COMPASS MAGAZINE #10
COMPASS MAGAZINE #10

FINANCIAL & BUSINESS SERVICES FULLY DIGITAL: Banks tackle do-or-die automation challenge

As regulators demand transparency and shareholders push for improved efficiency, financial services companies still rely on cumbersome manual processes in many key aspects of their business. To make all of their activities as efficient and visible as routine transactions, banks need unified systems that can handle both processes and documentation digitally.

Every day, up to US$74 trillion moves across a financial supply chain on which billions of people in 190 countries depend. Yet despite enormous success in straight-through processing (STP) of core payments and transactions, banks have struggled to fully automate many basic administrative processes, from regulatory procedures to new product development.

Changing customer, regulatory and shareholder expectations have fired the starting gun, however. Banking supervisors want greater transparency, compliance and oversight; shareholders demand cost-efficiency gains; and digitally sophisticated consumers seek seamless service across multiple channels.

“Events in 2008 were definitely a trigger point,” said Kevin Sullivan, head of technology architecture at State Street Global Advisors, the world’s second-largest asset manager, in reference to the failure of Lehman Brothers, which nearly toppled the global financial system.

“Those events brought higher levels of regulatory oversight that have made risk and audit controls a clear priority, and this means higher levels of automation.”

BIG OBSTACLES, BIG BENEFITS

The benefits of robust digital systems are many: improved transparency, traceability and data access; reduced potential for error and manipulation; increased innovation; reduced time to market; and significant cost savings.

“I would say we’re looking at possibly 35% to 40% of the remaining manual processes in banking that could be automated, particularly where interaction between different systems involves manual input,” said Nancy Atkinson, senior analyst at Aite Group, an advisory firm focused on financial services technology and regulation. “So there is plenty of room for improvement.”

“WE’RE LOOKING AT POSSIBLY 35% TO 40% OF THE REMAINING MANUAL PROCESSES IN BANKING THAT COULD BE AUTOMATED.”

NANCY ATKINSON SENIOR ANALYST, AITE GROUP

Others put the figure even higher. “Even though we have already taken a large number of manual instructions out of the system, I would say roughly 50% of the remaining manual processes could be automated,” State Street’s Sullivan said. “By reducing the number of people that need security access to perform manual tasks, automation has also increased security. I would say we’ve reduced security risks by more than 30%, maybe even 50%.”

Jan Paul van Pul, head of market infrastructures for Netherlands-based ABN Amro, said that the majority of current IT investment in financial services is being driven by regulations. “Something like 50% to 70% of banks’ strategic IT investment is targeted on areas related to regulatory initiatives,” he said. “The rest is on optimizing costs, improving cost/income ratios and driving innovation.”

DRIVING OUT PAPER

Many core banking processes still involve a high degree of manual work – especially where operational and management processes, regulatory and legal compliance, and governance are handled informally. Such informal processes make forensic investigations costly and time consuming. Trying to reconstruct decisions made with calls, emails and faxes, using spread sheets that have been modified with little or no record of what was changed, why and by whom, also exposes decision-makers to significant risks.

However, a bank whose executives can collaborate on a single platform governed by strict digital protocols and embedded documentation procedures, including digital signatures, is more likely to inspire regulators’ confidence. Using more extensive digital processes also offers advantages in customer service and understanding.

“Paper is being driven into a corner,” said Sailesh Panchal, head of function: Payments Design at UK-headquartered Lloyds Banking Group. “It is now very hard to introduce any new process that includes a manual element. There are very strict group guidelines against that, and you have to go through a governance process giving clear justification.”

DOCUMENTING ROI

Lloyds Banking Group has invested heavily in re-engineering its IT systems. “In 50 or so cases, upgrading to integrated IT systems involved a full rip-and-replacement of existing services,” Panchal said. “Some of the results have been dramatic; for example, account opening and closing times have been cut from hours to almost instantaneous.”

Justifying IT projects during a period of economic uncertainty has been challenging. “What we found was that if you take each process on an individual level, the numbers just didn’t stack up,” Panchal said. “But when we started grouping them together we found capability clumps, and this is where we are making progress.”

“IT IS NOW VERY HARD TO INTRODUCE ANY NEW PROCESS THAT INCLUDES A MANUAL ELEMENT.”

SAILESH PANCHAL HEAD OF FUNCTION: PAYMENTS DESIGN, LLOYDS BANKING GROUP

Banks that become fully connected and digitized can reap the value of superior transparency, information and insight while eliminating the risks and costs of disjointed, untraceable manual processes. In five years’ time, banks like ABN-Amro, State Street and Lloyds that invested early in digitizing operational processes will be the winners – and those that did not automate risk being the losers.

by Charles Piggott Back to top
by Charles Piggott

Charles Piggott is managing editor of Global Risk Regulator, a Financial Times publication on bank supervision and regulation. His articles have also appeared in The Banker, EuromoneyBusinessWeek, The Independent and The Wall Street Journal.