Dramatic forces of change sweep banking industry

So far we haven't talked about profit or revenues. Because we believe, we need to have first the full picture of the landscape where we operate in. Once we are abreast with the overall scenario, we would be able to appropriately portray the modernisation agenda in the right frame for optimising intended outcomes.
Keeping in mind about the global economic market place, identified challenges and focussed areas and our country specific situations, we now highlight some of the most relevant areas of modernisation for banking business that are applicable for our country. These are:
* Redefining business strategies: It is the essence of time to modernise business strategies for making profit while negotiating with the multitudes of challenges some of which we have mentioned previously.
For example, shifting from interest-based revenues through loans towards fee-based income, including lines of credit and many types of credit guarantees reduces a bank's risk exposure to a large extent. Tricks of the trade are the scales/volumes since margins are comparatively lower than the interest income from asset products.
Recent global recession demonstrated how essential adequate liquidity is and what happens to banks and other financial institutions when a ready supply of cash and highly liquid assets runs low.
* Product innovation/product diversifications: Most of the banks haven't come out from the 'Plain Vanilla' products/services like lending, deposits, transaction services etc. At the advent of rapidly changing and highly volatile competitive market place, diversifications of products and services for satisfying the differentiated customer needs and expectations are the tricks of survival. Shifting from the 'supply-driven' product strategy to 'demand-driven' strategy is now highly essential. This also increases the opportunity of cross-selling even within the existing customers.
* Customer centricity/customer focus: Customer centricity is the favourite buzz phrase, as bankers strive 'to improve the customer experience' and 'put customers at the centre of everything we do.' Accenture's Top 10 Challenges for Investment Banks, 2011 contains important challenges that fall into the 'driving the client agenda' and 'refocusing on client needs' category, namely:
(1)    Refocusing on client needs;
(2)    Maximising client profitability;
(3)    Collecting more accurate and timely customer information;
(4)    Improving operational efficiency;
(5)    Providing a more attentive service;
(6)    Integrating multiple delivery channels; and
(7)    Bringing new products to market more rapidly.
* Differentiating from competition: The number of banks in Bangladesh is more than necessary and by any comparison, ratio is higher than that of the neighbouring countries. Coupled with the stringent regulatory guidelines and volatile country economy added with the new entrants, every bank faces very stiff competition. There is no alternative but to seek competitive advantages with innovative approaches into the business. To remain relevant and win against new competitors, banks need to move to a more streamlined and agile operating environment.
* Redefining operating model: Business functions and business support/operations functions must be closely knitted to guarantee prompt and efficient services. Any dissonance between front and back offices will trigger serious service issues and shoot up the operational costs while shrinking down the profit margin. There must be structured and systematically developed 'Operations Manual' encompassing each and every business functions for ensuring seamless operational supports in a controlled environment. Functional processes must be standardised, automated and customer- centric rather than product-centric having appropriate value chain.
* Business/service delivery channel/ alternative delivery channel: There must be clearly defined business strategy in creating multi-channel service delivery/distribution points keeping absolute focus on market-specific consumer needs.
Care must be taken so that banks don't fall on the '3E Trap' of trying to give 'Everything to Everyone and Everywhere'. An efficiently managed delivery channel of a bank can rightly empower its customers by offering timely and convenient services while keeping the operating costs much lower. But again, having dynamic and service-oriented service delivery channels doesn't necessary mean to waive the focus from keeping the presence of brand through establishing physical distribution points. Most commonly used alternative channels are ATM, POS, Internet Banking, Mobile Banking, Self-service Kiosk, e-commerce etc.
* Risk management and internal control: Although we are referring these two primal areas of focus as modernisation agenda in banking, these are in fact fundamental components of good governance for any kind of businesses especially for financial institutions. We are fostering these because we need to re-look and re-focus on these in the wake of frequent national and international frauds and forgeries that are taking place. Technology can play the most crucial role and can be effectively leveraged in establishing appropriate risk management systems including establishment and management of centralised risk database at enterprise and national level. This will enormously empower the financial institutions and the regulators in performing global, national and industry trend analysis for forecasting the risks, analysing the probability and impacts and proactively apply appropriate risk mitigation strategies. Most importantly, this would facilitate establishing an integrated risk management approach which would enable centralised control and monitoring of risks and allow organisations to take the risk exposures by choice, not by chance. These will ultimately ensure transparency and accountability to both internal and external stakeholders. Thus these would ensure highly credible corporate/brand image in the local and international market.
* Focus on SME business: Banks in Bangladesh should be continuing modernisation of every possible product and service for offering much-needed funding for the growth of SMEs (small and medium entyerprises) since this keeps the economy healthy and substantially contribute to poverty alleviation. Although, size of interest income is smaller than the large lending, risk exposure is also much lower in SME funding. SMEs, being the missing middle in the financial system, there is a huge untapped market. Banks have enormous business opportunities while directly contributing to the national economy.
* Resource alignment and cost optimisation: Although these are primitive management agenda, these should always be re-focused since appropriate resource alignment is directly proportionate to productivity and cost optimisation.
* Clearly-defined strategy for technology investment: Information Technology (IT) is globally accepted as one of the key drivers in coping with the rapidly changing market place. To gain the benefits of becoming the pioneer or fast mover in the industry by incorporating new technology into the business, many organisations invest heavily in IT. The foremost aspects of undertaking decisions on IT investment are conceptualising the banking needs in alignment with customer expectations and service conveniences, determining the time needed for such investment and selecting the right technology that would complement the strategic intents and forecast growth of the bank.
As part of modernisation agenda for banking, we will cover some of the most contemporary technology investments:
CORE BANKING SYSTEM (CBS): Core Banking System (CBS) is the fulcrum of banking business and financial system in this technology-driven market place. It demonstrates the synchronicity of business, operations and financial functions of a bank in alignment with vision, mission and strategic objectives. It is the enabler of ensuring superior customer services in a controlled, accountable and transparent environment. With a unique and standardise platform of showcasing 360 degree overview of every relationships of each customer from a single data repository, CBS is the ultimate processor of integrating everything we do in the banking business. In the contemporary banking business, it is an integral part of the journey to sustainable business growth. It is also empirical that a CBS is the much-needed business system to leverage the competitive edge. In the advent of rapidly changing and highly volatile competitive market place, diversifications of products and services for satisfying the differentiated customer needs and expectations are the tricks of survival. Shifting from the 'supply-driven' product strategy to 'demand-driven' strategy is now the essence of time. And CBS is the most significant catalyst in this transformation.
MOBILE FINANCIAL SERVICES (MFS): Globally, MFS is now the most-talked-about technology-driven service channel, especially for the people who don't have the access to formal financial system. This is an enabler of distributed financial eco-system across every corner of the country by ensuring financial inclusion of each and every person. Although profit margin in MFS is razor-sharp, economies of scales can still contribute to the bottom line while having substantial contributions to the socio-economic developments of the nation.
INTERNET BANKING: The finest benefit of internet banking is that customers are no longer needed to wait in lengthy and wearisome queues merely to request for a transaction or statement. Internet banking service would empower a bank's customers to take control of every of their relationships with the bank anytime anywhere as long as they are connected in the internet using commonly-used mobile devices. This is one of a worthy technology investment to offer differentiated and tailored service offerings to the customers. This can also reinforce the slogan of 'Green Banking'.
There is no alternative to modernising the banking business for securing improved operating leverage, increased flexibility and sustainable competitive differentiation. Dramatic forces of change are sweeping the banking industry. The age of the empowered customer is here, changing the way financial products are being created, delivered, sold and serviced by the banks. Relationships with clients, partners and regulators are more complex than ever. Achieving sustainable growth in this new environment can never be achieved without adapting to the appropriate modernisation initiatives.
But then, modernisation is always progressive - a journey rather than a fixed end-state. It is all about 'predicting the unpredictable' setting the ground rule for winning only for the survival of the fittest. Forward-thinking companies are seeking competitive advantages with new approaches to their businesses. Banks can no longer remain immune to these changes and hence, need to rapidly evolve as to how they approach markets and customers - and how they provide differentiated and competitive values while managing risk appetite and exposures.

The writer is managing director of UCB.   
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