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4 Top Challenges Facing The Banking Industry Right Now

Jessica Schubert

woman using ATM at a nonbankHow is the traditional banking industry keeping up with today’s constantly changing technology landscape? Not very well it seems, according to the video, “Addressing Start-up Competition,” by SAP and IBM.

Banks are facing challenges in several areas, but there are four that stand out in today’s market.

The top 4 challenges facing banks and financial institutions

  1. Not making enough money. Despite all of the headlines about banking profitability, banks and financial institutions still are not making enough return on investment, or the return on equity, that shareholders require.
  1. Consumer expectations. These days it’s all about the customer experience, and many banks are feeling pressure because they are not delivering the level of service that consumers are demanding, especially in regards to technology.
  1. Increasing competition from financial technology companies. Financial technology (FinTech) companies are usually start-up companies based on using software to provide financial services. The increasing popularity of FinTech companies is disrupting the way traditional banking has been done. This creates a big challenge for traditional banks because they are not able to adjust quickly to the changes – not just in technology, but also in operations, culture, and other facets of the industry.
  1. Regulatory pressure. Regulatory requirements continue to increase, and banks need to spend a large part of their discretionary budget on being compliant, and on building systems and processes to keep up with the escalating requirements.

These challenges continue to escalate, so traditional banks need to constantly evaluate and improve their operations in order to keep up with the fast pace of change in the banking and financial industry today.

This information was based on Finextra’s video: “Addressing Start-up Competition,” featuring SAP and IBM representatives at SAP’s Financial Services Forum in London, England, June 2015.

For an in-depth look at how digital technology is transforming the business landscape, download the new SAP eBook, The Digital Economy: Reinventing the Business World.

To learn more about the business and technology forces driving digital transformation, download the SAP eBook, Digital Disruption: How Digital Technology is Transforming Our World.

What are the 3 Greatest Challenges Of Core Banking Transformation?

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About Jessica Schubert

Jessica Schubert is the Director of Global Partner Marketing, IBM Alliance Lead, at SAP. Her specialties include strategic partnerships, business alliances, go-to-market strategy, product marketing and demand generation.

Time For Banks To Fight Back

Laurence Leyden

Metamora, Illinois, USA --- USA, Illinois, Metamora, Close-up of man photographing checque --- Image by © Vstock LLC/Tetra Images/CorbisThe financial services industry has suffered consecutive blows in recent years. The global banking crisis, new regulations, empowered customers calling the shots, not to mention a new breed of digital disruptors out to steal market share, have wreaked havoc on business as usual.  Profits have been slashed, reputations have been damaged, and management has been blindsided.

The only way forward is change – a change of business model, a change of mindset, and a change of ecosystem.  It’s a major upheaval, and not to be taken lightly. Banks in particular have operated largely the same way for the past 300 years. Management is facing a once in a generation reassessment of 21st century banking.

Changes in customer behaviour, including 24×7 omnichannel service expectations, lack of loyalty by current customers willing to exchange privacy for easier access to information, generational expectations of future customers – “screenagers” and tech savvy Millennials – and technology advances in cloud, mobile, real-time data, and predictive analytics make yesterday’s business model redundant.

Banking isn’t actually about banking anymore. It’s about enabling people’s lifestyles. That means you have to completely re-think how you engage with customers. The lessons are everywhere in parallel industries. Nokia, for example, thought it was about the phone, not the customer experience. Digitisation has both emboldened and empowered customers. Ignoring this fact is pointless. You need to cater to what consumers want. That means your back-end systems need to be integrated, consistent, contextualised and easy to deploy across any channel.

There’s also a whole new ecosystem required to support this new business model. Banks are facing disaggregation as they no longer own the end-to-end value chain, as well as disintermediation as new market entrants attack specific parts of the business (think Apple Pay). Smart banks are forging relationships with different and unexpected partners, such as mobile and retail organisations, even providing products from outside of the group where they are the best fit for a customer’s needs.  As I’ve said in one of my previous blogs, there’s a new mantra for modern banking: “Must play well with others.”

Old-fashioned banking is gone, and with it so have old style processes, business models and attitudes. Nobody wants to be the last dinosaur.  It’s time for the industry to dust itself off, and step up. Embracing change is easier – and far more profitable – than risking irrelevance in the widening digital divide.

I’ve briefly summarised only some of the key drivers of digital transformation, but you can find much more insight – including views from thought leaders in banks, insurance companies, fintech providers, challenger banks and aggregators – by downloading the eBook from the recent SAP Financial Services Forum: The digital evolution – As technology transforms financial services who will triumph.

It’s essential reading if you’re going to successfully fight back.

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Laurence Leyden

About Laurence Leyden

Laurence is general manager of Financial Services, EMEA, at SAP and is primarily involved in helping banks in their transformation agenda. Prior to SAP he worked for numerous banks in Europe and Asia including Barclays, Lloyds Banking Group and HSBC. He regularly presents on industry trends and SAP’s banking strategy.

Why Banks Should Be Bullish On Integrating Finance And Risk Data

Mike Russo

Welcome to the regulatory world of banking, where finance and risk must join forces to banking executiveensure compliance and control. Today it’s no longer sufficient to manage your bank’s performance using finance-only metrics such as net income. What you need is a risk-adjusted view of performance that identifies how much revenue you earn relative to the amount of risk you take on. That requires metrics that combine finance and risk components, such as risk-adjusted return on capital, shareholder value added, or economic value added.

While the smart money is on a unified approach to finance and risk, most banking institutions have isolated each function in a discrete technology “silo” complete with its own data set, models, applications, and reporting components. What’s more, banks continually reuse and replicate their finance and risk-related data – resulting in the creation of additional data stores filled with redundant data that grows exponentially over time. Integrating all this data on a single platform that supports both finance and risk scenarios can provide the data integrity and insight needed to meet regulations. Such an initiative may involve some heavy lifting, but the advantages extend far beyond compliance.

Cashing in on bottom-line benefits

Consider the potential cost savings of taking a more holistic approach to data management. In our work with large global banks, we estimate that data management – including validation, reconciliation, and copying data from one data mart to another – accounts for 50% to 70% of total IT costs. Now factor in the benefits of reining in redundancy. One bank we’re currently working with is storing the same finance and risk-related data 20 times. This represents a huge opportunity to save costs by eliminating data redundancy and all the associated processes that unfold once you start replicating data across multiple sources.

With the convergence of finance and risk, we’re seeing more banks reviewing their data architecture, thinking about new models, and considering how to handle data in a smarter way. Thanks to modern methodologies, building a unified platform that aligns finance and risk no longer requires a rip-and-replace process that can disrupt operations. As with any enterprise initiative, it’s best to take a phased approach.

Best practices in creating a unified data platform

Start by identifying a chief data officer (CDO) who has strategic responsibility for the unified platform, including data governance, quality, architecture, and analytics. The CDO oversees the initiative, represents all constituencies, and ensures that the new data architecture serves the interests of all stakeholders.

Next, define a unified set of terms that satisfies both your finance and risk constituencies while addressing regulatory requirements. This creates a common language across the enterprise so all stakeholders clearly understand what the data means. Make sure all stakeholders have an opportunity to weigh in and explain their perspective of the data early on because certain terms can mean different things to finance and risk folks.

In designing your platform, take advantage of new technologies that make previous IT models predicated on compute-intensive risk modeling a thing of the past. For example, in-memory computing now enables you to integrate all information and analytic processes in memory, so you can perform calculations on-the-fly and deliver results in real time. Advanced event stream processing lets you run analytics against transaction data as it’s posting, so you can analyze and act on events as they happen.

Such technologies bring integration, speed, flexibility, and access to finance and risk data. They eliminate the need to move data to data marts and reconcile data to meet user requirements. Now a single finance and risk data warehouse can be flexible and comprehensive enough to serve many masters.

Join our webinar with Risk.net on 7 October, 2015 to learn best practices and benefits of deploying an integrated finance and risk platform.

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About Mike Russo

Mike Russo, Senior Industry Principal – Financial Services Mike has 30 years experience in the Financial Services/ Financial Software industries. His experience includes stints as Senior Auditor for the Irving Trust Co., NY; Manager of the International Department at Barclays Bank of New York; and 14 years as CFO for Nordea Bank’s, New York City branch –a full service retail/commercial bank. Mike also served on Nordea’s Credit, IT, and Risk Committees. Mike’s financial software experience includes roles as a Senior Banking Consultant with Sanchez Computer Associates and Manager of Global Business Solutions (focused on sale of financial/risk management solutions) with Thomson Financial. Prior to joining SAP, Mike was a regulator with the Federal Reserve Bank in Charlotte, where he was responsible for the supervision of large commercial banking organizations in the Southeast with a focus on market/credit/operational risk management. Joined SAP 8years ago.

How Much Will Digital Cannibalization Eat into Your Business?

Fawn Fitter

Former Cisco CEO John Chambers predicts that 40% of companies will crumble when they fail to complete a successful digital transformation.

These legacy companies may be trying to keep up with insurgent companies that are introducing disruptive technologies, but they’re being held back by the ease of doing business the way they always have – or by how vehemently their customers object to change.

Most organizations today know that they have to embrace innovation. The question is whether they can put a digital business model in place without damaging their existing business so badly that they don’t survive the transition. We gathered a panel of experts to discuss the fine line between disruption and destruction.

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qa_qIn 2011, when Netflix hiked prices and tried to split its streaming and DVD-bymail services, it lost 3.25% of its customer base and 75% of its market capitalization.²︐³ What can we learn from that?

Scott Anthony: That debacle shows that sometimes you can get ahead of your customers. The key is to manage things at the pace of the market, not at your internal speed. You need to know what your customers are looking for and what they’re willing to tolerate. Sometimes companies forget what their customers want and care about, and they try to push things on them before they’re ready.

R. “Ray” Wang: You need to be able to split your traditional business and your growth business so that you can focus on big shifts instead of moving the needle 2%. Netflix was responding to its customers – by deciding not to define its brand too narrowly.

qa_qDoes disruption always involve cannibalizing your own business?

Wang: You can’t design new experiences in existing systems. But you have to make sure you manage the revenue stream on the way down in the old business model while managing the growth of the new one.

Merijn Helle: Traditional brick-and-mortar stores are putting a lot of capital into digital initiatives that aren’t paying enough back yet in the form of online sales, and they’re cannibalizing their profits so they can deliver a single authentic experience. Customers don’t see channels, they see brands; and they want to interact with brands seamlessly in real time, regardless of channel or format.

Lars Bastian: In manufacturing, new technologies aren’t about disrupting your business model as much as they are about expanding it. Think about predictive maintenance, the ability to warn customers when the product they’ve purchased will need service. You’re not going to lose customers by introducing new processes. You have to add these digitized services to remain competitive.

qa_qIs cannibalizing your own business better or worse than losing market share to a more innovative competitor?

Michael Liebhold: You have to create that digital business and mandate it to grow. If you cannibalize the existing business, that’s just the price you have to pay.

Wang: Companies that cannibalize their own businesses are the ones that survive. If you don’t do it, someone else will. What we’re really talking about is “Why do you exist? Why does anyone want to buy from you?”

Anthony: I’m not sure that’s the right question. The fundamental question is what you’re using disruption to do. How do you use it to strengthen what you’re doing today, and what new things does it enable? I think you can get so consumed with all the changes that reconfigure what you’re doing today that you do only that. And if you do only that, your business becomes smaller, less significant, and less interesting.

qa_qSo how should companies think about smart disruption?

Anthony: Leaders have to reconfigure today and imagine tomorrow at the same time. It’s not either/or. Every disruptive threat has an equal, if not greater, opportunity. When disruption strikes, it’s a mistake only to feel the threat to your legacy business. It’s an opportunity to expand into a different marke.

SAP_Disruption_QA_images2400x1600_4Liebhold: It starts at the top. You can’t ask a CEO for an eight-figure budget to upgrade a cloud analytics system if the C-suite doesn’t understand the power of integrating data from across all the legacy systems. So the first task is to educate the senior team so it can approve the budgets.

Scott Underwood: Some of the most interesting questions are internal organizational questions, keeping people from feeling that their livelihoods are in danger or introducing ways to keep them engaged.

Leon Segal: Absolutely. If you want to enter a new market or introduce a new product, there’s a whole chain of stakeholders – including your own employees and the distribution chain. Their experiences are also new. Once you start looking for things that affect their experience, you can’t help doing it. You walk around the office and say, “That doesn’t look right, they don’t look happy. Maybe we should change that around.”

Fawn Fitter is a freelance writer specializing in business and technology. 

To learn more about how to disrupt your business without destroying it, read the in-depth report Digital Disruption: When to Cook the Golden Goose.

Download the PDF (1.2MB)

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