The banking industry as a whole operates in a fairly fixed market, with banks competing for the same customers with very similar offerings across different organisations.
That much-used saying "a bank is a bank is a bank" holds true in a lot of cases, as products and services have become highly commoditised, making that all important competitive edge hard to come by, writes Roger Warner, consultant at Compass Management Consulting.
Attracting and retaining customers is the name of the game, but the lack of product differentiation within banking markets means that the customers themselves are placing an increasing emphasis on service quality and price.
In order to make headway in these areas, financial institutions are left with few options other than to improve cost efficiency and productivity by streamlining processes and automating where possible.
One aspect that a lot of banks are focusing on is cost reduction, and as back office operations are a large cost centre for banks, this area is one 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 – 40%.
South Africa in particular has a significant opportunity for re-designing services within its back-offices as local banks still rely heavily on manual, paper-based processes characterised by high levels of errors and re-work.
However, there is no reason why South African banks cannot achieve the significant costs savings that top performing global banks already have. However, they must firstly gain a far better understanding of efficiency drivers within their operations.
The key is, and has always been, to develop business initiatives that deliver the best return. This can only be done if businesses understand where they are currently and where they want to go.
The foundation for delivering efficiency improvements is a well designed operational model. Banks who focus on how and where processes/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/efficiency, and can develop compelling business cases for technological investment.
An effective operational model will not only help to improve efficiency and as a result drive down costs and pricing, it will also help to deliver more consistent customer service, which will in turn lead to more satisfied customers who are more likely to remain with their current bank rather than moving to the competition.
However, 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/branch, and the back office.
Ultimately, 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.
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 banks need to understand their full service delivery costs before they can move forward. A baseline analysis and a back office review will highlight opportunities for improvement, whether these are in the areas of organisational design, automation, process change and so on.
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".
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.
A benchmark will also enable banks to gain knowledge of leading practices in other banking institutions across the globe, as well as what their strategies may be in terms of improving back office efficiency.
Understanding the size of performance gaps, what the root causes of these may be, and what leading banks around the world are doing to achieve improvements in terms of process, design, automation and so on, will put banking organisations in a good position to effectively assess strategic options for investment and improvement.
Back office functionality makes up a large part of banking operations, one seldom seen by the customer but one which affects their experience with the bank and ultimately their loyalty and profitability.
Improving back office processes can go a long way towards achieving important cost reductions and efficiency gains, which will in turn further improve customer satisfaction, providing a slight but vitally important competitive edge in a highly commoditised market.