Transforming banking operations through advanced operating models

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1 Transforming banking operations through advanced operating models According to recent research, banking executives believe there is untapped potential for advanced operating models to address the most strategic enterprise challenges. 1

2 About the research In 2014, Genpact commissioned a research project conducted by an independent research firm. The goal was to assess the potential for new operating models across a wide spectrum of industry sectors and functions. More than 900 senior-level executives completed the survey. Respondents were screened based on their ability to materially influence functional decisions. This analysis complements other research and insight derived from Genpact s experience designing, transforming, and operating business processes and operations. This document presents the findings drawn from 238 senior executives engaged in the banking industry. They are predominantly located in North America (81%) and come from companies with more than 10,000 employees (see Figure 1). More than 70% of the banks covered by the survey offer both retail and commercial services. The sample includes 201 banks that offer retail services and 206 that offer commercial services. Sample of more than 900 executives EMEA REGIONS SIZE* FUNCTIONS 25% 81% of banking and financial services respondents from North America alone 10% 84% 65% 84% * 15% 40% 10,000 + Risk Operations NAMER APAC *Company size defined by number of employees 16% 5,001-10,000 Figure 1 16% 95% of banking and financial services respondents from larger companies (size > 10,000 employees) Company size defined by number of employees Procurement Finance 17% 32% of finance and accounting executives from retail banking (retail only and retail and commercial both) 13% 15% Marketing 15% of operations executives from retail banking operations n=912 2

3 Abstract What are the most pressing challenges for banks? What are the differences between retail and commercial banks in the challenges they face? What functions impact those challenges the most for retail banking? What functions impact those challenges the most for commercial banking? How mature are these functions? Can new operating models of those functions help them transform? Which models can do this? In conclusion

4 Abstract As the banking industry is being restructured in the wake of the financial crisis and a rapidly changing regulatory landscape, COOs and other senior banking executives are grappling with unprecedented change. In addition to regulatory and cost pressures, there is a growing imperative to meet increasing customer expectations in a volatile market. Transforming business processes to implement advanced operating models is a big part of the solution, but levels of process maturity and preparedness for transformation vary across banking functions. For retail banks, payments processing and account setup and servicing offer opportunities for wide-ranging impact, while anti-money laundering is specialized but critical. Operational transformation in commercial banking seems more likely to focus on business banking origination/servicing and risk management. In addition, the three levers of operating model transformation technology, process reengineering, and advanced organizational structures (shared services, business process outsourcing, and hybrids thereof) create impact differently. Using commissioned research, Genpact has examined these trends to understand how banking institutions are evolving their operations to achieve business impact. 4

5 Compliance and risk management top the list of challenges facing banks today Regulatory compliance, risk management, and customer satisfaction are the biggest challenges confronting banks today Senior banking executives from across all functions were asked to rate the most important challenges facing their companies. Regulatory compliance and risk management were the most frequent responses, with each cited by 73% of respondents as one of their three most important challenges. Customer satisfaction ranked third with 60% (see Figure 2). Importance of the challenge % of respondents from banking industry stating that the challenge is among the Top 3 for their company Ensure compliance to regulations Increase customer satisfaction Increase growth and scalability Reduce costs Enable company s innovation Manage risk Enable agility and adaptability Reduce capital and asset intensity n=238 executives from retail only, commercial only, and retail/commercial banks Figure 2 5

6 Financial sector firms share concerns about compliance and risk management; other challenges vary substantially across industries Banking is similar to capital markets and life sciences in regard to how often executives attribute importance to compliance, but banking is closer to healthcare and high tech with respect to the need to increase customer satisfaction. Banking executives are less likely than their counterparts in other industries to point to increasing growth and scalability, enabling agility and adaptability, or enabling innovation as major challenges (see Figure 3). Importance of the challenge % in specific industries stating that the challenge is among the Top 3 for their company High Tech Capital Markets Healthcare Banking 1 Insurance Life Sciences CPG Manufacturing Ensure compliance to regulations Increase customer satisfaction Increase growth and scalability Manage risk Reduce cost Reduce capital and asset intensity Enable agility and adaptability Enable company s innovation 1 n=238 executives from retail only, commercial only, and retail/commercial banks n=912 Figure 3 6

7 Compliance and risk are the most important challenges for retail banks across all functions; client satisfaction ranks third To gain insights into the differences between retail and commercial banks, respondents were grouped according to whether their companies provide retail services only, commercial services only, or both types of banking. This allowed for comparisons between the 201 respondents engaged in the provision of retail services (see Figure 4) and the 206 involved in commercial services (see Figure 5). The top challenges were generally consistent across retail and commercial banks and across functions, including operations, finance, and risk, with both compliance and risk management listed as top challenges. Regulatory compliance, risk management, and customer satisfaction are the main challenges confronting retail banks today Ensuring compliance with regulations was cited most often, pointed out by 72% of retail banking executives as one of their top three challenges (Figure 4). Managing risk ranked close behind, at 71%, followed by increasing customer satisfaction at 58%. Operations executives in retail banks faced similar challenges as their counterparts in other functions. % of respondents from various functions stating challenge as among the Top 3 for their company Ensure compliance to regulations Increase growth and scalability Increase customer satisfaction Enable company s innovation Reduce capital and asset intensity Enable agility and adaptability Manage risk Reduce costs Overall Finance Operations Risk n=201 executives from retail only and retail/commercial banks Figure 4 7

8 Commercial bank operations executives rank compliance, risk, and customer satisfaction nearly equally as the top challenges Commercial bank executives face many of the same challenges as their counterparts in retail banks Ensuring compliance with regulations is often cited by commercial banking executives, with 76% indicating that it is one of their three most important challenges (Figure 5). Risk management is close behind, at 70%, followed by increasing customer satisfaction at 59%. Operations executives in commercial banks tend to give nearly equal prominence to compliance and risk management, with each at 74%, as well as customer satisfaction at 69%. % of respondents from various functions stating challenge as among the top 3 for their company Ensure compliance to regulations Increase customer satisfaction Reduce capital and asset intensity Manage risk Increase growth and scalability Enable company s innovation Enable agility and adaptability Reduce costs Overall Finance Operations Risk Figure 5 n=206 executives from commercial only and retail/commercial banks 8

9 Anti-money laundering is seen as a critical function for compliance and risk, but payments processing and account setup and servicing are perceived to have a broader impact across all key challenges In retail banking, anti-money laundering addresses key compliance challenges, but payments processing and account servicing impact a broader range of challenges To prioritize opportunities for process transformation based on business impact, banking operations executives were asked to assess the impact that different banking functions can have on their top challenges. In retail banking, anti-money laundering stood out as the most frequently cited function for addressing both regulatory compliance (89% of respondents) and risk management (77%). Payments processing (90%), followed by account setup and servicing (86%), were most frequently seen as having a material impact on customer satisfaction (see Figure 6). % of respondents stating that the function can have material impact on addressing each challenge Manage risk Ensure compliance to regulations Increase customer satisfaction Reduce costs Magnitude of challenge Magnitude of Challenge % of respondents stating it is one of the top 3 challenges in their company Payments processing Account set-up and servicing Mortgage servicing Anti-money laundering Mortgage origination Retail brokerage Multi-channel customer management Retirement services n=48 retail banking operations executives Figure 6 9

10 Payments processing is believed to have an impact on multiple key challenges for retail banks To achieve a broader understanding of the benefits of transforming each insurance function, impact indexes, which weighted the impact of each function according to the importance of the business challenges they address, were calculated. This analysis found that payments processing was most often cited as having an overall impact, with an index of 156, compared with 146 for mortgage servicing and 142 for account setup and servicing (see Figure 7). FUNCTION IMPACT INDEX* combining stated importance of challenges and stated ability of a function to address them Payments processing 156 Mortgage servicing 146 Account set-up and servicing 142 Mortgage origination 136 Anti-money laundering 134 Multi-channel customer management Retail brokerage Retirement services * Impact of a function on company's challenges is defined as f(x i ) = n j x ij y j, where x ij is the % of respondents who believe that improvement in the function x i will have a material impact on the challenge y j ; y j is the % of respondents citing the challenge as among the Top 3 n=48 retail banking operations executives Figure 7 10

11 Commercial banking functions impact enterprise challenges differently In commercial banking, more operations executives point to the business banking/ origination servicing and risk management functions as having the potential to address key challenges In commercial banking, the largest proportion of operations executives say that the risk management function can materially impact regulatory compliance (68%) and risk (80%) challenges, whereas 67% say that business banking origination/servicing can have the biggest impact on customer satisfaction (see Figure 8). % of respondents stating that the function can have material impact on addressing each challenge Magnitude of challenge Ensure compliance to regulations Manage risk Increase customer satisfaction MAGNITUDE OF CHALLENGE % of respondents stating it is one of the top 3 challenges in their company Equipment finance Business banking origination/servicing Auto finance Risk management n=35 commercial banking operations executives Figure 8 11

12 Business banking origination/servicing and risk management are believed to have a significant impact across challenges These two functions were also rated high for their ability to address multiple significant challenges (as measured through the impact indexes), with business banking originating/ servicing scoring 155, followed by risk management with an index score of 133 (see Figure 9). FUNCTION IMPACT INDEX* combining stated importance of challenges and stated ability of a function to address them Business banking origination/servicing 155 Risk management 133 Equipment finance Auto finance * Impact of a function on company's challenges is defined as f(x i ) = n j x ij y j, where x ij is the % of respondents who believe that improvement in the function x i will have a material impact on the challenge y j ; y j is the % of respondents citing the challenge as among the Top 3 n=35 commercial banking operations executives Figure 9 12

13 Anti-money laundering and payment-processing functions are regarded as most mature and prepared to mature further Anti-money laundering is considered the most mature retail banking function; retirement services and multichannel customer management are among the least mature The ability to deliver future impact in each banking function depends in part on the existing level of maturity but also on the preparedness to further evolve each function. Banking operations executives were asked for their opinions about each function s maturity and preparedness to mature further. In retail banking, anti-money laundering and payment-processing functions are seen as most mature, with 94% and 90% of respondents respectively rating them as mature or very mature. This contrasts with retirement services, which only 61% of retail banking executives rate as mature or very mature. Similarly, 98% of operational executives say that anti-money laundering is well positioned to mature further (prepared or fully prepared), and the paymentprocessing functions are close behind with 86% (see Figure 10). % of companies stated as very PREPAREDNESS prepared or prepared to mature in specified functions Size of the bubble indicates the impact of the sub-function on the company s challenges as a% of overall impact Multi-channel customer management Retirement services Retail brokerage Mortgage origination Payments processing Anti-money laundering Account set-up and servicing Mortgage servicing MATURITY % of companies stated as very mature or mature in the specified functions n=365 executives responsible for industry specific operations from retail and commercial banking, insurance, healthcare payer and life sciences Figure 10 n=48 retail banking operations executives 13

14 Most commercial banking functions are considered quite mature, but auto and equipment finance seem least prepared to mature further Commercial banking functions are considered mature; auto and equipment finance are least prepared to mature further Most commercial banking functions are relatively mature, with the proportion of operations executives rating them as mature or very mature ranging from 94% for business banking origination/servicing to 88% for auto finance. Business banking origination/servicing and risk management have the best ability to mature further, with nearly 90% rating both as prepared or well prepared, while auto and equipment finance are at the opposite end of the spectrum (see Figure 11). % of respondents stating the initiative can have a material impact on the function % of companies stated as very prepared or prepared to mature in specified functions PREPAREDNESS Size of the bubble indicates the impact of the sub-function on the company s challenges as a% of overall impact Risk management Equipment finance Business banking origination/servicing Auto finance % MATURITY of companies stated as very mature or mature in the specified functions n=35 commercial banking operations executives Figure 11 14

15 Advanced organizational structures are most frequently seen as having a material impact, but this perception varies across retail banking functions Banking operations executives see advanced organizational structures as widely applicable, but BPR and technology generate greater dollar impacts Advanced organizational structures, including shared service centers (SSCs), business process outsourcing (BPO), or hybrids of these, are more frequently cited by both retail and commercial banking operations executives as having a greater material impact than either business process reengineering (BPR) or the radically improved use of technology. In retail banking, notwithstanding the significant variations across functions, the proportion of respondents stating that advanced operational models can have a material impact on the function is highest (or tied for highest) for five of eight functions (see Figure 12). % of respondents stating the initiative can have a material impact on the function Radically improved use of technology Business process re-engineering BPO or SSC or Hybrid 1 Impact Index* Payments processing Mortgage servicing Account set-up and servicing Mortgage origination Anti-money laundering BPO Business Process Outsourcing, SSC Shared Services Multi-channel customer management Retail brokerage Retirement services Function Impact Index* combining stated importance of challenges and stated ability of a function to address them n=48 retail banking operations executives Figure 12 15

16 Advanced organizational structures are seen as more applicable in retail banking, but BPR and technology have bigger average dollar impacts Conversely, while they tend to be less applicable, technology and BPR deliver higher dollar impacts in those circumstances when they do apply (see Figure 13). % of respondents stating the initiative can have a material impact on the function AVERAGE $ IMPACT 1 Column width proportional to % of respondents stating that the initiative will have a material impact OPERATIONS BFSI OPERATIONS RETAIL BANKING 1 Annual $ impact is the impact of operating model initiatives in US$ per annum including reduction of cost, capital required, improvement of cash and revenue growth $268m $261m $267m $155m $103m $156m TECH - radically improved use of technology BPR Business Process Reengineering SSC Shared Services BPO Business Process Outsourcing TECH BPR SSC/BPO/Hybrid TECH BPR SSC/BPO/Hybrid n=135 executives responsible for industry specific operations from retail, commercial banking and insurance n= 48 retail banking operations executives Figure 13 16

17 Many commercial banking executives say that advanced organizational structures have a material impact on business banking origination/servicing, equipment finance, and auto finance Advanced organizational structures are also seen as having a broad impact in commercial banking. More executives say advanced organizational structures have a bigger material impact than BPR or radically improved use of technology for business banking origination/servicing, equipment finance, and auto finance. Technology is more frequently seen as impacting risk management (see Figure 14). Nonetheless, as in the case of retail banking, where applicable, technology is seen as having a higher dollar impact, and BPR is close behind. % of respondents stating the initiative can have a material impact on the function Business banking origination/servicing Radically improved use of technology Business process re-engineering BPO or SSC or Hybrid 1 Impact Index* 155 Risk management Equipment finance BPO Business Process Outsourcing, SSC Shared Services Auto finance Function Impact Index* combining stated importance of challenges and stated ability of a function to address them n=35 commercial banking operations executives Figure 14 17

18 In conclusion As the banking industry is being restructured in the wake of the financial crisis, COOs and other senior banking executives are focusing on the challenges of proliferating regulatory requirements, a more complex risk environment, and increasing customer expectations. This research examined how those challenges can be tackled by three levers of operating model transformation: technology, process reengineering, and advanced organizational structures. The related transformation of operations is an untapped strategic lever for the COO as well as the CEO. However, it is sometimes seen as a formidable undertaking. Few understand the IT + analytics + process operations nexus sufficiently. The technological excesses of the past (such as ERP or data warehouses) are well documented. Some technologies are unproven, some uses of analytics are unclear, and older technologies are rigid and expensive to evolve. Finally, deep analytics still frequently struggles to scale throughout the enterprise. Our experience of advanced operating models, accumulated over 15 years, clearly indicates that there are agile and practical ways to transform. The key is to design, transform, and run the processes that power advanced operating models so that they closely align with measurable business goals, thereby avoiding saddling the company with unnecessary and often unmanageable complexity. This approach focuses more rigorously on the sources of impact and deliberately disregards any practice that does not yield material outcomes. It also takes a more objective and holistic look at technology, analytics, and organizational practices. It leverages now-mature system of engagement technologies that complement system of record technologies. It treats analytics (the arc of data-to-insight-to-action) as a process and determines how to embed insight at scale into the fabric of other enterprise processes; it does not take the typical approach of viewing analytics as a task and a set of technologies. Finally, it harnesses the process and organizational levers available from established disciplines, such as reengineering, shared services, outsourcing, and global delivery. We think that there is a smarter way to transform operating models and address the most complex strategic challenges. This is a way for COOs to make their enterprises more intelligent and enable them to generate material impact. 18

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20 Genpact Research Institute The Genpact Research Institute is a specialized think tank harnessing the collective intelligence of Genpact as the leading business process service provider worldwide - its ecosystem of clients and partners, and thousands of process operations experts. Its mission is to advance the art of the possible in our clients journey of business transformation and adoption of advanced operating models. About Genpact Genpact (NYSE: G) stands for generating business impact. We design, transform, and run intelligent business operations including those that are complex and specific to a set of chosen industries. The result is advanced operating models that foster growth and manage cost, risk, and compliance across a range of functions. We have hundreds of long-term clients including more than one-fourth of the Fortune Global 500 and currently employ over 66,000 employees in 25 countries, with key management and corporate offices in New York City. Behind our passion for process and operational excellence is the Lean and Six Sigma heritage of a former General Electric division that has served GE businesses for more than 16 years. For more information, contact, banking.solutions@genpact.com and visit, Follow us on Twitter, Facebook, LinkedIn, and YouTube Copyright Genpact. All Rights Reserved. 20