Attracting and retaining customers is the name of the game in the banking industry, and lack of product differentiation means customers are placing an increasing emphasis on service quality and price.
So says Roger Warner, a consultant at Compass Management Consulting, who believes South African banks have a significant opportunity for re-designing services within their back-offices as they still rely heavily on manual, paper-based processes characterised by high levels of errors and re-work.
“There is no reason why South African banks cannot achieve significant costs savings that top-performing global banks already have accomplished,” says Warner.
However, he says, local banks must firstly gain a far better understanding of efficiency drivers within their operations.
According to Warner, the banking industry as a whole operates in a fairly fixed market, as banks compete for the same customers with very similar offerings across different organisations.
“That much-used saying 'a bank is a bank' holds truth in a lot of cases, as products and services have become highly commoditised, making that all important competitive edge hard to come by.
Counting the costs
In order to make headway in these areas, Warner explains, financial institutions are left with few options other than to improve cost efficiency and productivity by streamlining processes and automating where possible.
He adds that one aspect a lot of banks are focusing on is cost reduction, and given that back office operations are a large cost centre for banks, this is an area of great interest.
“Consolidating back office functions through a shared service operation to deliver consistent processes and leverage economies of scale is one option, and many global banks who have implemented this type of model successfully have achieved cost savings ranging from 20% to 40%.”
For South African banks, he believes the key is to develop business initiatives that deliver the best return.
He also notes that the foundation for delivering efficiency improvements is a well-designed operational model.
“Banks which focus on how and where processes or services can be most effectively delivered are not only able to leverage the benefits of economies of scale, but will also find it easier to identify areas of underperformance in service or efficiency and can develop compelling business cases for technological investment.'
Warner adds that an effective operational model will not only help improve efficiency and drive down costs and pricing, it will also help deliver more consistent customer service. This will lead to more satisfied customers who are more likely to remain with their current bank, rather than moving to the competition.
Back office benchmarking
However, he says because the back office is a very broad area with a multitude of functions and services, it is vital to examine all 'in-scope' processes from an end-to-end perspective prior to re-designing the operational model.
“For example, a domestic payment such as a debit order will typically be handled not only in the back office but also in the branch.
“One of the key issues impeding productivity in the back office is unclean or incomplete work coming in from the branch, so in order to improve efficiency, it is vital to firstly examine the interface between the front office or branch, and the back office,” he explains.
Warner also maintains that although the front office is the client-facing side of any bank, the customer experience will be affected by any glitches in the back office as well, so if there is a process failure at any point along the line, the customer is the one who will pay the price.
With a large proportion of any bank's staff working in the back office, there are ample opportunities to reduce costs in this area without negatively impacting customer service, he notes.
“On the journey towards improved back office processes and efficiency, a helpful first step is to always conduct a current state baseline analysis, to understand what is already in place in both the back office and the branch.
“Gaining awareness of what already exists is vital in recognising what can be improved upon, as you need to understand your full service delivery costs before you can move forward,” Warner suggests.
Once a baseline has been conducted as a starting point, some form of measurement and comparison, both internally and externally, is a necessary stage to understand and quantify the 'size-of-the-prize'.
Warner says benchmarking is an effective tool for this, as it enables banks to gain an understanding of how efficient and effective their individual back office functions are compared to each other, and compared to peer organisations both locally and internationally.
Improving back office processes can go a long way towards achieving important cost reductions and efficiency gains, which will improve customer satisfaction, providing a slight but vitally important competitive edge in a highly commoditised market, he concludes.
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