Banking Supply Chains: Not Just About Customers
By Mark Dangelo
April 18, 2017
Mark Dangelo is president of MPD Organizations LLC, featuring books, industry reports and articles. He is a strategic management consultant, outsourcing advisor and analytics specialist with extensive process, technology and financial results and is a frequent contributor to MBA NewsLink and MBA Insights. He can be reached at email@example.com or at 440/725-9402.
It's complicated, it's messy--but supply chains within banking organizations hold the greatest opportunity to compete and save money as utility and Banking-as-a-Service operating models expand.
There are so many things we accept as fact when it comes to banking and finances including how our products and services are built and consumed. As financial services and banking organizations, we are obsessed with the optics of what we offer, how our brand is perceived, where customers value our services and what regulators are privately saying to us. In truth, no one can fault bankers for worrying about optics, given the negative media attention (much of it self-inflicted) during the past decade.
Traditional operating procedures necessitate that when potential consumers come seeking transactional products or asset-backed debt at our institutions (virtual or real delivery), we often want to know our customer in detail. We ask them for information about their habits, existing obligations, ability to pay, personal identifiers, how they are using our solutions (or money) and anything else we need (or want) as part of regulatory demands and traditional risk management. For some consumers, bankers have become the Orwellian "Big Brother."
During the past decade, we've expanded our customer knowledge by asking or seeking social internet usage, competitive offerings, private information (often gained when they opt in to our apps down to their location), the type of phone being used and assembling third-party data to build a profile of every individual consumer. It does appear appropriate, considering that global debt now exceeds all GDP by 325%--nearly $215 trillion bring forth elevated risks of default (Institute of International Finance).
As a rule, we've greatly increased knowledge about our customer "supply chains"--but we are surprised that these same customers increasingly view decades of back-office processing or our entire institution as a "utility" or service that adds little value. As Fintech advancements push front and middle office solutions into successive iterations driven by pervasive mobility and robust data intelligence, consumer relationships with banks themselves has become one of commoditization--anyone will do if it fits my apps. Stated as consumers see us, "What unique value do you provide?"
This creates a series of problems for financial institutions. In the past, challenges to their internal fulfillment or supply chain efficiencies were between competitors under the watch of regulators. Now, consumers are using P2P settlement solutions and fixating on a mobile platform rather than the iconic capabilities financial institutions built over decades. Factor in tens of billion put into startups in the past three years designed to replace vast portions of our infrastructure, while shifting consumer touchpoints to third parties, and we seemed surprised that more than one-third of customers would rather bank with Amazon than a bank itself.
Consumers increasingly have a retail mindset and approach finances the same way. Banks seemingly failed to notice the quantum shift especially among the largest demographic segment--the Millennials. For this 75-million strong demographic, 77 percent always have their phone (and apps) with them, 53 percent don't think banks have anything to offer and 71 percent would rather go to the dentist than listen to a bank (American Bankers Association).
For supply chains implicitly embedded within financial institution operations by the processes, directives and technologies selected, delivery chaos and organizational resistance can be severe. The realities facing financial institutions brought on by capability limits and pressures are no longer about an organization adapting to one or two hazards to their operating models--there are many threats at once.
To put this complexity into perspective, let's look at an illustrative graphic applicable to most financial institutions, and in particular, their asset-backed segments (e.g., mortgage auto, boat):
Note: There is an implied one to many processes per supply chain. Therefore, a supply chain can incorporate many processes.
What is immediately apparent, whether you read every entry or not, is that the complexity of financial institution change is well beyond ingrained ideals of transitioning an enterprise, which cannot be accomplished by a one-off change or acceptance of channel or efficiency goal. Today, financial institutions face a fundamental and comprehensive redesign of their own supply chains starting with the customer and working back into every process and procedure.
It is this approach of moving through the supply or delivery chain, assessing existing and future capabilities (i.e., existing, build, partner, acquire), which will provide greatest value not just for efficiencies, but a clear understand of "can we compete?" If the answer is yes, then the "how" booking positive results, coupled with "what we will provide" creates a map for expansion or redevelopment.
An example of complex data product improvement designed to delight the consumer, as McKinsey noted in its digitization of business process brief, is where a bank case study "cut the cost of a new mortgage by 70 percent and slashing time to preliminary approval from several days to just one minute." Reworking and augmenting the entire supply chain was mandatory.
As we assemble assessments, taking to account large number of variables and internal politics, the reality of financial realities appears overwhelming--just too hard to do. Beyond the bravado of "we will dominate the market," the layers of components from operational intelligence to strategies and patterns to regulatory compliance to risk analysis must be matched to partnerships, joint ventures, business delivery capabilities and our maturity with digitization.
And then, within each of those segments, they are further decomposed into additional functional categories that demand further scrutiny before a single line of code can be cast. It is precisely why IT during the past two decades has become so fragmented within and across business lines and why vast amounts of time and capital are lost to "white elephants" reminiscent of custom building old TDA and DDA systems.
Yet, when our enterprise maps these desired changes to meet consumer demands, additional levels of necessities become apparent. The following graphic illustrates the sophistication of analysis necessary for supply chain examination, and how some of these categories interact (e.g., plug-and-play) with other organizational demands.
Some have written that this redefinition of internal supply chains is a natural evolution as enterprises apply simple digitization and move into multifaceted digitalization. Whatever the label, it will be the future for financial institutions. For institutions trying to negotiate BPO or ITO contracts in the middle of transformations, Cognizant's How Banking as a Service Will Keep Banks Digitally Relevant and Growing offers a unique discussion from an outsourcers viewpoint addressing some of the plug-and-play items.
It might be heresy to some, but introduction of regulations may have slowed transitional needs to achieve a market-driven transformations (as noted in the first diagram above). Moving forward, if regulations are relaxed or not-enforced, then competitive pressures alone over the next 2-5 years will force many institutions into shotgun mergers and acquisition or to redefine their business models as utilities allowing others to deal with value-added and highly fluid customer interactions. An argument can be made that the number of banks will continue to shrink year-to-year even with recent application of new banking charters due to a failure to comprehend material transformations needed within and across enterprise supply chains.
Moreover, financial institutions' cultures and reward structures are driven towards "high-producers" or those who can increase the top line. Enterprise models are constructed around individual customers and how we acquire, cross-sell and up-sell to them--a "one-stop shop." Yet, the model emerging is one where financial institutions are not, and likely not to be, the starting point for customer contact. The future financial institution models are increasingly based upon layered collaboration (not just top performers), consumption not construction and information standardization with a virtual staffing model.
Whatever the circumstances facing your financial institutions and before we chase solutions, we should examine and integrate them into our own complex supply chains--if they fit without the supply chain being materially reworked. For financial institutions to remain relevant, traditional organizational approaches (i.e., not touching the internal supply chains) cannot be THE competitive response in the face of permanent and fundamental shifts in the way financial offerings are being used by diverse consumer and homeowner demographics. These commonalities of problem and opportunity solutions are precisely what has led to commoditization of the industry and consumer perceptions of what value financial institutions deliver in their lives.
If and when Dodd-Frank and the hundreds of individual mandates are removed or changed, those banking operations longing for a return of the glory days, may find themselves marginalized. To assume there is a value in rollbacks, there is an implication which includes a steady-state across their operating environments and customer interactions. As we have seen in the preceding diagrams, none of these plug-and-play categories have remained constant, and removal of regulations will likely yield a vast amount of expensive chaos--and perhaps a call for re-regulations.
A method to avoid chaos is to transform internal supply chains with a business model that provide utility processing and BaaS features. The "ancient ways" of banking are gone. Reinstating them with regulation is no better than with regulation. Consumers are calling for new omnichannel models, new supply chains--are we prepared to positively answer them?
(Views expressed in this article do not necessarily reflect the views or policies of the Mortgage Bankers Association. MBA Insights welcomes your contributions; articles or inquiries should be submitted to Mike Sorohan, editor, at firstname.lastname@example.org.)