A few crucial technological decisions have a significant impact on both financial and customer loyalty outcomes.
Technology has emerged as a new foundation for competitive advantage, as a few banks around the world are demonstrating. Whether they're aiming for digital customer experiences, powerful data analytics, platform modernization, or new kinds of artificial intelligence, top banks leverage technology to get an advantage in everything from product innovation to process efficiency. Technology allows the bank to invest more in improving its offerings and customer experience by assisting in reducing operating expenses. Reduced operating expenses, more investment in enjoyable and effective technology, satisfied consumers, and increased revenue and profits to invest have all resulted from this positive feedback loop.
The successful use of advanced technology has become essential for banks for a number of reasons. Customers and business customers want digital experiences that are easy to use, convenient, data-rich, and more customized. They also want the freedom to transfer their funds to the provider that offers the best deal. Traditional banks continue to face threats from large technology companies and digital natives. The scope of requirements for regulatory compliance keeps growing. Furthermore, top banks are drawing the best tech talent because they are excellent workplaces.
With the help of modern technology, banks can now automate complex procedures and offer low-cost, real-time customer service using platforms that are cloud-native and AI-supported. Banks can use a network of vendors to use biometrics to confirm the identities of their customers. Businesses can provide more with less when they use best practices, continuous integration, and continuous delivery tools.
Despite the fact that banks spend a significant portion of their entire cost base—roughly 16% globally on average—on information technology, many of them are nevertheless burdened by high operating expenses as a result of bloated IT assets, complex processes, and antiquated technology. These traits work together to restrict the amount of money that can be invested, which results in a poorer product portfolio and customer experience, low customer satisfaction ratings, and a high rate of defection.
Reducing spending or spending more money altogether are not the answers. Rather, it begins with a well-defined strategic intention at the top to modernize the company and its technological foundations in order to streamline operations and quicken commercial expansion. Across the board, deliberate decisions are crucial.
What technology leaders do differently
In order to determine which decisions are most important, Bain & Company looked at the assets of the 42 biggest banks in the world. Three criteria were used to evaluate their performance: the Net Promoter ScoreTM (NPS) from the first quarter of 2023, the cost-to-income ratio (CIR) and total shareholder return (TSR) over the previous three years. We then evaluated their tech selections based on eleven criteria, which included the makeup of the board, the use of a contemporary technology stack, and the variety of IT personnel profiles.
Based on a regression study of the factors, we discovered that banks that prioritize technology are among the best in the world and have an average TSR that is 5 percentage points higher, a TIR that is 10 percentage points lower, and an NPS that is 12 percentage points higher than other banks in their area.
The following were the strongest correlates of excellent performance:
- A tech-savvy board of directors. For the board and C-suite, technology performance and strategy must be top priorities.
- A higher number of in-house engineers and fewer other IT staff. Successful banks have established a top-notch engineering department for the business and technology stack components that need to be unique.
- Positioning as a technology company. The talent, organization, and operational model of leaders are all infused with a technology-centered approach.
These leaders also have a deep understanding of the goal architecture. In order to establish a clear competitive advantage over customers, economics, and risk, they modernize where it counts most.
Figure 1 illustrates the considerable contrasts between tech leaders and other banks. Notably, improved performance was not a result of increasing investment on technology alone. As a matter of fact, performance was negatively correlated with IT spending as a percentage of revenue. When a bank expands its IT investment too quickly, it adds complexity because money may go to places that aren't properly overseen by architects or decommissioned continuously.
Figure 1
A handful of technology choices have an outsized effect on performance
The companies that performed the best in their respective regions were BBVA, DBS, Capital One, and JPMorgan Chase (see Figure 2). When they first began their journeys, there was little evidence to support the relationship between their performance outcomes and their choice of technology as a key difference. However, their tales highlight the significant effects of the decisions they took.
Figure 2
Top-performing banks have a consistent, strategic focus on technology
Strategic choices toward tech leadership
Examining these enterprises, we discovered three potential avenues in addition to one more that is still in the early stages of development but could eventually be successful.
Reduce costs through simplification.
To boost efficiency and productivity, certain banks may choose to concentrate on standardizing and streamlining procedures, technology, and product offerings. Lower operating costs will make it possible to spend more in cutting-edge technology that transform the way that work is done. This approach is usually appropriate in situations where cutting expenses and streamlining current processes are urgently needed. The goal architecture must use modular components in place of the outdated technological stack.
After determining that operational excellence and digital transformation were two of its three main priorities and seeing the necessity for company simplification, Santander pursued this course of action. Reaching the significant benchmark of having 32 million digital clients in 2018 as opposed to 13.6 million in 2014 was accomplished. In order to facilitate account and card openings the next day, Santander significantly streamlined procedures that had previously required a week. With a $4.7 billion investment, technology was deemed a top strategic priority in 2021 once more. The bank lowered its cost-to-income ratio by 6.5 percentage points between 2015 and 2022, moving it up to the top quartile of the institutions we looked at in terms of performance and technology.
Use digital and data to connect with customers.
In this case, a bank concentrates on enhancing its digital platforms and employing analytics and data to enhance the client and employee experiences. Hiring more personnel with expertise in data analytics and user experience design is necessary for this strategy to be successful. A bank should pledge to make investments in responsive, adaptable channels as well as in the data and data disciplines that enable them.
A modernization operation at JPMorgan Chase is retiring 2,200 apps and reorganizing or replacing cloud apps. The bank has made significant investments in data quality and has assembled a team of over 900 data scientists—essential components of an effective AI strategy. The bank's achievements were recently acknowledged by the Evident AI Index, which placed it at the top of the list of major banks for AI capabilities. In 2022, JPMorgan Chase invested over $14 billion in technology, including an 11% increase in the "change-the-bank" segment of the investment over the preceding three years. CEO Jamie Dimon has frequently defended such large spending to skeptic Wall Street analysts, citing the estimated $1.5 billion in business benefit of AI and machine intelligence.
Become a technology powerhouse.
A bank can boost flexibility and creativity by making widespread, ongoing investments when it pledges to transform into a digital firm at every stage. In order for this strategy to succeed, the bank must make significant investments in engineering expertise and the entire technological stack, and the core technology must already be cutting edge, expandable, and scalable.
In 2020, Capital One took a cloud-first stance, shutting down its final data centers and transferring both customer-facing apps and core IT to the cloud. Over a hundred projects have benefited from open-source technologies. Capital One began creating and marketing software in 2022 to assist its business clients in expanding their usage of cloud computing and data. Its 12,000-person technological staff is highly regarded and regularly draws top talent from large technology companies.
Replace the legacy stack with a clean slate.
A certain amount of disruption could be necessary when the complexity is too high or a bank has to offer new experiences and products more quickly than present technology would allow. Certain banks have made the decision to start from scratch in order to provide their staff with exposure to cutting edge technologies and pave the way for the potential replacement of core banking. The effectiveness of these initiatives will depend on their capacity to transfer users from the old platform to the new one and decommission it.
Recently, an incumbent bank began taking this path, spending over €500 million to create a digital bank operating under a subsidiary brand. Millions of the bank's present clients, particularly those who now use the app instead of branches, are to be transferred, and the savings will surpass the whole amount invested annually. With new investments in a fully digitalized customer experience and innovative artificial intelligence-based compliance activity solutions, the digital bank's operations have transformed the banking group as a whole. Although the digital bank was built in just two years, the incumbent's operations will need to be transformed over a four-year period.
Common commitments
It goes without saying that a bank's starting position, strategy, and willingness to adapt will determine the course it takes to update its technology. Nonetheless, every one of the four strategies outlined below has the following characteristics:
- For the board and C-suite, technology is a key source of competitive advantage, making it a strategic priority.
- IT and business teams work together to avoid complexity by changing simultaneously.
- Investing in simplification is an ongoing process rather than a one-time endeavor. The complexity of vendor ecosystems, app portfolios, data assets, and architecture will constantly be driven by external factors.
- One of the objectives for the business and technology stack components that deserve market distinctiveness is to have a world-class engineering function and architecture capabilities.
- Constant technological advancement and investment will eventually supplant some traditional forms of spending, like hiring personnel for contact centers and opening physical locations.
The significance of correctly executing strategy and technology choices is underscored by the substantial correlation shown between performance and these decisions. Leaders in the industry like JPMorgan Chase, DBS, Capital One, and BBVA show that a winning cycle in technology begins with persistent, hard work to modernize and simplify where it counts most.
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