The birth of brand banking

Retail banking is now one of the most dynamic financial services sectors, with the high street banking brands looking to steal a march on each other through new product offerings and well publicized branch renewal schemes. However, this advantage is often short-lived, with new products that gain market share being quickly copied by other banks.

Competitive pressure from non-banks is also intensifying. Established financial services brands, such as insurers and credit organizations, are looking at retail banking as a potential avenue to expand their brands and increase their share of customer wallet. Dutch financial services group ING, for example, has witnessed great success entering the UK savings market through its ‘Direct’ service built on a strong marketing campaign and the offer of above-average interest rates.

However, the biggest shift has been the number of non-financial services brands taking an interest in financial services. For a long time, many have provided credit and loans to purchase their goods. Now they are examining how to use their high street presence and brand recognition to deliver current accounts, credit cards and even mortgages.

As a result, customer acquisition and retention for banks is an increasing challenge. Financial institutions are seeking technological advances that can deliver competitive advantage. This can take many forms – reduced operational costs, improved customer service or the ability to bring new products to market more quickly.

Technology lowers entry barriers

The established banks are struggling to continually patch old legacy mainframes and to manage the complex array of application connections. Their IT complexity has made running an efficient operation difficult. Many are investing considerable percentages of IT budget simply to fire fight problems to ensure core systems don’t fail.

As new distribution channels have emerged, they have been forced to introduce additional layers of complexity to their architectures, or risk losing business. The evolutionary developments of distribution channels have also created silos of data, requiring further integration layers. This is making IT infrastructure management ever more time consuming. As a consequence, there is additional pressure on banks to provide a consistent customer experience across these channels.

But technology has moved on and the options available to banks are far more extensive. The internet in particular has been a great leveler of the competitive landscape, lowering entry barriers. Paper free, real-time processing via a browser has made the traditional bank assets more of a liability. And while white-labeling solutions from banks was once the norm, many new entrants are now able to go it alone thanks to powerful commodity hardware and the use of web services. This has made it far easier for competitors to take market share by implementing new technologies far quicker than an existing bank. In a market where time-to-market is critical, they can introduce innovative products and manage multiple channels effectively.

“Channel proliferation is a major concern for banks and new market entrants. The internet is a great tool for providing services but it has already become a commodity service that customers expect,” says David Vander, Worldwide Industry Manager for Banking at Microsoft. “However, customer expectations are now far higher than they used to be. They expect to choose the channel that suits them, so banks must be prepared for that. Customers compare their banking experience to other retailers and the banks are not fairing well in many people’s eyes. They want to be the most important aspect of the experience, not their product.”

The online financial services brands have a flexibility that enables them to concentrate on creating innovative, personalized services to differentiate from traditional banks. Generally, they are not interested in duplicating the traditional branch-led banking model. Beginning with a blank sheet, new market entrants can use the latest technology to provide efficient online services. For them, siloed data simply isn’t an issue. They also do not have to worry about branch overheads or legacy applications and the costs they entail, creating a much lower cost-to-income ratio per customer.

The birth of brand banking

Technology’s ability to lower the barriers to entry has heralded the arrival of non-financial brands entering the retail financial services space. It has also led to the emergence of a new phenomenon – the brand as a bank.

While for years the traditional high street branch represented a notion of a safe and secure institution, younger generations do not have the same associations or attachments. The emergence of the brand among the key 18-35 demographic has affected how banking services are offered. Organizations and retail brands are all eager to boost their bottom line by expanding their reach into the banking market with new products and services.

Existing players have also recognized brand power, launching products under new banners to appeal to a new audience. Also being recognized are the skills and experience that can be found in the highly competitive retailing sector, where the customer is at the heart of the organization. This has led to a cultural shift at management level in many banks, with several appointing senior executives from the retail sector to use their knowledge to shape the next generation of banking products. Strong, established retail brands have four advantages:

• Brand strength: trusted retail brands have a large number of loyal customers open to being offered financial services products. In many cases, these brands are viewed more favorably than existing bank brands.
• Lower costs and competitive products: with existing and established outlets, the operational costs for offering financial services products are lower for retailers than financial services firms. This enables retailers to pass savings on in the form of competitively priced products, particularly in the insurance sector.
• Easy access to customer base: potential customers already visit stores to purchase goods and know the brand, so do not need to be enticed by large marketing campaigns. There is plenty of opportunity to engage with these customers at various times during their retail experience, both in store and online.
• Business intelligence: retailers have more in-depth customer data than many financial services providers and have a track record of running successful loyalty schemes. They are also used to extracting and analyzing this data to manage their businesses. There is an opportunity to extend this knowledge to their financial services operations.

Technology considerations

Investing wisely in IT continues to be an issue for most banks. While new entrants do not struggle with the legacy mainframes or the data silo issues of traditional providers, it is important to learn from previous mistakes. Organizations looking at establishing banking businesses need to carefully examine their requirements and the technology they need. It is essential that new market entrants consider every aspect of their technology investment to ensure their architectures meet both today’s and tomorrow’s business needs.

“The cost pressures in retail banking are relentless. Integration projects are expensive and often fail to achieve their aim, which is why new banks must think very carefully about their architectures,” says Stewart Foster, Director of the Activebank division at Financial Objects. “They need to learn from the multi-channel efforts to date where channel migration has been achieved but up-sell and cross-sell of services has remained elusive.”

Success is therefore dependent on using the right technology and the right channels to efficiently deliver banking services. There are four key factors that must be taken into account:

• Customer experience: how can the bank attract and retain customers? Providing market leading customer services through multiple channels is the only way to increase your share of customer wallet.
• Process excellence: online services offer far greater automation. By reducing manually intensive processes as much as possible, the business is simplified and the cost-to-income ratio is greatly reduced.
• Reduce cost and risk: reducing infrastructure complexity makes it far easier to manage risk. There are significant technology risks associated with old platforms and applications that are still in production. Cost and maintenance overheads will also be reduced compared to competitors using legacy mainframe systems.
• Sustainable leadership: the technology must support the brand. Brands with the greatest equity are the most profitable because their customers are generally more loyal and willing to pay higher prices for the product, and have a closer relationship with the brand. That means greater cross-selling opportunities, increased share of wallet and bigger profits.

The cost of deploying and supporting many enterprise applications often dwarfs the initial development or acquisition costs. Much of this cost can be associated with the tools, technologies, processes and best practices for managing applications. Advances in standards, tools and application methods offer new approaches to deliver value and establish a solid foundation for future growth. The increased use of industry-proven standards such as XML, Simple Object Access Protocol (SOAP), J2EE and Microsoft .NET has greatly increased channel integration options. The traditional programming language for mainframes, COBOL (Common Business Oriented Language) has existed for more than 40 years. However, developers are harder to find as many no longer want to write applications in older procedural-based programming languages. Because developers capable of building a banking system in these languages are now such a limited resource, they are inevitably more expensive.

Regardless of the approach, there two key issues that must be taken into account. How are online services, with no physical customer contact, using technology to differentiate themselves from the competition? And how are new market entrants ensuring they have the right systems in place to provide the right services?

Flexibility delivered through SOA

New development approaches can enable the creation of application architectures that are much more flexible than their predecessors. Service-oriented architectures (SOA) have gained in popularity as a way for organizations to develop and deploy new applications efficiently. A ‘service’ is defined as a set of logical functions that have been abstracted together for reasons of efficiency and/or effectiveness; it describes the capabilities of the service and its scope.

The service-oriented approach provides a framework for thinking about the business as a set of services rather than a set of organizational structures and departmental processes. SOA is based around common platforms, protocols and reusable code to support enterprise-wide applications and business processes.

“Before organizations can reap the benefits of reusing and enhancing their existing technologies, instead of simply upgrading existing systems or building new ones from scratch, they need to adopt modern development architectures centered on the notion of service-orientation,” says Foster. “Service-orientation is a crucial prerequisite to creating connected systems. With the development of messaging standards based on XML, service-orientation is quickly becoming the mainstream approach for building connected systems.”

For financial institutions, an SOA approach creates a new level of flexibility in how they can interface and integrate applications. For example, when a bank needs a new application, a component-architected solution enables implementation without impacting existing applications or workflows.

Implementation options

When examining implementation approaches, it is important to recognize that the decision should be driven by business imperatives and the ability to commit resources. Whether the bank is a start up or part of another organization, there are three implementation options:

• A ‘big bang’ where all branches (if applicable) and lines of business go live simultaneously.
• Phased pilots where a few pre-selected branch locations use the solution before a full rollout begins.
• A line-of-business approach where the bank rolls out one or more lines of business, such as accounts, and then introduces new lines (mortgages, cards, insurance) over a period of months or years.

The first approach provides faster implementation cycles and greater visibility. However, it also demands much higher resourcing levels and represents a higher risk for new entrants: there is no second chance to bring the products to market. For start-up banks, the phased and line-of-business approaches are ideal. These afford the new banking operation time to understand how the solution is working and how it affects their service offering. It also enables the bank to incorporate lessons it has learnt from its operations and ensure a perfect business fit. The line-of-business approach provides additional flexibility to the bank. It can introduce particular channels or products and add new channels as the organization matures. In a traditional bank, this might create siloed structures with disparate customer information, different workflows and inhibit the bank from deriving the complete benefit of the new technology. But by implementing a component-based solution, these issues do not arise.

The benefits of a component-based architecture

Component-based architectures offer rapid application development tools and techniques. These can be used to create functionally independent and interoperable solutions, built to common industry standards. A bank’s core system should protect current investments by offering sets of components without data duplication and redundancy. It should also allow third party applications to be integrated without the need for system re-engineering or re-writing code.

Component-based architectures fit all types of banking operations. New entrants can implement application suites as a core solution, or build a system using components as a line-of-business application. This approach also works for existing banks looking to gain new flexibility to meet the challenge of new market entrants. Their main concern about replacing legacy applications is the complexity of unraveling old interfaces and patches. With component-based solutions, there is no need for ‘rip and replace’ projects – individual applications can be replaced without ever touching the mainframe or affecting how it works.

“Approaching banking applications using a component strategy provides a method for addressing the problem of bringing the right building blocks together to create highly distributed business process management,” says Vander. “The component approach is based on SOA, which provides a modular architectural framework or a composite infrastructure that enables software components to interact seamlessly.”

Rather than developing new applications for every product or channel, banks should aim for an open IT architecture where all systems are integrated. This enables new services and products to be added quickly and cheaply within an SOA architecture model. The bank’s technology infrastructure is divided up into components, based around a set of pre-defined services, separate, but integrated with one another.

The advantage of this approach is that the different components can be upgraded or repaired without re-writing millions of lines of code or impacting on the core processing systems. By implementing an open architecture model, web-based banking simply becomes part of another ‘layer’ of the bank.

The benefits of the component-based approach can be summarized as:

• High return on investment: the low cost of ownership running applications on commodity hardware and software and a low cost of deployment delivers a fast and high return on investment.
• Improved productivity: the ease of use allows organizations to greatly increase efficiency and productivity.
• Customer-centric operations: the complete flexibility enables any delivery channel to be used. This lets the bank meet and exceed the customer service level expectations.
• Increased revenues: a complete view of all customer activity allows new products to be brought to market quickly. This delivers competitive advantage and additional revenue through cross selling of additional products and services.
• Reduced costs: the costs associated with servicing each account are reducing through greater levels of automation and the use of the most appropriate delivery channel.
• Lower levels of IT investment: the open architecture model, with its inherent XML connectivity makes it easier to interface components with any other system.
• Component re-use: source code is inherently flexible and re-usable components increase the speed of development resulting in quicker, simpler deployments and reduced time to market.

Don’t get left behind

The proliferation of new technology and outsourcing has made the cost of entry into financial services relatively low. This is making it easier for non-financial institutions to sell products they have not produced and has led to the rise of niche players taking valuable market share from existing providers.

Whether a new bank, subsidiary of an existing financial services provider or retailer, it is critical to make the right technology investments. Technology has moved on and banks need to ensure they don’t get left behind. Advanced, component-based systems enable the customer-centric services demanded by an increasingly selective client base. They offer new market entrants the opportunity to efficiently implement a new architecture.

Providers can choose the applications they need for their lines of business, or implement the solution in its entirety as a core system. Banking is all about knowing your customers’ needs, and providing them with the right products at the right time through the right channels 24/7. Without the right technology, building a strong and loyal customer base will be impossible. Customers will choose a competitor that can offer the services they want, through the channels they choose. Banks cannot afford to take that risk.

Making the right technology choice

When considering what technology to choose, the focus should be on maintenance cost and operations cost. Other important factors include:

• Is the technology future proofed?
• Is the solution based on open standards to facilitate straight-through processing and real-time information capability?
• How easily can the solution be implemented and maintained?
• Can commodity hardware and software be used to lower the total cost of ownership?
• Is the technology stable and user friendly?
• Can the solution be modified without compromising the architecture or re-writing millions of lines of code to evolve with business needs?
• How easy will it be to add new applications to support new lines of business such as loans, mortgages and credit cards?
• Is the solution scalable to handle a ramp up in business volumes?
• Does the vendor have a proven track record with implementations in similar sized institutions?

This article was supplied by Financial Objects. For more information, please visit: www.finobj.com