Top 5 Imperatives for Banks

Kannan Amaresh

The year 2007 has been volatile for global financial markets. Rising commodity prices, equity market growth and rising interest rates all played a part in this process. Despite all the turbulence affecting global financial markets, banks will continue to focus on key themes such as managing costs, improving profitability, ensuring regulatory compliance and sustaining shareholder value.

Adopting the top 5 imperatives set out in this article will help banks in taking a step towards meeting some of their critical objectives set out above.

1. Predictive Banking

Predictive Banking is a modern revolutionary system that differs greatly from the traditional data mining and business intelligence tools. It is an analyst-guided discipline that utilizes data to make forward-looking predictions. Further, predictive analytics is a revolutionary system that forecasts customer behaviour and results in order to guide specific business decisions. Predictive analytics aids banks to recognize the inherent value locked within their existing enterprise data.

Strategically, predictive analytics provides a quantitative foundation for rapidly identifying, objectively evaluating, and confidently pursuing new market opportunities. Banks that will incorporate predictive analytics into their daily operations will improve their business processes, enhance their decision making and gain the ability to direct, optimize, and automate decisions, on demand, to meet defined business goals. More so, given these benefits, coupled with the availability of predictive banking methodology and software in the coming year, makes it necessary to supplant traditional methods with predictive banking.

2. Profiting from the Data Tsunami

Banks continue to be confronted by a deluge of data not all of which is assimilated into useful information. This year will see an even greater surge of this data tsunami as banks seek to expand their product delivery channels & mediums of data exchange which will create newer data streams.

Banks will increasingly question the value generated by such data, as the ability to manage and leverage upon it will make a direct impact on their revenues. As part of larger information governance initiative there will be a need to put in place a strategy for dealing with the assimilation of unstructured data and invest in technologies that will transform the growing pile of data into communal knowledge pools.

2007 will witness the coming of age of the movement away from mass marketing to focus marketing, as banks will have to cope with greater fragmentation of the target markets. "Know Your Customer" will now have to be dealt in its literal sense. Banks that can seamlessly integrate the customer data irrespective of their structure/source will be best positioned to leverage on the information and attain higher performance.

3. Challenges encountered in the implementation of SEPA

The Single Euro Payments Area (SEPA) involves the creation of a Euro Zone in which all-electronic payments, be it national or international are considered to be domestic. It aims to improve the efficiency of international payments, and also to develop common financial instruments, standards, procedures and infrastructure that would result in economies of scale. The establishment of SEPA has two major milestones:

o January 1, 2008 when Pan-European payment instruments for Credit Transfers, Direct Debits and Debit Cards will be available to the customer in addition to the national ones

o December 2010 when the Pan-European ones would replace majority of the national payment instruments

With the first milestone fast approaching, banks in the SEPA area will be required to invest heavily in technology in order to support the SEPA payment instruments. Even though SEPA is a regulation whose implementation is mandatory, banks are going to be faced with challenges which need to be met head on.

4. Adaptive Pricing Paradigm (APP) in a Global zed Market

The term "Adaptive Pricing Paradigm" was originally used to refer to manufacturing companies from developing countries (primarily China) selling products at a price lower than the manufacturing costs of the counterparts in developed countries (primarily US) on account of lower labour costs. As quality improved in developing countries and they mastered advanced techniques in manufacturing and processes in services, even companies that produced high value added goods & services were at risk. At that point, they were forced to transform their business models so that they adopted the APP, i.e. lowered the cost of production / providing service to the point where they were able to sell profitably in the market with the lowest purchasing power. The three components of the Adaptive Pricing Paradigm are:

o Lowering the cost structure;

o Selling profitably in markets with the lowest purchasing power;

o Replicating the low cost model in markets with higher purchasing power;

Banks like ICICI Bank of India, which has successfully introduced a lean, and lower cost business model in India has now entered mature markets like the United Kingdom, which now constitute a significant portion of its business. The trend has only become more global. The year 2007 will be the starting point of a trend, where global banks, driven by demographics, are establishing sizeable presence in large and fast growing emerging economies viz. the BRIC. They will be forced to establish innovative APP business models in these economies, which they will eventually replicate in their home markets. Banks like HSBC are already using terms like "shift spend to global innovation and service" and "being the low cost producer (of IT)" which sums up the phenomenon.

5. Banking the Retail way

Of late retailers have been giving banks a run for their money by stepping into the financial services space. These retail chains already have well established marketing skills, customer base and service standards, which are all the ingredients of developing a healthy customer relationship. Recently, many retail stores and auto merchants have started issuing financial products like credit cards and auto loans to their customers. Also, retail websites have started giving services to their customers such as online payment of bills as well as a whole suite of banking products. Google has recently launched 'Google Checkout' in U.S.A., which allows online users to make purchases from the Internet retailers without having to repeatedly key in their credit card details. In the last quarter of 2006, Checkout handled about $900 million of transactions and this figure is only expected to grow.

In addition to retailers, non-banking financial institutions are also actively involving themselves in marketing and selling their own financial products - Insurance companies are actively pursuing the prospect of selling products such as Credit Cards by leveraging on their customer base and distribution network.

In order to nurture long term relationships as well as retain their hold over their present customer-relationship, banks, who till recently were considered as the only institutional set-up which could provide financial services, will need to work on increasing customer service levels as well as their distribution network in order to survive the retail onslaught.

Another method for banks would be to develop alliances with large retail chains, which would help them in tapping the readily available customer base as well as a large distribution network. A study conducted by Data monitor in Europe has found that at least 25% of the retailers who have been polled are ready to enter into strategic alliances with banks to provide financial services. Hence, the challenge for banks would be to enter into long term strategic relationships with large retail chains by offering new and innovative financial products to their customers.

The author heads the Banking Domain Competency Group (DCG) at Infosys Technologies Ltd.,