A Financial Transformation

IBM Corp. released its findings from its 2011 banking study. The study concludes banks globally need to invest in insights that will enable the institutions to become more client centric, reduce complexity, and optimize risk.

Focal Points:

• The IBM Institute for Business Value and The Economist Intelligence Unit surveyed the top 200 banks across the Americas, Asia, Australia, and Europe. Globally, 90 percent of the bankers believe they need to transform their firms to survive and prosper. Banks in mature markets need to reduce operational complexity that is costing the industry nearly $200 billion annually. The potential extra profit that could be derived from reducing complexity is in the 20 – 30 percent range depending upon the size of the enterprise.
• To become more client centric the financial firms need to create innovative pricing models that are more closely aligned with client segments. Moreover, pricing needs to reflect client holdings across multiple deposit and loan products.  Furthermore, the study finds that for many banks client satisfaction in the channels is at best mediocre. Banks currently have insufficient client information and poor risk data, which handicap their ability to modernize and establish good pricing models, IBM notes.
• The most disconcerting findings IBM noted were in the area of risk and compliance. The study finds systemic risk is on the rise. The top 30 banks are bigger now than before the financial crisis. In many countries bank assets are about 200 percent their national GDP. Moreover, 90 percent of organizations have experienced a rise in fraud attempts. Lastly, 80 percent of financial services firms state that their risk and compliance platforms and processes are not integrated across the business. Meanwhile, hundreds of new regulations in different jurisdictions are on the way while 240 new rule making processes are underway in the USA alone.

Experton Group believes banks, as well as other businesses, need to develop pricing methodologies that are client centric and map well with the new, and multiple, ways in which customers prefer to work with their providers. Banking institutions, especially those that are the product of multiple mergers, tend to have excess and overlapping applications, processes, and infrastructure. Experton Group finds that the simplicity savings on the IT side easily matches the 20 – 30 percent range that could be achieved by reducing bank operational complexity. The systemic risk exposures have not diminished and may not improve much over the next five years. IT executives should expect the requirement for banks to reduce their operational risks to cause continued tightening of funds and capital constraints. Thus, IT executives should be looking at alternative methods of financing, such as leasing, rather than use of corporate capital or lines of credit. Moreover, IT executives should be concerned with the rise in fraud attempts and should, therefore, ensure their organizations have eliminated siloed risk and compliance processes and installed advanced analytics that can detect and prevent fraud attempts in real-time.