Can't Get There From Here

There was a skit on Saturday Night Live many years ago about a game show based on directions for getting around New England, and one of the punch lines was, "can't get there from here". Today, many large banks are finding this to be true when it comes to restoring their returns on equity (ROE) to pre-Global Financial Crisis (GFC) levels. As illustrated in the chart from "Quarterly Trends for US Banks", Third Quarter 2013, Federal Reserve Bank of New York, returns on equity at US Banks dropped significantly during the Global Financial Crisis and have yet to fully recover. Increased capital requirements (e.g. Basel II/III), reduced fee income (e.g. Dodd-Frank/Durbin) along with greater consumer options (i.e. non-banks) have made it increasingly difficult for most retail banks to repeat past performance. In the words of FDIC Vice Chairman, Thomas Hoenig, "If they've now targeted a return on equity that's 20 percent, we have a problem..." Or in other words, these banks "can't get there from here."

So what is to be done? Banks are now faced with the dilemma that single digit returns on equity are not going to attract much investor capital or excitement, and new constraints prevent the business from growing. These constraints can take the form of new regulations, changing consumer preferences and inflexible, brittle technology. Fundamentally, the business model for retail banking has changed since the Global Financial Crisis, and banks need to consider new options.

Banks looking to buck the trend should consider transforming their retail banking operations to meet their goals.

Four key areas where banks could focus to enable transformation are:

I. Modernizing Aging Infrastructure: Many banks still rely on mission critical systems developed and implemented 30-40 years ago. Not only do these older systems come with uncompetitive total costs of ownership, but also their support resources are becoming scarce (i.e. not many colleges are still teaching COBOL, Assembler and PL/1). To keep up with customer demands and market pressures, banks tend to bolt more functionality and access points onto their legacy core applications. The results are more brittle systems with higher maintenance costs. In time, IT simplification may become the ultimate driver toward core modernization.

II. Adopting Straight Through Processing: Almost 50 years ago as banks were beginning to automate and centralize deposit account processing, they needed a means to ensure that their customers could not withdraw the same funds more than once. Memo posting as a complement to the new batch-processed demand deposit account (DDA) systems was the answer, serving commercial banks well for the last half century. Today batch posted transactions such as paper checks, once dominant, have dwindled in volume as cash and "cash-like" transactions such as POS (point-of-sale) and ATM withdrawals have seen their volumes explode, thus rendering memo post an anachronism. Next generation, real-time account servicing systems enable banks to process/post transactions "once and done". Customers have instant confirmation of their transactions, which are consistent across all bank channels, and exceptions can be addressed closer to the time transaction making their resolution much easier. Real-time systems also eliminate the risks from batch failures and system amends during lengthy end-of-day batch updates. Any transactions with windows for returns such as checks, ACH debits, etc. can still be held, sorted and posted in accordance with the bank's business rules. Banks should revisit the value of batch processing with memo posting in light of today's realities.

III. Becoming Customer Centric: Banks that have siloed organizational structures usually have siloed supporting technologies. As a result, it is very difficult for these banks to get complete views of their customers as applications tend to be deployed via line-of-business with data dispersed across the enterprise. It should come as no surprise that these banks have difficulties with cross-selling and attaining visibility into who are their profitable customers. Externalizing data via a master data management (MDM) or other enterprise strategy will enable a bank to make credit, pricing and risk related decisions on a relationship level versus an account one.

IV. Targeting New Niches: The cliché, "you can't be everything to everybody" holds true in banking because, to borrow another cliché, "one size does not fit all". Banks that are nimble have the ability to modify their products and services to suit the unmet needs of individuals and customer segments; they are also are well positioned to drive new business and expand wallet share of existing customers. Transforming supporting IT platforms to become more flexible with faster time-to-market will enable a bank to have a sustainable competitive advantage.

Lastly, bank transformation, like any other transformation, should be treated as a journey rather than a destination. I would love to hear from you on how your institution plans to get to there from here.