give way to new age core banking solutions with the following key features:

• A unique and integrated customer database with 360 degree visibility, which enables banks to understand customer needs.

• 24/7 banking access across channels, all providing the same set of functionalities.

• Real time processing and updates that enhance customer experience and also enable bank staff to view current data across channels.

• Scalability across entities and geographies.

• True multiplicity – multiple products, integration of multiple channels, capacity to operate across languages, currencies and countries.

• Sophisticated channels such as Internet and mobile banking and multipurpose ATMs integrated into multi-channel architecture.

• Lower Total Cost of Ownership, through outsourcing of infrastructure or application management.

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4. www.rtdonline.com/BMA/BSM/18.html

5. w w w. t e m e n o s . c o m / D o c u m e n t s / Fi l e s /About%20Us/Temenos%20Newsletter/Temenos%20Newsletter%20Nov06.pdf

6. The Customer-Centric Bank: Debunking the Myth that Cross-Sell = Customer-Centric

7. www.mckinsey.com/App_Media/Reports/Financial_Services/Retail_Banking2010_Multichannel.pdf

8. www.icai.org/resource_file/11490p841- 851.pdf

Ashit Gandotra Senior Associate Consultant, Infosys

Finacle from Infosys partners with banks to transform process, product and customer experience, arming them with ‘accelerated innovation’ that is key to building tomorrow’s bank.

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