retail banking in cee - roland berger · the digital transformation which retailers have already...

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RETAIL BANKING IN CEE

Digitalization of Back Office Activities

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CONTENT

PREFACE

EXECUTIVE SUMMARY

PART I – INTRODUCTION TO THE TOPIC: WHY DIGITALIZATION IN THE BACK OFFICE IS RELEVANT FOR RETAIL BANKS IN THE CEE REGION

PART II – DEFINITION AND VISION: DEFINING DIGITALIZATION, MOTIVATION, AND VISION FOR THE DIGITAL BACK OFFICE

PART III – TARGETED AREAS: KEY PROCESSES TO BE TARGETED AND APPLIED APPROACH TO DIGITALIZATION

PART IV – IMPLEMENTATION: OPERATIONALIZATION OF BACK OFFICE DIGITALIZATION AND APPROACH TO IMPLEMENTATION

PART V – SUMMARY AND OUTLOOK

METHODOLOGY AND SCOPE OF THE STUDY

ABOUT US

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PREFACE

Frigyes SchannenManaging PartnerCEE Financial ServicesRoland Berger

Patrick DesmarésSecretary GeneralEfma

In our daily life, digitalization is an often discussed and fashionable topic. Many financial institutions see this as an opportunity to gain further competitive advantage. Obviously, it is mainly elaborated in the context of sales and marketing. Back office activities were less in direct focus; however they are even more critical for success. We believe digitalization will provide for the back office and support functions a similar disruption as the industrial revolution did to textile production back in the 19th century.

This year Roland Berger and Efma conducted a holistic study to capture insights on back office digitalization. More specifically, the aim of this study is to assess the current status of the back office, identify the digital forerunners of Central Europe and provide pragmatic recommendations for success and how to avoid the pitfalls of this revolution.

In this booklet, we summarized the key findings of our assessment based on the consolidated view of the retail banking industry in CEE. The report contains insights on the approach retail banks in CEE are pursuing in order to adapt to the disruptive force of digitalization. It is structured into five parts:

I. Introduction to the topic: Why digitalization in the back office is relevant for retail banks in the CEE region

II. Definition and Vision: Defining digitalization, motivation, and vision for the digital back office

III. Targeted areas: Key processes to be targeted and applied approach to digitalization

IV. Implementation: Operationalization of back office digitalization, and approach to implementation

V. Summary and outlook

In order to get a crisp picture, we have carried out interviews with executives (CEOs, Board Members - especially COOs) of leading banks in the CEE region. The insights gathered during these interviews have been combined with the knowledge from our primary research on digital technologies and cooperation with selected fintechs.

We are convinced this report and the insights will support you in developing, refining, and reshaping your approach to digitalization overall, but especially your attitude towards digitalization of the back office.

Sincerely yours,

4 EXECUTIVE SUMMARY

5

EXECUTIVE SUMMARY

Digital technologies bring a new level of flexibility to client interaction and business overall

In order for a digital roadmap to be executable, top-level management needs to be involved from the start

Objectives of digitalization revolve around two facets: client experience and process automation

DIGITALIZATION IS THE OPPORTUNITY WHICH OFTEN CAUSES A HEAD-ACHE

The emergence of digital technologies brings new capabilities to businesses and allows them to address their clients faster, better and precisely coping with their individualism. Some financial institutions master the embedding of these new technologies very well, however for the majority of the banks it means a difficult task with numerous challenges.

New business opportunities and challenges lie in the capabilities offered by the technology. From offering and value proposition viewpoints, digitalization could be a tremendous differentiating factor. On the other hand, changes at the front end of the bank result in significant changes in the back office – Usually the head-ache of the Head of Operation.

OBJECTIVES AND REASONS FOR BACK OFFICE DIGITALIZATION

Back office digitalization has two main facets: improvement of the client experience, and automation of processes. Surely these are interconnected, but there is one key difference: in what way the starting point and the objectives are derived. While client experience oriented banks focus on improving client proximity, the process automation approach is more of an internal view on digitalization (e.g. doing things faster and better).

The three main reasons why banks digitalize their back office are to improve the response time, enhance the client experience and increase the data quality. Interestingly, there are some differences depending on the size of the bank to be observed. Small banks are more focused on efficiency improvement, while large banks are more driven by the improvement of risk management.

VISION OF DIGITALIZED BACK OFFICE SHOWS CONSENSUS

When defining a strategic vision for the digitalization of the back office, banks show consensus on several key points. Firstly, all consider the interaction points to be the key enablers of digitalization. This way more value added activities and new services can be provided. The process with which this can be achieved will gradually develop into an STP standard and only require human interaction for exception management, back-up services, and process engineering.

THE APPROACH TO DEFINING A DIGITAL ROADMAP

When defining the direction of digitalization, 50% of the banks already have a consolidated roadmap, which is in most cases part of the bank’s overall strategy. This roadmap is usually extended over a period of 2-4 years, follows an IT solution

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Shared ownership between local and group management allows the overcoming of silos between departments

There has been a shift in the focus of digitalization in the last three years towards credit admininstration, cash managamnent & CRM

EXECUTIVE SUMMARY

structure and relies on high-level business cases. Depending on the bank, this roadmap can be increasingly KPI based and more defined regarding the target picture and the appropriate road towards it.

As several banks are trying to avoid a detached view of Group management, Board and/or B-1 level field and client visits have been introduced in order to increase the insight of the management and thus the executability of the decisions made. Despite this executability, there is still a high level of theoretical reasoning and lengthy qualification processes, which lead to the currently emerging trial-error pragmatism of banks. This is underlined by the claims, that business cases often do not entirely summarize the economic rationale.

OWNERSHIP AND RESPONSIBILITY DISTRIBUTION OF INITIATIVES

The ownership of digitalization initiatives lies with the Board, often with the CEOs or Head of Retails. In 33% of the cases the Head of Operations takes on the responsibility of developing a digital initiative. The coordination has to be located at the highest level in order to overcome silos between departments.

The next step will be the central coordination between members of international groups to maximize the potential of IT solutions and people. The main priority which the responsibles are basing the decisions on, is predominantly cost reduction as it represents a hygiene criterion. The trigger of the initiatives on the other hand lies in the hands of the front office, while the trend points towards the industrialization of the decision making.

FOCUS AREAS

Compared to the previous three years, there has been a shift in focus from initiatives regarding scoring, payment processing and document management towards the digitalization of credit administration, cash management, and CRM. These are also expected to be the focal points of the digital agenda during the next three years.

When focusing on these fields, two major limiting factors have to be taken into consideration: the legal framework and client preferences. Positive developments are foreseeable in both areas. An example for this is that pioneers are already applying legal workarounds for e-signatures as the current environment does not allow for extensive usage of e-signatures across CEE.

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As the implementation is local, it is susceptible to local obstacles like the availability of labor force or technology

EXECUTIVE SUMMARY

IMPLEMENTATION

After setting the focus, most banks have a similar approach to implementing their digital agendas. The Group determines the budget and the required projects, which are delegated to local management. At this level, the set-up of the project and the break-down of tasks is conducted and then carried out by third parties.

This operative task is limited by obstacles like the unavailability of cheap labor force and technology, making it difficult to economically justify the digital developments as in many cases the IT systems are too expensive - Resulting in low or no cost saving. For the technology, banks are usually contracting local IT solution providers, but the lack of qualified programmers forces banks to reach out to expensive programming companies. This inefficiency could further be optimized by utilizing centralized Group solutions across CEE countries.

Based on the learnings of banks, in order to ensure success in digitalization initiatives, three criteria must be fulfilled: top management buy-in, a modular project approach and early involvement of IT.

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PART I

Introduction to the topic: Why digitalization in the back office is relevant for retail banks in the CEE region

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The digital transformation which retailers have already undergone, is now driven in the financial services sector by five main trends

INTRODUCTION TO THE TOPIC

FIVE MAIN TRENDS ARE DRIVING THE RECENT DIGITAL TRANSFORMATION

The digital transformation has been in full swing in the retail sector since the turn of the millennium. Moving from standardized mass offerings and non-automated paper based processes towards individualized and cross-channel offerings and automated processes. Starting with Amazon revolutionizing the digital retail space, soon followed by a wide range of early adopters entering the stage with diverse service offerings.

However, this development has not penetrated the space of the financial services market at such an early stage. It is only in the last few years that banks have started to adapt to the digital trends. Consequently, the influence of this has caused a substantial uplift recently.

Figure 1. Five trends driving the digital transformation

CONNECTIVITY

Connected systems and channels – Interaction through back end

MOBILITY

Permanent access independent of location and time

CLOUD

Unlimited data capacity and continuous data access

BIG DATA

Availability and interpretability of big customer data

SOCIAL

Connectivity and communication in online communities

0110110

Several of the trends depicted in Figure 1 are, although interdependent, individual drivers of certain behavioral changes in customer interaction and demand. They are all components of the structure of new requirements and challenges that banks are facing. Increased connectivity is pushing forward the rise of straight through processing and permanent access to the internet. This is independent of time and location, the main component of increased demand for a mobile equivalent of all web-based services. These two trends are supporting the spread of cloud based storage, big data, and social networks. This adds up to seamless, client friendly communication and decreases the effort a customer has to make for any kind of online activity.

These developments have instantaneous implications for banks. If not addressed, it could lead to the loss of the banks’ competitiveness in the volatile, uncertain, complex and ambiguous journey of digitalization:

> Accompany the self-determined client in a multimedia world holistically > Manage interaction with clients over diverse channels > Implement digitalization along the whole value chain (not only at the front end) > Disintermediate and counteract new competitors > Make use of data analytics for client centric cross-channel interaction and sales

Due to the traditional business models, which are still the preeminent in the financial services sector, there is a large need for banks to catch up with other, already heavily digitalized industries. This is also important because different financial tech companies are on the rise, and if banks do not digitalize fast enough, they will lose market share and revenue to them.

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The interaction between banks and their clients will evolve into a completely independent and self-determined relationship

INTRODUCTION TO THE TOPIC

CUSTOMERS WILL EVOLVE TO BE INDEPENDENT OF BANKS REGARDING CHANNELS AND DATA

The traditional form of interaction with clients was through the branch as the main touch-point, only supported by other channels. This has already developed into a model where the branch is only one small part of the communication strategy.

Existing channels like the ATM, the call center, and the internet have gained importance through technological advancements in the respective fields. New channels such as social networks and mobile applications have emerged due to the current trends in the field.

Figure 2. Expected evolutionary path of customer interaction

DISTRIBUTION"CLASSIC"

FORESEEABLEEVOLUTION LEVEL

IMAGINABLE EVOLUTION LEVEL

Savingsbank

CustomersMortgageprovider

Insu-rance

Creditunion

Invest-ment

companyDirectbank

Com-mercialbank

www.Call

Center

Mobilesalesforce

Mobile/Apps

Socialnetworks

ATM

Branch

Customers

today

Business clients

today

Private individuals

Customer

> Banking products and services usable anytime and anywhere

> Branch becomes one of the options, but it still assumes an important role

> Customer with complete self-determination and nearly entirely independent from bank when choosing channel and product

> Intermediaries as interface – Disintermediation of bank

> Branch as primary contact point complemented by further distribution channels

> Limited usage of direct distribution channels

Trend of customer interaction

Inte

rm

ediaries

Digi

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nd d

irect

distri

bution channels

Branch

Eventually, the interaction between banks and their clients will evolve into a completely independent and self-determined relationship which will be channeled through financial intermediaries who provide supplementary and complementary services to customers. This change is not a question of whether it will occur. The question is how fast this last evolutionary stage will be reached. From a legislative point of view, the level of involvement for third-party financial intermediaries will increase exponentially once the revised Payment Services Directive will be introduced by the European Commission. This will allow complete user-empowerment over their data and account information.

12 INTRODUCTION TO THE TOPIC

SCOPE AND METHODOLOGY OF THE STUDY AND QUESTIONNAIRE

While most banks focus mainly on the front office perspective of digitalization, in order to have instant customer involvement, we believe that the back office offers great opportunities for digitalization. The reason for this is that most of the customer interaction, activities between the products and the actual service, flows through the back office and is also highly dependent on it. It forms a base for the products and their proper marketing, sales, and servicing.

This is further upheld by all support functions and systems, which are the operative enablers of any digitalization effort a bank might attempt.

Figure 3. Schematic view of banks’ service and support functions

In order to obtain a deep understanding of the mindset of bank executives, we have mainly focused on interviewing COOs and executives responsible for operations or the digitalization of processes from the back office all the way to the front-office.

To accumulate a sufficient number of answers in an exhaustive manner, we have formulated the interviews and our questionnaire in a top-down structure, outlined by the following main topics and questions:

> Definition: How do you define digitalization at your bank? > Future vision: What is your vision on the future roles and functions of the back

office? Do you expect any disruptive changes?

Client segments

Marketing & Lead

generation

Back office activities

Product portfolio

Sales &Distribution

Clientservicing

Support functions (IT architecture, HR planning/controlling,

legal, risk management, etc.)

13INTRODUCTION TO THE TOPIC

> Goals to be achieved: What kind of competitive advantage do you want to achieve through digitalization?

> Strategy and targeted areas: Do you have a digitalization roadmap? How do you define your priorities?

> Responsibility for the initiatives: Who is responsible for the strategy? Who is responsible for the creation?

> Digitalization measures and approaches: What kind of digitalization projects are you planning for the next years?

> Implementation: What are the key obstacles of digitalization? How do you overcome them?

> Case studies and lessons learned: What were the key lessons learned during your recent digitalization project?

Following these topics we have gathered data and analyzed all answers, thus being able to formulate a complete picture of the digital landscape of CEE banks.

For better comparability of findings, we have segmented the respondent banks into small and large bank group. In our definition the large bank has more than 6.3 billion euros in assets.

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PART II

Definition and Vision: Defining digitalization, motivation, and vision for the digital back office

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The client is always in focus, we have to redesign the processes starting from their view

It’s about creating new processes, bringing value to the clients and to the bank

The overall goal is to have end-to-end automized processes

DEFINITON AND VISION

RESPONDENTS HAVE A DEVIATING UNDERSTANDING OF WHAT DIGITALIZATION REALLY IS

“Integration and usage of information technology in order to improve/automate processing, improve client interaction, control/track processes, manage and exploit customer data, and create new products, the ultimate goal being the achievement of a competitive advantage” Digitalization is in many cases a must for banks, not an option as clients - especially the younger generations - demand the introduction of modern solutions.

The quote above can be considered as the combined and common definition of digitalization for banks in the CEE region. While there were several differing and diverse opinions, the common concept was identifiable.

One very common aim of process automation is reaching straight-through-processing, meaning automated end-to-end processes.

Figure 4. Word-cloud of digitalization definitions

Digitalizationautomation

informatione-channelsscanning

building new bankwork maximum

Competitivenessvaluedata findincreaseGroup

paperlessprocessorder focus

application end-to-endoffice

solutionsuseprocessing

enablinginteraction

clienttechnologyinvolves

bettercustomerjust available

trackingincreased

definitiontouch points efficiency

always

processesfront

The identified need for end-to-end processes is further supported by the importance of client experience and the reduction of data based errors, in order to accommodate processes without - or significantly reduced - human involvement. There are several other motivators for digitalization, which are considered important

by the respondents as well.

Foremost, these are workload allocation and a short response time. As expected, there was a consensus over the importance of these factors. However, two groups really split the playing field and have shown the existence of two distinct philosophies with regards to digitalization. One group considers digitalization a way to improve their

...improve client interaction...

67%

...in order to...

...create new

products

...manage & exploitdata...

...control /track

processes...

...improve /automateprocessing...

...to...96% 8%33%42%

Integration and usage of information technology...

100%

... achieve a competitive advantage

100%

offering and make the customer experience as positive as possible, differentiating themselves from the competition. In these cases the image was considered important, and cost reduction less important. The other group is mainly business case driven and will only implement functionalities, processes, and services if those directly benefit the financial statement. Thus, they do not consider a positive image an important motivator for transformation. Interestingly, it was mostly the larger banks that

17DEFINITON AND VISION

There are many ways for digitalization. The banks need to find the right way which adds value for the customer

Response time 100%

Client experience 100%

Knowledge management 100%

Low cost position 100%

Product innovator 100%

Positive image 100%

Resource utilization 100%

Competitive agility 100%

Risk management 100%

Data quality 100%

54% 33% 13%

21% 17%63%

17% 50% 33%

54% 17% 29%

33% 25% 33% 8%

38% 21% 29% 13%

42% 29% 21% 8%

29% 46% 13% 13%

29% 46% 17% 8%

50% 33% 13% 4%

Very relevant Relevant

Fairlyrelevant

Notrelevant

considered the image aspect more important and the smaller banks that were business case driven and focused more on the financials. This can be explained by the fact that the investment costs of digitalizing are proportionally bigger for the small banks. Consequently, they want to see a quick financial return for the money they have invested, while large banks are better able to accept long-term returns through an improved image. Additional goals mentioned were the sale of data and regulatory compliance.

Figure 5. Relative importance of reaching specific goals through the digitalization of the back office

After analyzing this data set separately for large banks and small banks, the numbers show another interesting conclusion. Improving the risk management is a stronger motivating factor for large banks (91%) than it is for small banks (78%).

The reason behind this stems from large banks prefering to apply risk adjusted product pricing while small banks rather apply a standard product pricing, since it is less complex. With the help of digitalization, large banks could improve their time-to-yes and time-to-money while also delivering a more precise risk assessment. And as such, large banks could become more competitive with offering individualized loan rates to all of their clients and at the same time reduce process time.

A second observation is the difference in the motivation of achieving a low cost position. Large banks are less focused on achieving a lower cost position (45%), while it is of high importance for small banks (78%). On the other hand, this can be explained by the fact that digitalization means a proportionally larger investment for small banks than for large banks.

18 DEFINITON AND VISION

Client interaction will still require human workforce, but digitalization will change the way it is done

THE VISION FOR THE FUTURE WILL INFLUENCE SIX SECTIONS OF THE BACK OFFICE

The client still remains central in the focus and one of the main goals of back officedigitalization is to improve their experience. Banks can achieve the highest competitive advantage by investing in technologies that allow consumers to get the most convenient and seamless experience on their devices without the need of face-to-face interaction.

Consequently, the remaining five sections of the back office will be influenced as well. Automation will take over most of the work currently done by manual labor. The overall consensus is that end-to-end STP will be the norm and that the back office will operate entirely paperless by 2025. The back office will probably no longer exist in its current form and there will be staff reductions. One of the areas that is expected to gain importance due to the digitalization of the back office is the management of the data available to banks. They will be able to create newly found value..

Figure 6. Vision of the retail back office processes by 2025

Clientinteractions

Processing/operations Datamanagement

BACK OFFICEACTIVITIES

StaffChanging service scope

Process management

Manual work

A

C

B D

FE

Client Interactions

A

Client communication is usually initiated in the front office of a retail bank. All the information captured in the front still has to be processed by the back office. Currently 80% of client interactions still go through the back office. The aim for banks is to standardize and digitalize processes so the work in the back is reduced and all client information is processed automatically. Additionally, other point to be reached is omni-channel communication.

It will be a step by step development - No big bang


The recent mobility trends have led to clients demanding solutions which involve the full scope of internet banking on mobile phones. They want to get a seamless and interactive experience, both on their PCs and on the go. This is requiring banks to catch up with their product and service offering.

Besides this development on the digital side, branches will still play an important role in the acquisition of clients. Data capturing will most likely be taken over completely by the front and middle offices.

Processing/Operations

Manual work

B Overall consensus is that end-to-end STP will be the norm and that the back office will operate entirely paperless by 2025. This way the response time will be reduced and a more smooth client experience can be achieved. In their automation efforts, banks are mainly aiming to implement modular digital workflows. In order to reach high level automation, first the products, then the processes need to be simplified. The second step can be the digitalization for which two options are visible. The first is a complete

redesign of the process starting from a target picture. This option is mainly applicable to smaller banks, due to the relative simplicity and small size of their system. The second option is the step-by-step digitalization of the process. This is the choice of larger institutions with more complex core systems in order to allow for tailor-made STP. Despite the digitalization efforts, processes like cash and collection management will remain largely manual.

Process management

CThe manual operations which are currently being conducted in a factory like manner will gradually move over to the designing and controlling of automated processes, managing exceptions, and providing backup services. The back office will generate the tools for automated processes and provide the front office with the capabilities to initiate end-to-end processes. The inter-vention of the back office will only be required in the case of exceptions, which cannot be processed automatically or

in case a process needs to be fixed. There will be an exponential growth in automation (STP). As a result, the back office will cease to exist in its current form - It is only going to have a control function instead of the current operational function.

Data management

DUtilization of data is a weak point currently. The information generated in this part of the process has large potential to be capitalized on and the management of this data will thus gain importance in the future. One point mentioned by interviewees is the monetization of transactional data or the introduction of identification services using already existing user data and IDs.

Straight-through-processing will be the norm

The back office will more or less disappear in the way we know it today

Clients do not care about banking. They just want a simple way to achieve their goals

20 DEFINITON AND VISION

Banks will lose ground due to the spread of alternative financial services like crowd-funding, micro-lending, low value SEPA transfers, and community payment systems

In short: less people, more automation

Big data initiatives and cloud solutions along with coupling of other external databases are expected to reshape the back office functions with the main goal of being able to provide ad-hoc specific reports on the business. The lack of data mining experts and increased control requirements by headquarters will further drive the centralization of data analytics and CRM. The requirements by the headquarters are further enhanced by regulatory changes, making automated reporting and the development of the essential capabilities are must.

Changing service scope

EGrowing competition coming from outside the banking industry will make banks consider what their core competences are and what to focus on to keep their competitive advantage. Several functions and processes, like payment services, POS management, and cards are considered to be the first processes to be outsourced. Different fintech companies set their focus on one specific function and service for the mass market and can thus capitalize on economies of scale.

The regulatory environment will be one of the influencing factors in the barriers to entry for these players, though it currently seems to be playing in their favor. Fintechs and companies from other industries (e.g. telco, retail) provide a threat in simple, mass products (such as payments, payday loans), where they can capitalize on economies of scale. The threat from the fintech competition is not very high yet. Several banks have already initiated measures, which are either own developments or partnerships with fintechs. In the early stages this can lead to large synergy effects on both sides in terms of size and competitive advantages.

Staff

F Further FTE reductions are expected due to digitalization. However, the largest wave is already behind us (Efma CEE study: 2008: 22%, 2014: 13%, 2020: 10%, reduction overall). With the changing roles and functions the required skills will also change.

IT as well as process engineering capabilities will be sought out by companies to strengthen their process development capabilities. Manual data entry will no longer be needed as

the vision is to achieve completely automated workflows. As such, the existence of the back office and its staff altogether become a critical question.


Retail operations

Retail risk

Branch network &sales management

CRM & CM

Contact center

Product development, segment management

Marketing

Head office overhead1)

AFFE

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BACK

OFF

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DIG

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UNA

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BY B

ACK

OFFI

CEDI

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ALIZ

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N

> Major increase witnessed in outbound – Centralization and automation are expected to slow down growth

> Centralization of functions and increased IT are indicated to reduce FTEs in retail operations

-0.8%

0.2%

-0.6%

5.3%

3.0%

1.1%

2.1%

-2.1%

-1.1%

2008RECENT

CHANGESFUTURETRENDS 2020

8.5%

-4.8%

5.1%

6.5%

3.2%

-1.3%

0.7%

> Significantly increased reporting (partly regulation driven) fueled growth – With systems in place, further growth is not foreseen

> Majority of banks performed branch network optimization programs – FTEs often unchanged due to accompanied growth

> Move towards dedicated employees and department instead of cross-functional set-up as basis for FTE increase

> Growth attributable to the introduction of new segment management approaches

> Increased importance of social media and digital sales channels in near future as drivers for FTE growth

> HR, compliance and legal drivers for recent growth – Forward looking, automation is expected to slightly decrease FTE count

1) Finance, HR, Legal, Compliance, etc.

Increase/decrease >5% Increase/decrease >2% Increase/decrease >0%

HOW AN APPROVED TECHNOLOGY PROVIDER SEES THE BACK OFFICE DIGITALIZATION

Lexmark has evolved to be recognized as a lauded leader in imaging and output solutions that help people and organizations improve process and reduce cost. Their award winning imaging and output technology has continued to evolve as the world becomes more digital and connected. For Lexmark, by 2020 traditional back office processes will be invisible to the outside world. Seamless client identification and authentication at the front office will initiate back office processes quickly and efficiently delivering a compliant straight through single process.

Furthermore, there will be a shift from the cost reduction viewpoint to performance improvement and experience. Processes, initiated by the client will determine and drive the back offices processes needed to support and complete the transaction in a controlled manner. According to Lexmark, banks should define the experience for their clients’ perspective and then build out the process to support it rather than forcing a client through an difficult, non-productive end user experience which only benefits the bank. This way an effective and well thought through blueprint can be designed from the outset. According to Lexmark, it is important to focus on the reduction of processing times and friction points; by reducing unnecessary client obstacles, processes can be improved. They also emphasize that the best way to approach a digitalization initiative is by identifying the key people within the organization who will promote/force the need for change and new technology.

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PART III

Targeted areas: Key processes to be targeted and applied approach to digitalization

24 TARGETED AREAS

About half of the banks have a clear roadmap for digitalization, they work with a 2-4 year time horizon and they are based on rough quantifications

The Group has to support local management to overcome local obstacles

DIGITALIZATION ROADMAPS ARE USUALLY EMBEDDED INTO THE OVERALL STRATEGY, MAINLY AT THE GROUP LEVEL

Digitalization is still a relatively fresh topic. Most banks do not approach it as a separate matter, but more as a part of the big picture. This means, that there is no distinct digital strategy, only a chapter or sub-chapter embedded into the overall strategy. Besides the fact that it is a new topic, another reason for the lack of a separate strategy is the target. Digitalization is only considered as a means to an end, and not the goal or the target itself. It is driven by the front office and according to the priorities set by them. The overall back office budget will then be used considering those priorities.

The banks with a defined digital roadmap (50% of all banks), only about 40% have a concrete agenda and objectives they want to achieve. Depending on this agenda, the usual timeframe for the digital roadmap is between 2-4 years, with regular annual revisions. The process of setting the budget is common for all banks. They are set top-down, mostly based on a rough business case calculation.

OWNERSHIP OF DIGITAL INITIATIVES IS GENERALLY SHARED BY BOARD MEMBERS AND DEPARTMENT HEADS

As the overall strategy, the responsibility for digitalization projects is also shared differently between the Group and the local/regional level. Responsibility is usually shared between Board Members and department Heads enabling a cross-organizational approach. 30% of banks have a shared model in place, combining the CEO with the Head of Operations or Head of Retail.

Figure 7. Split of overall responsibility for digital initiatives

Chief ExecutiveOfficer

Head of Operations

Group

No specific owner

Head of Retail

Head ofIT

Head of Strategy

8%

25% 4%

4%25%17%33%

25TARGETED AREAS

Cross-country pooling of knowledge between units presents large opportunities for the group-wide implementation of digital initiatives

The CEO or the Board Members have a supportive and supervisory role. The local or regional Retail Heads have the direct responsibility for executing the initiatives, sometimes shared responsibility as well. Often, a special unit is formed under the Retail Heads in order to coordinate digitalization initiatives.

The sharing of responsibility for digitalization can differ depending on the size of the banks. Small banks differ from large banks mainly regarding the fact, that the ownership of digitalization initiatives is more shifted towards the Head of Retail and the CEO. At large banks, this responsibility is mostly assumed by the Head of Operations or has no actual owner, as it is in 36% of the cases. The overall long-term plan of banks is to either establish a Chief Digital Officer position or to delegate the activities of digitalizing the back office to line managers - who are then supported by the IT department. From 2013 to 2014, the number of CDO positions on a cross-industry level is estimated to have doubled, but currently only 4% of financial services institutions have a CDO.

Another position emerging in the CEE region, which could inherit the responsibility over the digital roadmap is the Head of Strategy. This position is only present at 4% of surveyed banks. It will gain importance with time and take responsibility for the planning and execution of digital roadmaps.

Within the organization there are 3 different organizational set-ups a bank can initiate: the hierarchical model, the collaborative model and the embedded model. In the first one, all main digital activities are centralized in one department. In the collaborative model, business units only assume responsibility for activities which are less transformative for the digital agenda of the organization. The last option, the embedded model allows for all business units to control the digital activities which concern them. Out of these three, the most efficient and sustainable one is the collaborative model, as it provides flexibility for silo and cross-silo initiatives.

WHILE COST REDUCTION IS IMPORTANT, BUSINESS POTENTIAL IS STILL THE MAIN DRIVER OF DIGITAL INITIATIVES

The priorities for the business year of a retail bank are various and come from various sources. Built up from group level, regional, local strategies, business activities, back office initiatives and regulatory requirements. Priorities are defined and depend on the necessity of a digital project or product innovation.

Defining back office digitalization priorities

One of the key inputs to annual digitalization priorities is a strategic document originating from group level or local strategies. The mid- and long-term goals that have implications on digital processes or existing IT systems will be translated into annual targets and will shape the basis for digitalization projects in that year.

One step further, it is the front office which is the key driver behind digitalization, also influencing all back office developments. Based on what clients need and require regarding services and products, the front office will route these needs to the back office. They will have to define the appropriate processes to facilitate these changes.

26 TARGETED AREAS

On the other side, innovation is also driven by competitors and the overall digital maturity of the market. Since back office initiated projects are usually targeting capabilities to better accommodate new front end solutions, silo thinking needs to be avoided and the co-operation between front and back needs to be functional.

Figure 8. Main decision making criteria

Mentioned among the TOP5 decision making criteria

Businesspotential

Strategic fit

Strategic fit

Cost reduction

Influence on customer experience:innovation & mobility

Influence on customer experience: reduce lead time

Revenue increase

FTE reduction

Material cost reduction

Local strategic fit

Regulatory compliance

Data quality/transparencyimprovement

Low execution complexity

Group strategic fit

Short execution time

Availability of resources/capability

Level of investment need

63%

71%

63%

54%

46%

46%

42%

33%

25%

25%

20%

13%

8%

One factor that cannot be influenced on either group or local level are the regulatory requirements. 42% of survey respondents consider the need for regulatory compliance one of the most important prioritization criteria for digital initiatives as they are considered obligatory and non-optional. These projects are responsible for 30-50% of the digitalization efforts.

Decision making criteria

The main driver behind digital projects is business potential which translates into revenue increase through improved customer experience and data management. Regarding the customer experience the two main focus points are reducing the lead time and implementing innovation and mobility. The business cases, including cost-benefit analysis (CBA) with qualitative and quantitative indicators play a secondary, yet a crucial role. A commonly encountered difficulty with the business cases is the estimation of revenue increase potential, since it is even after implementation not always instantly measurable. The two cost factors which are significantly important target areas for the banks are the reduction of full time employees (and thus their wages) and the reduction of material costs. It is interesting that the question of the digitalization initiatives being a right local or group strategic fit is less important for the banks than the business potential and cost reduction issues. This is due to the fact

27TARGETED AREAS

The rise of the individual risk based scoring development is foreseeable, as digital tools allow for more efficient assessment of individual risk levels

that most banks do not have strategic plans regarding digitalization for longer periods than a year. They focus more on the instant effects of digitalization which they could achieve within a year, instead of formulating long-term plans for digitalization that span over several years.

The responsibility to evaluate these decision factors falls into the responsibilities of the IT department which will evaluate costs, resources needed, and the feasibility of initiatives. If the project proves to be larger, regarding timeframe or costs, it is preferably split into two or several sub-projects going step-by-step towards the target picture.

The final decision is then made by one responsible project sponsor or by a voting system which is an existing practice in relatively smaller banks to support the decision making processes.

THERE IS A SHIFT IN FOCUS FROM SCORING, PAYMENT PROCESSING & DOCUMENT MANAGEMENT TOWARDS CREDIT ADMINISTRATION, CASH MANAGEMENT & CRM

Figure 9. Digital initiatives conducted or to be conducted

Scoring

Payment processing

Cash management

Credit administration

Sales support/CRM

Past 3 years Past 3 years and currently Currently Currently and next 3 years

Next 3 years Continuously Not in focus

Credit application

Collection management

Account & depositadministration

Document management

100%33% 17% 17%8% 25%

100%13%4% 8% 25%33% 13%

100%21% 25% 17% 21%13%

100%8% 8% 17% 21% 17%8% 21%

100%33%38%17% 13%

100%25% 8% 29%13% 21%

100%29% 21%8%13% 21%

100%33% 4% 8%17% 13% 21%

100%21%21% 17%13% 17%13%

4%

4%

4%

4%

4% 4%

Scoring

The developments in credit scoring were mostly achieved in the past three years. After the crisis banks have set their priorities on revising their credit scoring and tried to standardize their methodologies on a group level as much as possible. Most of these projects are now completed. The focus is now expected to shift from the retail to the corporate segment. Furthermore, there is a constant need for fine-tuning, due to regulatory changes. This involves need for calibrations, implementation of new feeds, and more. Methodological differences of equal risk and individual risk based pricing are expected to continue. Currently, available digital tools allow for more efficient assessment of individual risk levels. Therefore, a rise in the individual risk based scoring development is foreseeable.

28 TARGETED AREAS

Credit application is one of the most important areas for digitalization, with the ultimate goal to improve time-to-yes and time-to-money for mortgages and consumer loans

Payment processing

EU level regulations (e.g. SEPA) are one of the main drivers for the majority of changes which are and will be taking place in the area of payment processing. Although high STP share has already been achieved (close to 100% in domestic transactions), there are further points which need to be addressed. These future focus areas for digitalization initiatives are going to involve mobile payment systems and improved capabilities by extracting client transaction data. The latter is expected to bring new business opportunities to retail banks by offering third party targeted shopping history based advertisement opportunities.

Document management

Most banks have already finished their document management process updates with some completing them in the near future (few months). For the implementation of the upgrades, banks have put their focus on e-signatures, centralized paperless archiving, and DMS implementation. The key goal will be to centralize the existing fragmented solutions into one single system.

Account and deposit administration

The majority of banks have already achieved full automation in this area: improvement potential is seen in the services offered for clients, e.g. reporting possibility towards authorities. However, it is important to assess these areas in the light of their importance on the overall customer experience and client churn. Continuity and zero defect operation are the ultimate KSFs. From a technical point of view, no disruption is expected in the near future

Collection management

A lot has been done in the past years especially in terms of workflow optimization. Multiple banks have recently introduced entirely new tools to manage collection processes and developments will still be initiated even if not as many as in credit application. Future initiatives will focus on workflow optimization, event triggered and early collection measures, and the extended use of e-channels. Despite all of these, there is still a limit to the initiatives, since it is not yet technologically feasible to completely automize this process.

Credit application

The process of credit application and origination is still heavy on human interaction in the back office. It is one of the most important areas for digitalization with the ultimate goal to improve time-to-yes and time-to-money for mortgages and consumer loans. The majority of banks have already introduced a digital workflow or a fully automated process for the PI segment. Currently, the focus is more on the SME side, on loan origination at retail partners and on mortgages overall. In the past, a considerable FTE reduction has already been achieved through different initiatives and now the focus has turned to digital signatures, DMS, and paperless projects. Many of these are also driven by the regulatory changes.

29TARGETED AREAS

Credit administration

In credit administration there is still need for constant small improvements which will lead to several changes in the future. It is considered a somewhat important area and it will remain so in the next three years. A larger focus on SMEs and on credit cards is expected.

Cash management

There is no significant digitalization expected in this area. Banks in the region are concentrating on initiatives to reduce cash usage. This is however, driven by the overall social development. This can partially be accelerated by offering modern payment methods such as the e-wallet.

Sales support/CRM

The local and group level strategies of banks are putting special emphasis on the digitalization potential in data management. As there is no real centralized client data management system, there is still a lot of improvement necessary in order to enable proactive client communication. Another benefit of centralized data management is the monetization potential of the data for other industries, the legal implications of which have yet to be reviewed. Several banking groups launched projects to centralized data analytics in order to develop the required capabilities, but also to keep this crucial source of information in their hands.

Several banking groups launched projects to centralize data analytics

31

PART IV

Implementation: Operationalization of back office digitalization and approach to implementation

32

There is untapped potential at the group level, which could develop into an IT solution provider role enabling smaller countries state-of-the-art technology

IMPLEMENTATION

IMPLEMENTATION RESPONSIBILITIES

On-time and quality realization of digital initiatives is essential in reaching the admired business impact. In order to gather the best team for the projects, banks extensively utilize group level expertize, technical providers, and often 3rd party consultants. The graph below shows the importance of different capacity sources in digital initiatives.

Figure 10. Average importance during implementation [pts]

Note: Importance is evaluated on the scale of 1-4. 1 is not important and 4 is important

Groupcontri-bution

Internal resources

3rd partyconsul-tants

Techpro-

viders

Partners/Fintechs

3.6

2.4

1.9

2.8

1.6

Internal resources (local) are usually responsible for the pre-project setup work, alignments and involvement of IT. Knowledge of internal IT is crucially, especially in their understanding of the core banking systems and the overall IT architecture of the bank. Many banks admit that IT is often involved too late. An underlying reason for this could be the limited amount of resources in the IT departments and large backlogs in the IT priority lists.

The Group mostly defines or validates the project budgets. Content and capacity contribution is provided only to large projects. In some cases, the Group assumes the role of technology provider and it provides Group standard IT solutions (e.g. Document Management System). We see in this area large untapped potential as by leveraging the Group economies of scale, even smaller markets (such as CEE) could afford more state-of-the-art technology. Pioneer institutions have already established Regional Centres of Competence aiming to unify the IT architectures and to deploy good practice capabilities to smaller markets.

Third party consultants are rarely used by the banks, mainly due to budget constraints. If they are used, their support is utilized in collecting benchmarks and good practices. Furthermore, project management support is often requested.

Technology providers are extensively used by the banks. Their support is demanded not only in the conceptual setup phase, but also during the actual realization. Banks rate their implementation or tailoring capabilities as rather weak. Most of them offer one-size-fits-all solutions with limited customization.

Fintech and other partners are rarely called in by banks. Even tough these partnerships bear limited costs and ensure global technology reach, it is weakly utilized by banks. We foresee these partnerships to gain in importance and they will shortly become key innovation forums.

33IMPLEMENTATION

OBSTACLES OF IMPLEMENTATION

The implementation of digital initiatives is often significantly obstructed by implementation obstacles which can certainly be overcome through proper project management. The top mentioned obstacles of implementation are the unavailability of required technology internally and unclear and/or lack of business cases.

Another important obstacle which is specific to the CEE region is the availability of relatively cheap labor force. This is the reason why business cases are usually not straightforward and the financials are not always in favor of digitalization. Another commonly mentioned obstacle throughout all layers of management is the scarcity of quality programmers. In fact not only at banks, but this issue has become a key limiting factor in enabling digital initiatives to become reality.

Figure 11. Criticality of implementation obstacles

Unavailable technology (of the bank) 100%

Available cheap labor force vs.digital solution 100%

Readiness of the organization/resistance by employees 100%

Conflicts between IT and Business 100%

Low acceptance by the clients 100%

Unclear or lack of business cases 100%

71% 4%25%

29% 17%54%

Regulatory constraints 100%

Long project realization timeframe 100%

Complexity of business processes/products

100%

17% 33% 50%

33% 46%21%

Lack of internal capabilities(especially IT) 100%13% 33% 54%

16% 42% 42%

Complexity of legacy IT systems 100%

Financial constraints/otherbusiness priorities

High criticality

100%

Low criticality Negligible

12% 21% 67%

8% 54% 38%

34% 33% 33%

35% 52% 13%

42% 46% 12%

42% 29% 29%

An important external factor mentioned by the majority of bank executives is the low acceptance of clients. This is often due to a lack of effort to adequately educate or even introduce the clients to the new possibilities. Digital devices and remote banking are increasingly accepted by clients, this is propelled by the emergence of digitally native Y and Z generations. Lack of internal capabilities means a bigger obstacle for small banks than large banks. The reason behind this is evident, as big banks have larger internal capacities with a higher chance of having internal talent.

Financial constraints and complexity of legacy IT system capabilities are of low criticality or even negligible to banks. Furthermore, most banks experience regulation and competition from non-banks as the main external hurdles for transforming their business models.

34 IMPLEMENTATION

HINTS TO OVERCOME THE OBSTACLES

Not limited to the financial sector, IT has become one of the key market drivers instead of being a simple business enabler. Banks are required to proactively manage the obstacles of implementation in order to make digital initiatives a success. Digital project management needs to be specifically addressed to deal with the level of agility and flexibility incumbent to the digital world. This can be achieved through strong client orientation, which incorporates client-centered practices and test groups in the concept, development, and roll-out phase. Banks agree top management buy-in, modular project approach, and early involvement of IT are crucial to reach good results in digitalization.

Important for a successful digital project is to appoint the right project sponsor. Banks need to select person who is demanding, energetic to motivate, and able to penetrate the silos between departments.

Next, it is crucial to study the best practices. Ensure proper preparation and topic understanding among participants - Discuss good and bad examples to broaden the common view and goals.

Without acceptance by employees, the initiative will certainly not yield the desired results. Create buy-in and align understanding from the start of the process through clear communication and messages, as well as group level awareness meetings.

An often neglected step is the need for proper data cleaning. Review the data sources, check for validity and create a single source of truth going forward.

Another key take-away is to apply a modular project approach. This requires to cut the project into manageable sections with clear deliverables to avoid a long project realization timeframe and consequent loss of focus. Naturally, without the buy-in from top managers, the project is deemed to get surpassed by other tasks in terms of priorities. Projects driven from the top have a higher priority in the organization, resulting in a shorter and more focused implementation.

Last but certainly not least, early involvement of IT is crucial. Here it is important to create a testing and feedback loop with IT experts to ensure applicability and usability outside of the conceptual and development environment.

35IMPLEMENTATION

37

PART V

Summary and outlook

38 SUMMARY AND OUTLOOK

SUMMARY OF FINDINGS

While traditional and digitally native companies are embracing new technologies and merging their business models and processes with digitalization, the financial services industry - and especially banking sector - is lagging behind.

As clients are being influenced by digital technology in their everyday lives, they are expecting the same level of maturity in their interaction with their bank. This is one of the drivers of the recent boost in digital initiatives by financial institutions. Another facet of digitalization is the automation of processes, which on the one hand reduces error rates in data and document processing, and on the other hand reduces costs incurred in the back office. Based on these two factors, banks have to define and include a digital strategy into their overall strategy and business models. Our study assesses the regional approach of top bank executives regarding the definition, setting of priorities, and the implementation of digital initiatives.

DEFINING DIGITALIZATION, MOTIVATION, AND VISION FOR DIGITAL BACK OFFICE

In this digital movement, banks show a consensus regarding the digital back office vision. External interactions will be the key enablers for further initiatives as the back office has to ensure more value added initiatives and the provision of new services for clients or external partners. From a processing standpoint, human interaction will move gradually into the background and will be limited to exception management, back-up services, and process engineering. Besides these inclusions of human workforce, all processes should reach the STP standard in the future and enable the process to be executed from input to output without any intervention.

STRATEGY, PRIORITIES, AND TARGET AREAS OF DIGITALIZATION

In order to execute the defined strategies, 50% of banks have already defined a roadmap for digitalization, which is still for the largest part inclusive of the overall strategy and is extended over a 2-4 year timeframe with annual revisions. The responsibility for digitalization is often shared between the local and group level leadership and is supported by extensive business cases, which despite being focused on digitalization, do not always summarize economic feasibility of the initiatives. The wider involvement of the group and the pooling of knowledge pose an opportunity for the future of which banks have yet to make use.

The triggering entity for digital initiatives is usually the front office, which identifies a certain client or optimization need and communicates this need for an initiative to the back office. The ownership of these projects mostly lies with the Board, often with the CEO, Head of Retail or Head of Operations.

In the past 3 years the focus was mainly on scoring, payment processing, and document management, but a shift in preferences can be observed. As a result of this shift credit administration, cash management, and CRM are moving into the focus.

39SUMMARY AND OUTLOOK

When planning these digitalization strategies banks have to take into account the two main limitation factors: client preferences and legal limitations.

IMPLEMENTATION OF DIGITAL INITIATIVES

In the implementation banks are following a similar method, which is a collaborative approach between the Group and local management. The Group defines a budget and the required projects, which are broken down into tasks and delegated to local management. Local management then hires third parties to execute the operative side of the project.

As the initiatives are mainly carried out on a local level, success also depends on the local availability of cheap labor force and technology. To allow for an economically feasible execution, group level synergies have to be achieved, which facilitate the common implementation of digital innovations throughout the entire network. This would partially also negate the lack of quality programmers on a local level.

Overall, there are three key criteria for the success of digitalization initiatives: top management buy-in, modular project approach and early involvement of IT. Furthermore, each project requires a responsible sponsor, who is able to penetrate silos between departments and enables the exchange of knowledge and best practices. The communication directed towards employees must be clear and convincing in order to enable acceptance. Furthermore, responsibility must be assumed to properly prepare and validate the data and its sources.

40



METHODOLOGY

Roland Berger has conducted representative interviews among top managers of major CEE banks with Efma’s continuous support, which built the backbone of this study on the digitalization of banks’ processes and in general back office activities. The main objective was to provide regional insight on what different bank executives see as relevant areas and what plans they have to counter certain obstacles they are facing. The main questions we have formulated are the following:

> How is digitalization defined throughout the region? > What is the vision on future roles and functions of the back office and what disruptive changes can come? > What kind of competitive advantage does digitalization provide? > How many banks have a roadmap for digitalization and how are priorities set? > Who is responsible for digitalization strategies and their creation? > What kind of projects are banks in the region planning for the coming years? > What are the key obstacles of digitalization? How can they be overcome? > What are the key lessons that we can take away from the different projects?

The Digitalization of Back Office Activities study was completed through the cooperation of over 25 leading banks in their respective countries throughout CEE. The study covers 11 counties, namely Bosnia and Herzegovina, Bulgaria, Croatia, Czech Republic, Hungary, Poland, Romania, Russia, Slovakia, Slovenia, and Serbia.

Figure 12. Study sample highlights and countries in scope

Roland Berger project experience &expert network

41METHODOLOGY AND SCOPE OF THE STUDY

In addition to the regional coverage of our interviews, we have summarized case studies from a leading technology provider, who supports several banks in the development or operation of their IT infrastructure. Together with our vast project experience and expert network, we are confident that we can provide new insights on how regional competitors think about digitalization.

As the methodology outlined in Figure 13, the first step was to define the framework and required data about the banks’ digital back office activities. This was jointly conducted by Roland Berger and Efma. As a second step, interviews were conducted with top level executives followed by the collection of individual KPIs, based on our survey guidebook.

Figure 13. Study methodology

As the third step, the collected data and information was analyzed. Next the preliminary findings and conclusions were determined and compiled in a preliminary report, which provided the base for the final Efma report. As a final step the Digitalization of Back Office Activities study got published and communicated by Efma in December 2015.

Efma provided continuous support during the entire report writing process. They played a crucial role as facilitator in organizing interviews, providing contacts, and often acting as an intermediator between Roland Berger and the banks. The conducted interviews with top managers serve as a representative sample of the CEE retail banks’ digitalization efforts, activities, and projects.

Definition of the framework & preparation

Data collection & interviews

Analysis & writing the study

Communication & presentation of results

43

ABOUT US

Efma

As a global not-for-profit organisation, Efma brings together more than 3,300 retail financial services companies from over 130 countries.

With a membership base consisting of almost a third of all large retail banks worldwide, Efma has proven to be a valuable resource for the global industry, offering members exclusive access to a multitude of resources, databases, studies, articles, news feeds and publications. Efma also provides numerousnetworking opportunities through working groups, webinars and international meetings. True to its vocation, Efma has recently developed an Innovationportal which aims to identify and award the most innovative projects in the retail financial services arena.

For more information: www.efma.com

Roland Berger

Roland Berger, founded in 1967, is one of the world’s eading strategy consultancies. With 50 offices in 36 countries, the company has successful operations in all major international markets. The strategy consultancy is an independent partnership exclusively owned by about 220 partners. Roland Berger has also made a name for itself beyond the standard consulting business, establishing itself in the field of research and development. Numerous studies on current business and management issues bear the company’s logo.

The Roland Berger Academic Network, an association established in 1998 and comprising various universities, puts the company at the core of a continuous exchange of theoretical and practical knowledge. In addition, Roland Berger sponsors, chairs at several universities and publishes the „Roland Berger Academic Network” and the „Papers on European Management” series

Visit www.rolandberger.com

44

Many thanks to the following persons for collaborating in the production of this study:

Roland Berger Partners, Principals, Project Managers and Consultants who helped collect the data with the participating companies: Frigyes Schannen, Codrut Pascu, Nikita Ponomarev, Alina Florean, Alexander Klimov, Balázs Zoletnik, Michal Carny, Ákos Újlaki, David Soós, and Christian Nobl.

Furthermore, we would like to thank Patrick Desmarès, Lukas Dzuroska, Lubomir Olach, and Patrik Ruman, our partners within Efma for providing insights, industry expertise, and overall guidance.

Roland Berger Financial Services team for analyzing the data and writing the study:Alina Florean, Alexander Klimov, Balázs Zoletnik, Michal Carny, Ákos Újlaki, David Soós, and Christian Nobl.

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