Management Consulting | BCG - Retail Banking 12/15/04 3:28 PM … · 2013-07-25 · Opportunities for Action in Financial Services Transforming Retail Banking Processes Retail Banking

Opportunities for Action in Financial Services

Transforming Retail BankingProcesses

Retail Banking 12/15/04 3:28 PM Page 1

Transforming Retail BankingProcesses

The retail banking environment is undergoing majorchange. Retail banking customers are much moreactive than they were a decade ago. Over the pastdecade, third-party distributors—such as mortgagebrokers and independent financial advisers—havesecured a larger role in distributing retail bankingproducts. And retail banking customers are demand-ing more customized products and services. Thesechanges impose significant new demands on retailbanks—if they are to stay competitive. The answer lies in reconfiguring their business processes—specifi-cally, redesigning, automating, integrating, and stan-dardizing.

For many banks, incremental improvements to end-to-end processes in business silos will be insufficient.What’s often required is a more comprehensive trans-formation that can be achieved by turning to modular,standardized process models. This proposed modular,standardized approach is a critical departure from thetraditional end-to-end, product-based process-and-sys-tem architecture, which encompassed the full valuechain (service, product-administration, and customer-data-repository tasks) for each product.

Such a transition is especially helpful for scalableproducts—such as credit cards, simple loans, andother “vanilla” banking products. But it may not besuitable for all players in all circumstances. It is partic-ularly valuable for retail banks seeking to drive radicalimprovements in overall performance. A few leadingbanks have already adopted modular, standardizedprocesses and are now enjoying improved efficienciesand lower costs.


The Size of the Prize

The benefits of increasing operational efficiency areenormous. For example, right now in several majormarkets, banks must sell three to four times as manymortgages as they did ten years ago just to maintaintheir profit margins. (See “Banking’s ChangingDynamics,” BCG Opportunities for Action inFinancial Services, August 2003.) If a bank effectivelytransforms its processes, it can reduce its unit costsbetween 20 and 40 percent, completely changing itscompetitive position.

In addition, financial services business is increasinglyoriginated by third parties. In an environment inwhich banks make less and less of what they sell totheir customers, they need to work more closely withexternal partners to succeed in cross-selling and cap-turing that business. To do so, banks must easeprocess integration and data flow (such as customerinformation) with their external partners.

Banks need more flexible and more integratedprocesses to provide the targeted product and serviceofferings that their customers seek. For instance, cus-tomers now look for more varied mortgage offer-ings—such as mortgages linked to current accounts(to reduce interest expense) and reverse mortgages(to provide cash during retirement). To maintain andbuild competitive advantage, banks need to improveflexibility and reduce costs. If they don’t, specialistproviders are likely to pick apart their best businesses.

Going Modular

Traditionally, retail banks have organized their opera-tions by product line—such as loans, deposits, andinvestments—in individual business silos, each of


which has used different process models. Retail banksstill tend to manage most of these various processes—from customer acquisition to product service—in-house. Now that they need to cooperate more withexternal partners, banks have to rethink those oldsilos and processes. To make the transition to modu-lar structures, a bank should take its traditional end-to-end silo organization back to first principles andthen assemble individual modules. (See Exhibit 1.)This involves peeling processes back to individualbuilding blocks and then putting them together inthe most efficient way possible—frequently acrossproduct lines. In the back office, this often involvesbuilding scale. In the middle office, it means consoli-dating separate processes into shared utilities.

However, for some players it may be preferable to runa separate platform for a particular product—such asspecialist mortgages or current accounts with specialfeatures—when the potential scale benefits of onecentral platform are insufficient to warrant the com-plexities of merging that product’s business processesinto the central platform.

There are two guiding principles in the transition to amodular structure:

• Modularity: Grouping similar types of tasks anddefining functional building blocks consistentlyacross different products or channels.

• Commonality: Treating similar modules as one andconsidering one common, standard solution.

Applying modularity creates interchangeable processblocks. For instance, scoring the risk of customerdefault is a task conducted for multiple products.Therefore, it is more efficient to treat this task as anintegrated module rather than having it hard-wired


Similar tasks havedifferent scope

1 Common tasks areexclusively specified

Productapplication

Customerprofile

Product/Channel A

Product/Channel B

Product/Channel C

Integrated process model built around silos

Modular, standardized process model

Product/Channel A

Product/Channel B

Product/Channel C

Customeraddress

Customer incomeCustomer securities

Product features

Customer addressCustomer income

Customer securitiesProduct features

Customeraddress

Productfeatures

Customer incomeCustomer securitiesRisk assessment

Customer addressCustomer incomeCustomer securities

Product features

Product features

Product features

Productdelivery

Productservice

2

Customerprofile

Similarly scoped,yet specific modules

1 Standardizedcommon tasks

2

Productapplication

Productdelivery

Productservice

SOURCE: BCG case experience.

Exhibit 1. The Old and the New: Evolving Process Models


into any one particular product or process (such ascredit card origination).

Commonality drives consistency and reduces ineffi-ciencies due to redundancies. For instance, one soft-ware program can originate various products. Com-monality could, for example, include using one standard method for capturing information aboutcustomers’ assets and income.

Up and Down or Sideways

Retail banks are using different approaches to modu-larize and standardize their processes. For example,we have encountered four distinct process models inour retail banking work. (See Exhibit 2.)

Horizontally Organized. Traditionally, most retailbanks have employed a horizontally organized model,in which individual platforms support processes forone product only (such as home loans). Subprocess-es—such as risk rating, security valuation, and cus-tomer-specific data—generally are not shared withother products and product platforms. In this model,platforms also can be channel specific. We expect thismodel to be attractive only for monoline productproviders or for highly specialized products.

Vertically Organized. In a vertically organized model,functionality is provided across all products. Forinstance, one large North American bank now seeksto consolidate all its customer information and needsin a customer-capture tier as it builds common origi-nation and servicing processes across all its retail-banking products.

Predominantly Horizontally Organized. A predomi-nantly horizontally organized model has some modu-


larization within a product-oriented framework. Onelarge bank, for example, has a product-specific lend-ing architecture and horizontally dedicated front-end,service, and product systems. For mortgages, the bankis combining the front end with other services toensure seamless integration with outsourced productdelivery and maintenance.

Predominantly Vertically Organized. Some banks haveadopted a hybrid model that is predominantly verti-cally organized. For instance, one large commercialbank in the Southern Hemisphere consolidates front-end origination and provides common services (suchas risk scoring and pricing) to its various products,channels, and product-specific systems. All retail prod-ucts share the same origination and service platform,allowing consistency in communication with cus-tomers.

Customercapture +

origination Specificservices

Productspecific

Horizontally organized Vertically organized

Predominantlyhorizontally organized

Predominantlyvertically organized

Customercapture Originate

Productspecific

Home loans

Personal loans

Credit cards

Customercapture Originate CloseService

Home loans Outsourced

Personal loans

Credit cards

Customercapture +

origination Commonservices

Productspecific

Home loans

Personal loans

Credit cards


Exhibit 2. Four Modular Process Models Are Emerging


All four models achieve a certain degree of modulari-ty and standardization, but none of them meets allthe different needs of all banks (that is, there is noone-size-fits-all solution). They have to be adapted toan individual bank’s needs and circumstances.

In choosing and shaping process models, banks mayconfront hurdles in several key areas:

• IT Legacy Environment. Often the effort to disentan-gle a bank’s proprietary systems in order to modu-larize them or to integrate them with other mod-ules is prohibitively expensive.

• Legislation. In some markets, legislation may pre-vent consolidation across products or channels. Forexample, sharing customer data outside the con-text of the original product or transaction may beprohibited in some countries.

• Lack of External Catalysts. Some markets may lackthe external catalysts to drive modularization. Forinstance, the lack of a common standard (dataexchange) for integrating third-party brokers’ orig-ination processes undermines the benefit of pro-viding a standardized plug-in module.

• A Bank’s Internal Organizational Structure. If a bank’sinternal organizational structure is based on prod-uct or customer segments, sharing common func-tionality and customer data may create governanceconflicts and interfere with accountability.

If banks can overcome these hurdles, they can cap-ture significant business opportunities. Look at howthe automotive industry benefited when it introducedthe platform strategy—using the same components(such as drive train parts) for multiple automobile


models. By reducing duplication in products andprocesses, automobile manufacturers improved opera-tional efficiency, increased overall flexibility, and prof-ited from integration with specialized suppliers.

The retail origination process provides another exam-ple of the benefits of moving to a modular approach.Designing a bank’s retail-origination-process modelaccording to the principles of modularity and com-monality creates opportunities within the organiza-tion and beyond. (See Exhibit 3.) By supporting justone IT environment, a bank can reduce duplicationof development and maintenance efforts. And bypooling resources, it can capitalize on scale effects.Standardizing common tasks also promotes consisten-cy in the customer-bank relationship and maintainsthe integrity and accessibility of customer data.Introducing a modular, standardized process struc-ture also creates opportunities for cooperation withexternal players. It enables a bank to plug in third-party providers with ease. Scale and scope advantagesalso can be achieved. For example, three German

Customer profile

Retail banks

“Dock on” specialized players(such as mortgage brokers)

Other institutions

Specialized players

Consolidation players

1

Customer profile

Productapplication

Productapplication

Productapplication

Consolidate with utility providers (such as mortgage companies)

2

Productdelivery

Productdelivery

Productdelivery

Productservice

Productservice


Exhibit 3. The Benefits of Modular, StandardizedProcess Models in the Origination Process


banks consolidated their home-loan-processing enti-ties into one unit to drive down costs and improveefficiencies.

Building the Model

When a bank builds a modular, standardized processmodel, it is critical to align the IT architecture prop-erly. To do so, the bank must consider six central ele-ments of the IT platform and design them to be con-sistent with its chosen business-process model. (SeeExhibit 4.)

Customer Information Platform. This is the informa-tion database that provides frontline staff and cus-tomers with up-to-date information—for example, onhow a customer connects with and uses accounts andproduct holdings as well as on how the customerinteracts with the bank’s relationship managers.

Customer data captureExposure data capture

Loan detailsSecurity data capture

Servicing test

Risk assessment

Product feature +pricing suite

Document generationDocument management (imaging)

Workflow

Front-end origination Specific services Product systems

Data repositories

Process support

Customerdata repository

Security validation

Productapplication

Customerprofile

Productdelivery

Productservice

Account maintenance

Statements

Product accounts


Exhibit 4. Organizing the Six Central Elements of the IT Platform


Origination System. Consolidating front-end systemsto support the origination of different products (suchas home and personal loans) provides significantopportunity. The customer information platform andthe origination system need to be closely integrated—or delivered as one solution—since customer-related data are essential to product innovations.

Specific Services. Individual system componentsshould provide specific functionality. For instance,risk assessment, which may differ by customer seg-ment, is best provided by a dedicated module.

Data Repositories. It is essential to separate customerdata from product data so that valuable customerinformation can be shared across products.

Process Support. Tools that support process executionshould not be customer or product specific. Theyshould be provided as independent building blocks.

Product Systems. Systems designed to maintain theproducts that the bank originates must be highly scal-able (able to ramp up volumes rapidly).

Making informed decisions about these six key ele-ments should allow the bank to move toward a moremodular and standardized approach, bringing sub-stantial efficiencies and cost savings.

Seven Key Steps

As retail banks seek to modularize and standardizetheir process models, they should take seven key steps:

• Group similar process steps within individual productend-to-end processes. Be sure to “cut” these groupssimilarly in terms of scope and task.


• Assess commonality among these groups of processsteps. To what extent are the underlying processessimilar across products, across channels, and alongthe end-to-end process?

• Drive to standardize business rules for commontasks. Question the relevance of differences. Oftendifferences are the result of arbitrary decisions andhave no specific business justification.

• Combine the groups into process modules—andclearly define input, output, and processing forthese modules.

• Assess strategic, operational relevance for each mod-ule. Does that module need to be accessible to ordoes it need to integrate with external players? Isthat module a utility service and therefore not abasis for competitive differentiation?

• Understand your IT, legal, and regulatory constraints.

• Designate specific IT tools to support each processmodule.

* * *

In summary, modular, standardized business-processmodels offer retail banks the chance to achievegreater efficiencies and to team more effectively withoutside players. They are a new and considerablesource of advantage in a consolidating and increasing-ly competitive industry.

While modularization can lead to overstandardizationand, if it reduces the number of systems, to bottle-necks, banks that succeed in making the transitioncan achieve considerable improvements. Banks thatmaster modular, standardized business models can


substantially improve their unit costs, significantlyupgrade customer service, and create the flexibilityneeded to introduce new products and services. TwoNorth American banks, for example, have experi-enced marked increases in customer satisfaction as adirect result of embedding modular process capabili-ties into their products (specifically mortgages andconsumer loans). Modular processes also can halvethe time to get new products to market. Banks thatignore modular, standardized processes may be over-taken by their rivals.

Thomas ReichertAndy Maguire

Michael Spellacy Guido Kuehnelt

Thomas Reichert is a vice president and director in theSydney office of The Boston Consulting Group. AndyMaguire is a vice president and director in the firm’sLondon office. Michael Spellacy is a manager in BCG’s NewYork office. Guido Kuehnelt is a project leader in the firm’sSydney office.

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Management Consulting | BCG - Retail Banking 12/15/04 3:28 PM … · 2013-07-25 · Opportunities for Action in Financial Services Transforming Retail Banking Processes Retail Banking