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Mckinseys' Global Banking Annual review of 2022 states that: 'Banks must become more resilient and reinvent their business models to ride out the current volatile period and achieve long-term growth and profitability. Todays retail banking market is vastly different in shape and structure from the old environment, in which the traditional model of universal banking was economically sound. Second, they need to efficiently allocate their finite resources to areas of spend with the highest impact and ROI. Ritesh serves both national and global banking and securities groups who are looking for risk management in preparation for economic and climate change, including net zero banking and climate . The next step was to then systematically redesign and reengineer the customer journeys at scale. One bank that undertook a customer-experience transformation concluded that the lifetime profitability of a satisfied customer willing to actively recommend the bank to his or her friends was five to eight times greater than one who had a negative perception. These are being developed by established incumbents and new players, encouraged by increasingly demanding consumers. term. Executives on the marketing side thought about life events, while product owners viewed the customer experience through the lens of purchasing products. On one level, banks need to ensure that execution, infrastructure, and support capacity are optimized to ensure constant operation of all use cases and journeys. Many customer-experience programs are launched off the back of analyses such as this. Leaders should act promptly to take advantage of strong financials and double down on three key capabilities essential to a platform-based business model: data analytics, a cutting-edge technology stack, and an agile operating model. Author Talks: What is the key to unlocking digital transformation Underpinning these actions, appropriate technical documentation and cataloging of assets (for example, APIs, ML models, data dictionary, DevOps and MLOps tools) ensure proper governance and access control. A myopic approach to vendor selection and the customization of individual applications can undermine the impact of a new CBS. Such sprints took place over periods of two to four weeks. Within the next three to five years, we expect to see digital bank return on equity increases of 5 to 7 percent. As a result, the risk of disruption to critical operations is minimized, and customer-facing applications run with high availability and responsiveness. Managing a customer-experience transformation in banking. Banks must shift their thinking from rigid products to fit-for-purpose, customer-centric offerings. CIOs and CTOs want to modernize the system architecture to enable more capabilities, such as rapid product releases. Andr Jerenz: How can incumbent banks succeed in this new era of digital banking? Some institutions have tackled this challenge; many are behind the curve. These begin with a top-down, unwavering C-suite commitment to the program and to modeling the customer-experience behaviors that the organization espouses. When a well-defined stock of APIs-as-products are orchestrating flows across systems, product innovations can advance from concept to production and deployment of minimum viable product within 30 to 60 days. and leading organizations have improved issue-resolution time and planning time by between 30 and 50 percent.9Wouter Aghina, Christopher Handscomb, Jesper Ludolph, Daniel Rona, and Dave West, Enterprise agility: Buzz or business impact? March 2020, McKinsey.com. Raphael Friese is a consultant in McKinseys Stuttgart office, Harald Kube and Henning Soller are partners in the Frankfurt office, and Sebastian Schbl is an associate partner in the Berlin office. These include, among other things, a consistent focus on value, ensuring the customers central role in any transformation, and the ability to scale a program. He leads McKinsey's efforts on global banking, climate risk and climate readiness. Being able to quickly assess resources and run accurate predictive models are crucial . This all must be underpinned by a new agile operating model that integrates the business and IT, and a workplace that welcomes people. Andr Jerenz: How can banks cope with the extent of the massive change? Businesses in highly regulated industries such as insurance and banking must adhere to national or regional regulations and ensure that regulators' systems can connect with their own. The most successful customer-experience efforts apply a human filter to collected information to address key questions about the motivations and wishes of customers. Business and technology collaborate as co-owners in designing and managing operating models and outcomes. Consequences of this approach include overcustomization of a standard product and complex interfaces or scope changes during the runtime of a project. How to implement transformations for long-term impact | McKinsey First, many banks ignore the need to achieve early, quick wins to demonstrate value and build momentum for change. Regulation. But not all banks are prepared for a full digital transformation. Sep 21, 2022 52 Dislike Share Management Consulted 37.5K subscribers McKinsey case prep program: https://managementconsulted.com/consu. Digital transformation initiatives 40% of all technology spending will go toward digital transformation, with enterprises spending in excess of $2 trillion in 2019. They should bear in mind, for example, that introducing a change in an existing digital channel could potentially entail changes not only across the front end but also across multiple interfacing systems, core product processors, and analytics layers. Nicolas Maechler is a partner in McKinseys Paris office, Jonathan Michael is a partner in the Sydney office, Robert Schiff is a partner in the San Francisco office, and Thomas Rdiger Smith is an associate partner in the Melbourne office. Many organizations embark on large-scale transformations, only to end with frustrated leaders and worse-than-expected long-term results.These efforts typically start with high aspirations and significant energy then lose an average of 42 percent of their expected value in the later phases of the transformation program, where the focus shifts to executing and sustaining change. Relatedly, they may be less than fully transparent at the start about the implications of the transformation, such as possible stability issues during migration. They need to better understand their customers, identify specific needs or pain points, and respond by providing more personalized, targeted offerings to address those needs. The infrastructure should also support the development of ML models through automated and repeatable processes. For example, transferring workloads from traditional on-premises infrastructure to public cloud requires careful measures to protect customer data, along with a robust strategy for detecting and remediating potential threats and vulnerabilities. However, to succeed in todays fast-evolving market, which leaves little margin for underperformance, it is imperative for banks everywhere to know where they make a profit and where they dont (Exhibit 1), and to protect and expand their most strategic revenue streams. To attempt to meet these rising expectations and compete effectively in the industry, incumbent banks have invested heavily in technology modernization programs and new-venture buildswith mixed success. Welcome to this McKinsey financial services case. Many organizations have spent billions of dollars on multiyear technology initiatives within silos, only to find that they fail to generate the scale benefits required to justify investments. In all cases, the CEO must make customer experience a priority, and in some cases the appointment of a chief customer officer can serve to underline that commitment. Retail Banking Consulting and Strategy Services | BCG Despite the growing awareness of the value in superior customer experience, efforts to improve it are rarely held to the same rigor as an effort behind, say, a traditional productivity transformation. Eric Lamarre: Just yesterday we were with the CEO of a very large bank here in New York. Yet these vendors can underestimate the complexity of the requirements, investing too much time and money in tech without considering whether it meets specific business needs. . You need to measure it and adopt and scale it. Customers are central to a wave of new opportunities and challenges facing banking executives, with regulators increasingly expecting banks to deliver on more than just credit-risk management and associated capital requirements. As value is demonstrated, larger and larger parts of the organization are included. Product companies understand better than banks and other service organizations that using customer insights is a way to develop a superior product. Public cloud enables velocity through higher levels of automation, templates, and reduction of operational risk. Regular risks include potentially conflicting agendas or timelines. To compete for data on an equal footing with technology companies, banks will need a comprehensive data infrastructure to support data collection, storage, and advanced analytics, as well as a digital marketing engine to translate analytical insights into personalized messages that anticipate individual customer needs and intentions. As AI technologies play an increasingly central role in creating value for banks and their customers, financial-services organizations need to reinvent themselves as technology-forward institutions, so they can deliver customized products and highly personalized services at scale in near real time. Inadequate planning and the temptation to keep legacy applications can siphon off resources and sap a transformations momentum. They are facing increased regulatory pressure, continuing poor publicity and a deterioration of customer trust. Agile, iterative testing then allows a team to test new approaches, learn from failure, and refine and start over again at a high metabolic rate. All stakeholders tend to underestimate the time required to migrate customers to the new CBSin many cases, by as much as 75 percent. However, few of these programs home in on where the value comes from. Second, provide a developer-focused platform that includes a standardized set of flexible APIs and configurable code so developers can easily launch and deploy new products without extensive integrations, training, and people. Exhibit 1 The vulnerabilities inherent in the universal banking model are becoming more severe as three key trends continue to reshape the competitive environment: shifting in scale advantages from branches to innovation digital attackers taking the first significant bites out of traditional banks' revenue streams The Future of Banking Operations is Digital | Accenture In our experience weve found banks increasingly finding success with at scale transformation efforts. Training existing employees to become proficient in higher-value activities is a crucial lever, and our experience and research show that reskilling can be 20 to 30percent more cost-efficient than recruiting new talent. At traditional banks, developers spend less than one-thirdabout 32 percentof their time writing code; most of their time is dedicated to maintenance, infrastructure upgrades, and middle-layer or API builds rather than leveraging standard APIs. One bank found that customers willing to promote the bank were four times more likely than neutral customers to add additional products. A cutting-edge technology stack to reduce costs and speed up innovation. Any organization undertaking an AI-bank transformation must determine how to structure the organization so that its people interact and leverage tools and capabilities to deliver value for each customer at scale. The new, tech-enabled operating model will significantly blur the lines between what we traditionally called business and what we traditionally called technology. When implemented successfully, this foundational layer can enable a bank to accelerate technology innovations, improve the quality and reliability of operations, reduce operating costs, and strengthen customer engagement. Digitally-focused banks benefited from market valuations that, on average, were 18% higher than less digitized peers in 2019, and 27% higher in 2020. Some financial institutions, despite seeing the imperative to change, have maintained and modernized their legacy platforms. Banks often lumber in the middle of the pack. Remaking banking customer experience in response to coronavirus, The expanding role of design in creating an end-to-end customer experience, From touchpoints to journeys: Seeing the world as customers do. Fickle customer loyalties. Ashwin Adarkar is a senior partner in McKinseys Southern California office; Stefano Cant is a partner in the Milan office, where Enrico Lucchinetti is a senior partner and Zaccaria Orlando is an associate partner; Klaus Dallerup is a senior partner in the Copenhagen office; and Vito Giudici is a senior partner emeritus in the Hong Kong office. How to become tech-forward: A technology-transformation approach that works, DevOps: The key to IT infrastructure agility, A new management science for technology product delivery. In our experience, a handful of elements are necessary to execute any program that will deliver durable impact. At many institutions, standard practices now include omnichannel engagement, the use of APIs to support increased real-time information exchange across systems, and the use of big data analytics to improve credit underwriting, evaluate product usage, and prioritize opportunities for deepening relationships. Before embarking on a fundamental transformation of core technology and data infrastructure, financial-services organizations should craft a detailed strategy for building an AI-first value proposition. We recommend addressing three components as part of a comprehensive program: the workforce, the workplace, and the work model. For example, a sound DevOps and release-management strategy can contribute to a 25 to 30 percent increase in capacity creation, a reduction in time to market of 50 to 75 percent, and more than a 50 percent reduction in failure rates.7Thomas Delaet and Ling Lau, DevOps: The key to IT infrastructure agility, March 2017, McKinsey.com. McKinsey on digital transformation in banking (free research) According to a 2021 McKinsey survey, for example, 71 percent of consumers expect personalization from businesses and brands, and 76 percent of those consumers get frustrated when they dont receive it. If an organization allows interdisciplinary teams across the enterprise to search and extract data held on the platform, these teams can optimize their data consumption according to customer needs and market opportunities. Digital bank transformation: PwC I. Various business lines have set up organically built platforms upon this foundation, making it costlier and more and more complex to maintain. To that end, we find it useful for banks to apply the same rigor of value attribution to customer experience as they do for productivity programs. A progressive approach to core banking transformation - IBM McKinsey on digital transformation in banking (free research) I only just stumbled across this 124 page report from McKinsey and, building on yesterday's free research from Deloitte, this report is all about digital transformation and replacing core systems, my favourite subject. The capabilities of the reimagined engagement layer1Violet Chung, Malcolm Gomes, Sailee Rane, Shwaitang Singh, and Renny Thomas, Reimagining customer engagement for the AI bank of the future, McKinsey.com, October 13, 2020. enable the AI bank to deliver highly personalized seamless journeys across bank channels and within partner ecosystems. Internet retailers and other e-commerce players typically sit atop customer-satisfaction rankings. Each of the main retail banking business models requires an IT infrastructure that is capable of handling significant variations in demand for streaming and processing capacity and delivering new solutions through fast innovation cycles. Often the first round of initiatives will not deliver the desired satisfaction levels. Differences in the profitability of key retail banking businesses have always existed to some extent, depending on the market, and daily banking has often served as the foundation for building lifetime client relationships. In many cases, banks choose a tech vendor based on price rather than the vendors banking industry knowledge and experience with a CBS. In complex organizations it is easy for change efforts to get stuck in the depths of business silos, even when the objective is to create a cross-functional platform for tracking customer preferences and improving outcomes. Winning in digital banking - McKinsey & Company These competing priorities often result in significant misunderstandings and mismatched incentives and planning horizons. Digital and cloud transformation for banking - PwC This approach can produce value early and provide the successes to build momentum and secure ongoing support from the organization. Should they undertake the challenge and begin thinking about how best to chart their course to becoming an AI bank, their leaders may consider 12 key insights gleaned from the experience of financial-services leaders that are in the process of carrying out such transformations (Exhibit 3): If banks are to thrive in a world where customer expectations are increasingly shaped by the AI-and-analytics capabilities of technology leaders, they must rebuild their core technology and data infrastructure to support AI-powered decision making and reimagined customer engagement. The next article in this series examines the crucial elements of the platform operating model. the workforce, the workplace, and the work model. Some banks don't have a decommissioning plan for legacy applications, processes, and products at the start of the transformation, choosing to keep them running to reduce the transformations initial complexity. McKinsey on digital transformation in banking (free research) July 2, 2020 by Chris Skinner I only just stumbled across this 124 page report from McKinsey and, building on yesterday's free research from Deloitte, this report is all about digital transformation and replacing core systems, my favourite subject. When setting up such environments, banks must build upon the foundational elements of infrastructure management, including observability, resiliency, and high availability, as well as a robust configuration strategy. There are multiple reasons for this. What follows are edited excerpts of their conversation. It is essential to enable data-science teams with appropriate tooling and access to scalable computing power so that they may experiment and innovate. OKRs: The bridge to succesful and Sustainable Transformations These processors are also complemented by microservices, or discrete applications (such as for payments, card accounts, or loans) that externalize the logic within traditional core platforms. Relatedly, banks may not detect missing functionality in the new system or fully understand its complexity. A second benefit accrues from continuously improving service design. McKinsey Global Services em Lisboa. Self-monitoring and preventive maintenance also are automated, and disaster recovery and resiliency measures run in the background to ensure constant uptime even if incidents evade automated self-repair and require manual intervention. This banks story is not unique. In brief Banks need to accelerate their journey to digital to survive the threats that tomorrow poses. These customers also typically see the bank as their main financial institutiona key driver of overall lifetime revenue. Building the core technology and data capabilities upon a highly automated, hybrid-cloud infrastructure can enable the AI bank to scale rapidly and efficiently as it gains competitive and differentiating capabilities. McKinsey Financial Services Case Interview - YouTube The work at level one was to establish a fact base behind prioritized customer journeys, for example, understanding what truly drives customer experience and satisfaction in securing a home loan. They should also develop a road map for the transformation, focusing on three dimensions of value creation: faster time to market with efficient governance and productivity tracking, clear alignment of demand and capacity to meet strategic and near-term priorities, and a well-defined mechanism to coordinate change the bank and run the bank initiatives according to their potential to generate value. Mambu is a global provider of cloud banking platforms that offers infrastructure based in software as a service (SaaS) for banks and financial-services providers. This is no small challenge, and it must be reflected both in technical talent capacity and in bank hiring policies. The Growth of APIs in Banking. Today, the requirement has changed to hiring the best people who can manage technology. See Anusha Dhasarathy, Isha Gill, Naufal Khan, Sriram Sekar, and Steve Van Kuiken, How to become tech-forward: A technology-transformation approach that works, November 2020, McKinsey.com. Furthermore, these changes are not limited to the retail business: expectations of corporate and wealth management customers are also rapidly increasing. The most direct path to success is to target profit pools in specific businesses of the universal banking modeldaily banking (deposit accounts, payments, and credit cards), navigating life events (with complex lending products), or building and protecting wealthwhere the bank can define and deliver a value proposition that can win in our new digital age. This change requires a massive shift, including in the role of the CIO. Finally, banks often fail to set up transformation programs with scaling in mind. Hosting these environments on a distributed-network cloud environment allows a balance between paid-up-front baseline storage and computing capacity, on the one hand, and, on the other, elastic on-demand surge capacity without disruptions to service. Andr Jerenz is a partner in McKinseys Hamburg office, and Henning Soller is a partner in the Frankfurt office. For the biggest banks, how they treat their customers is becoming more of a political issue, as any CEO who has been called before a congressional or parliamentary inquiry can attest. You can also generate more revenue from customers who manage their money with a smartphone, tablet, or PC. Ritesh is a core member of the Global Risk and Resilience practice. It also strengthens employee engagement, measured in higher employee retention and higher customer satisfaction, which also contributes to financial performance.2Enterprise agility: Buzz or business impact?, McKinsey, March 20, 2020. Digital banks have arrivedand they are here to stay. Traditionally, banks had to hire the best traders and relationship managers to get the business up and running.
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