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Transforming banking operations through advanced operating modelsAccording to recent research, banking executives believe there is untapped potential for advanced operating models to address the most strategic enterprise challenges

EXECUTIVE SUMMARY

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About the researchIn 2014, Genpact commissioned a research project conducted by an independent research firm. The goal was to assess the potential for new operating models across a wide spectrum of industry sectors and functions. More than 900 senior-level executives completed the survey. Respondents were screened based on their ability to materially influence functional decisions. This analysis complements other research and insight derived from Genpact’s experience designing, transforming, and operating business processes and operations.

This document presents the findings drawn from 238 senior executives engaged in the banking industry. They are predominantly located in North America (81%) and come from companies with more than 10,000 employees. More than 70% of the banks covered by the survey offer both retail and commercial services. The sample includes 201 banks that offer retail services and 206 that offer commercial services.

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As the banking industry restructures in the wake of the financial crisis and a rapidly changing regulatory landscape, COOs and other senior banking executives are grappling with unprecedented change. In addition to regulatory and cost pressures, there is a growing imperative to meet increasing customer expectations in a volatile market. Transforming business processes to implement advanced operating models is a large part of the solution, but levels of process maturity and preparedness for transformation vary widely across banking functions. For retail banks, payments processing and account set-up and servicing offer opportunities for wide-ranging impact, while anti-money laundering is specialized but critical. Operational transformation in commercial banking seems slightly more likely to focus on risk management. The three levers of operating model transformation—technology, process re-engineering, and advanced organizational structures (shared services, business process outsourcing, and hybrids thereof)—create impact differently. Using commissioned research, Genpact has examined these trends to understand how banking institutions are evolving their operations to achieve business impact.

Introduction

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Compliance and risk are the most frequently named challenges in retail banking today across all functions, while customer satisfaction ranks third

Regulatory compliance, risk management, and customer satisfaction are the main challenges confronting retail banks today•Ensuringcompliancewithregulationsiscitedmostoften,pointedtoby72%ofretailbankingexecutivesasoneoftheirthreetopchallenges(Figure1).

•Managingriskranksclosebehind,at71%,followedbyincreasingcustomersatisfaction,at58%.•Operationsexecutivesinretailbanksfacesimilarchallengesasdotheircounterpartsinotherfunctions.

Figure 1

% of respondents from various functions stating challenge as among the ‘Top 3‘ for their company

n=201executivesfromretailonlyandretail/commercialbanks

0 10 20 30 40 50 60 70 80

Ensure compliance to regulations

Increase customer satisfaction

Reduce capital and asset intensity

Manage risk

Increase growth and scalability

Enable company’s innovation

Enable agility and adaptability

Reduce costs

Overall

Finance

Operations

Risk

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% of respondents from various functions stating challenge as among the ‘top 3‘ for their company

Commercial bank operations executives cite compliance and risk management nearly equally as top challenges •Ensuringcompliancewithregulationsiscitedoftenbycommercialbankingexecutives,with76%

indicatingthatitisoneoftheirthreemostimportantchallenges(Figure2).•Riskmanagementisclosebehind,at70%,followedbyincreasingcustomersatisfaction,at59%.•Operationsexecutivesincommercialbankstendtogivenearlyequalprominencetocomplianceandriskmanagement,eachat74%,aswellascustomersatisfaction,at69%.

Commercial bank executives face many of the same challenges as do their counterparts in retail banks

Figure 2

n=206executivesfromcommercialonlyandretail/commercialbanks

Overall

Finance

Ensure compliance to regulations

Increase customer satisfaction

Reduce capital and asset intensity

Manage risk

Increase growth and scalability

Enable company’s innovation

Enable agility and adaptability

Reduce costs

0 10 20 30 40 50 60 70 80

Risk

Operations

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The payments processing function materially addresses many of the most important challenges

•Paymentsprocessing(90%),followedbyaccountset-upandservicing(86%)aremostfrequentlyseenashavingmaterialimpactoncustomersatisfaction.

• Inretailbanking,anti-moneylaunderingstandsoutasthemostfrequentlycitedfunctionforaddressingbothregulatorycompliance(89%ofrespondents)andriskmanagement(77%).

•However,impactindexesthattakeaccountofboththeimportanceofeachchallengeandtheabilityofeachfunctionthataddressesit,indicatethatpaymentsprocessingisperceivedashavingthebiggestimpact,withanindexof156,comparedwith146formortgageservicingand142foraccountset-upandservicing(Figure3).

Figure 3

n=48retailbankingoperationsexecutives

Retail banking operations executives say payments processing has high potential for impact on customer satisfaction

FUNCTION IMPACT INDEX* combining stated importance of challenges and stated ability of a function to address them

*Impact of a function on company's challenges is defined as f(xi) = ∑ n

jxijyj, where xij is the % of respondents who believe that improvement in the function xi will have a material impact on the challenge yj ; yj is the % of respondents citing the challenge as among the ‘Top 3’

156

146

142

136

134

99

97

83

Payments processing

Retail brokerage

Anti-money laundering

Retirement services

Multi-channel customer management

Account set-up and servicing

Mortgage servicing

Mortgage origination

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n=35commercialbankingoperationsexecutives

Figure 4

Business banking origination/servicing and risk management are believed to impact the most pressing commercial banking challenges • Incommercialbanking,thelargestproportionofoperationsexecutivessaythattherisk

managementfunctioncanmateriallyimpactregulatorycomplianceandriskchallenges.•Morethantwo-thirdssaythatbusinessbankingorigination/servicingcanhavematerialimpactoncustomersatisfaction.

•Thesetwofunctionsalsohavethehighestscoresonimpactindexes(Figure4).

Commercial banking operations executives most often point to the business banking/origination servicing function as having potential for addressing key challenges

FUNCTION IMPACT INDEX* combining stated importance of challenges and stated ability of a function to address them

*Impact of a function on company's challenges is defined as f(xi) = ∑ n

j xijyj, where xij is the % of respondents who believe that improvement in the function xiwill have a material impact on the challenge yj ; yj is the % of respondents citing the challenge as among the ‘Top 3’

155

133

91

74

Business bankingorigination/servicing

Equipment finance

Auto finance

Risk management

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Retail brokerage and retirement services are prepared to achieve process maturity; mortgage services are least prepared

•Retailbankingoperationsexecutivesseeanti-moneylaunderingandpaymentsprocessingfunctionsasthemostmaturefunctions,with94%and90%ofrespondentsratingthem,respectively,asmatureorverymature,whilenearly40%seeretirementservicesasnotyetmature.

•98%ofoperationalexecutivessaythatanti-moneylaunderingiswellpositionedtomaturefurther(preparedorfullyprepared),andthepaymentsprocessingfunctionisclosebehind,at86%

•Mortgageservicingandretirementservicesrankattheoppositesideofthespectrum,asaboutone-thirdoftherespondentslamentedtheirlimitedpreparationtomaturefurther(Figure5).

Retirement services 33 37 30

32 35 33

Mortgage origination 32 46 22

Multi-channel customer management 43 38 19

Account set-up and servicing 50 33 17

Retail brokerage 39 45 16

Payments processing 44 42 14

Anti-money laundering 72 26 2

Mortgage servicing

Somewhat/Not preparedFully prepared Prepared

Figure 5

% Respondents stating the preparedness of their organization to mature a function

n=48retailbankingoperationsexecutives

Anti-money laundering is considered the most mature retail banking function

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% Respondents stating the preparedness of their organization to mature a finance function

n=35commercialbankingoperationsexecutives

Figure 6

Most functions are fairly mature; risk management and business banking originations/servicing are considered the most mature

•Mostcommercialbankingfunctionsarerelativelymature,withtheproportionsofoperationsexecutivesratingthemmatureorverymature,rangingfrom94%forbusinessbankingorigination/servicingto88%forautofinance.

•Riskmanagementandbusinessbankingorigination/servicingarethoughttobethebestpreparedtomaturefurther,withnearly90%ofrespondentsratingbothfunctionsaspreparedorwell-prepared.

•Attheoppositeend,autoandequipmentfinancearelesspreparedtoevolve(Figure6).

Most commercial banking functions are mature, but risk management and business banking operations are prepared to mature further and impact key business challenges

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Auto finance 48 14

Equipment finance 48 26

38

26

Business banking origination/servicing 62 26

Risk management 51 38

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PreparedFully prepared Somewhat/Not prepared

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Advanced organizational models are most often seen as able to have material impact, though the perception varies across operations

•Advancedorganizationalstructures—includingsharedservicecenters(SSC),businessprocessoutsourcing(BPO),orhybrids—aremorefrequentlycitedbyretailbankingoperationsexecutivesashavingmaterialimpactthaneitherbusinessprocessre-engineering(BPR)ortheradicallyimproveduseoftechnology.

•Notwithstandingsignificantvariationacrossfunctions,theproportionofrespondentsstatingthatadvancedorganizationalmodelscanhavematerialimpactonthefunctionishighest(ortiedforhighest)forfiveoftheeightfunctions(Figure7).

•Ontheotherhand,whiletheytendtobelessbroadlyapplicable,technologyandBPRseemtodeliverhigherdollarimpacts(aboutUSD260millionperannum,comparedtoabout160millionforadvancedorganizationalmodels).

Figure 7

% of respondents stating the initiative can have a material impact on the function

n=48retailbankingoperationsexecutives

Executives see advanced organizational structures as more applicable to evolve banks’ operating models, but BPR and technology are considered to be able generate greater dollar impacts

Function Impact Index* combining stated importance of challenges and stated ability of a function to address them

Business process re-engineering

Radically improved use of technology

Impact Index*

BPO or SSC or Hybrid1

Account set-up and servicing

Mortgage servicing

Mortgage origination

48

42

2744

56

29

28

42

46 146

136

1425354

Retail brokerage 29 1925 97

27

35

Retirement services 274619 8321

274228 33 13440

Multi-channel customer management 274828 52 9948

Payments processing 275828 40 15648

33

29

Anti-money laundering

1 BPO – Business Process Outsourcing, SSC – Shared Services

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% of respondents stating the initiative can have a material impact on the function

n=35commercialbankingoperationsexecutives

Figure 8

Many believe advanced organizational models have broad impact for business banking; technology and re-engineering are seen as more important for risk management

• Incommercialbanking,advancedorganizationalstructuresaremorefrequentlycitedbyoperationsexecutivesashavinggreatermaterialimpactonbusinessbankingoperations,equipmentfinance,andautofinance(Figure8).

•Theradicallyimproveduseoftechnologyismostoftenseenashavinganimpactonriskmanagement.

•BothtechnologyandBPRareseenasgenerallyhavingahigherdollarimpactinsituationsinwhichtheyareapplicable(aboutUSD300millionperannum).

Commercial banking executives say advanced organizational structures are most likely to have material impact on business banking operations

Business process re-engineering

Radically improved use of technology

Impact Index*

BPO orSSC orHybrid1

Function Impact Index* combining stated importance of challenges and stated ability of a function to address them

1 BPO – Business Process Outsourcing, SSC – Shared Services

11Auto finance

46Risk management

20 31Equipment finance

51 6054Business banking

origination/servicing

34

17

20

23

51

91

155

133

74

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In conclusion Asthebankingindustryrestructuresinthewakeofthefinancialcrisis,COOsandotherseniorbankingexecutivesarefocusedonovercomingthechallengesofproliferatingregulatoryrequirements,amorecomplexriskenvironment,andincreasingcustomerexpectations.Theresearchersexaminedhowthosechallengescanbetackledwiththree levers of operating model transformation:technology,processreengineering,andadvancedorganizationalstructures.

TherelatedtransformationofoperationsisanuntappedstrategicleverfortheCOOaswellastheCEO.However,itissometimesseenasa formidable undertaking.

Ourexperienceofadvancedoperatingmodels,accumulatedover15years,clearlyindicatesthatthereareagileandpracticalwaystotransform.Thekeyistodesign,transform,andruntheprocessesthatpoweradvancedoperatingmodelssothattheyclosely align withmeasurable business goals,thusavoidingsaddlingthecompanywithunnecessaryandoftenunmanageablecomplexity.

Thisapproachfocuses more rigorously on the sources of impactanddeliberatelydisregardsanypracticethatdoesnotyieldmaterialoutcomes.Italsotakesamoreobjectiveandholisticlookattechnology,analytics,andorganizationalpractices.

Finally,thisapproachharnessestheprocess and organizational leversavailablefromestablisheddisciplines,suchasreengineering,sharedservices,outsourcing,andglobaldelivery.Wethinkthereisasmarterwaytotransformoperatingmodelsandaddressthemostcomplexstrategicchallenges.ThisisawayforCOOstomaketheirenterprisesmoreintelligentandgeneratematerialimpact.

This document presented the highlights of research findings. Discover more in the full report.

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About Genpact

Genpact (NYSE: G) stands for “generating business impact.” We design, transform, and run intelligent business operations including those that are complex and specific to a set of chosen industries. The result is advanced operating models that foster growth and manage cost, risk, and compliance across a range of functions. We have hundreds of long-term clients including more than one-fourth of the Fortune Global 500 and currently employ over 66,000 employees in 25 countries, with key management and corporate offices in New York City. Behind our passion for process and operational excellence is the Lean and Six Sigma heritage of a former General Electric division that has served GE businesses for more than 16 years.

For more information, contact, banking.solutions@genpact.com and visit, www.genpact.com/home/industries/banking-financial-services

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Genpact Research InstituteThe Genpact Research Institute is a specialized think tank harnessing the collective intelligence of Genpact – as the leading business process service provider worldwide - its ecosystem of clients and partners, and thousands of process operations experts. Its mission is to advance the “art of the possible” in our clients’ journey of business transformation and adoption of advanced operating models.

www.genpact.com/research-institute