How Banks Can Parlay Technology into a Competitive Edge
Technology has become a new basis for banks in order to survive in the competition. Leading banks use technology best to achieve a competitive advantage in areas including product innovation and product efficiency. Advanced technology helps banks lower running costs and elevate their investment capacity, improving products and customer experience. .
Today, it has become significant for banks to systematically use powerful technology. Customers look for convenient, simple, data-rich, and well-customised digital experiences. Traditional banks experience an endangering situation from the technology vendors. Digital trade financial services, such as AI-supported processes and cloud-native banking spaces facilitate automated sophisticated tasks and real-time responses to clients at lower costs.
Digital banking takes advantage of the ecosystem of vendors when it comes to verifying customers’ identities via biometrics. Uninterrupted integration and delivery tools help financial services to provide more with less effort. However, there are many banks spending on technology just 16% of their total cost base and receive higher operating costs as they are stuck with legacy techniques, complex procedures, and bloated IT assets. This expenditure culture actually limits investment capacity, which leads to poor customer satisfaction and product portfolio.
Business banking doesn’t mean ambitious more and spending less, or just spending more. It comes with a clear strategy that modernises the business from the top and the technology simplifies and accelerates the growth of a business.
Unique techniques employed by technology leadersBain & Company studied the assets of 42 international banks to find out which choices and technology matter the most. We evaluated the results over 3 dimensions:
1. Total shareholder return (TSR)
2. Cost-to-income ratio (CIR) over the past 3 years
3. Net promoter Score (NPS) from the first 3 months in 2023
We made a regression analysis of the variables and found that banks that focus on advanced technology rank top and achieve 5% points higher TSR than other digital financial services, 10% points lower CIR, and 12 points higher NPS. We found the standard correlations of high performance and it include:
• Board of directors with tech-savvy brains
• Good number of in-house engineers and a small number of other IT staff
• Ability to position as a technology company
Besides this, these leaders have a clear-cut idea of the target, so they can effectively modernise where it needs to develop a unique competitive advantage on customers, finances, and risk. Spending more does not lead to better returns, actually spending proportionally to revenue brings a negative impact with performance.
Capital One, BBVA, JPMorgan Chase, and DBS have won leadership titles in their region. They didn’t have a well-established method that could differentiate their choices and performance outcomes. However, their stories explain how much powerful decisions they took and the choices they made.
Strategic choices for technology leadershipOur examination has encountered 3 effective paths and an extra method that needs to be employed and become more viable.
Cost reduction via simplification:
Some digital banking firms choose to simplify and standardise products, technology and processes so that they can enhance productivity and efficiency. This path replaces the legacy technology stack with modular elements in the target architecture.
Santander, a commercial finance institute employed this path and defined digital transformation and operational excellence as its top priorities. It succeeded in increasing the number of digital customers from 13.6 million in 2014 to 32 million in 2018. The bank simplified procedures and enabled next-day opening of accounts and cards. From 2015 to 2022, the bank lowered its cost-to-income ratio by 6.6% points, which helped it reach the first quartile in technology and performance among the banks we assessed.
Using modern technology and data to connect with customers: In this path, a bank is required to enhance its digital mediums and the way of using data and analytics to elevate the connection with customers and the staff. This path needs more staff in customer service and data analytics.
JPMorgan Chase used a modernization program that restructured and replaced apps for the cloud and can decommission around 2200 applications. This commercial finance institute invested heavily in better data analytics and created a data scientist team with around 900 people. They developed a successful AI strategy and the efforts were recognized through the Evident AI Index, which placed the bank in first rank in AI talents among other major banks. The bank spent around $14 billion on technology in 2022 and with AI strategy, it has achieved a business of more than $1.5 billion.
A technology Powerhouse: When a bank wants to become a technology company at all levels, it needs to make a pervasive and constant investment to increase innovation and flexibility. This path needs the core technology to be modern, scalable, and extensible and the banks should invest heavily in the complete technology stack and engineering capabilities.
Capital One employed a cloud-first method in 2020, which closed its last data centres and moved core IT and customer-core applications to the cloud. In 2022, the bank started making and selling software products so that business clients can increase their use of data and the cloud proportionally. It has a 12000-technology staff, which gets respect and attracts talent from other big technology firms.
Substitute the legacy technology with a fresh start: Certain banks have decided to launch new banks from scratch, expose cutting-edge technology to their team, and develop a possible path to core banking replacement. The possibility of success of these efforts depends on their talent to migrate customers to the new space and decommission the old platform.
One incumbent bank recently started using this path. It invested around $500 million to develop a digital bank under a sub-brand. Millions of its current customers will be migrated to the new platform and the transformation is expected to be extended to other areas of the banking group through new investments in a digitised customer experience and new solutions based on AI in compliance activities.
Taking a path to modernise technology is highly dependent on its start, strategy, and urge for change. There are certain features that characterise these 4 paths:
• The board and C-suit should see technology as a strategic priority and consider it as a crucial source of competitive advantage.
• Simplification is not a project, it is a discipline that works to increase the complexity of architecture, app portfolios, vendor ecosystem, and data assets.
• Developing a world-class engineering technology and architecture ability is a goal for the business and technology stack as it has an impact on the differentiation in the market.
• Modernization of technology and investment are consistent and it will substitute other kinds of spending, such as physical branches and call centre staffing.
Strategic choices and performance have a strong correlation with the technology and it highlights the significance of getting them executed perfectly. Technology leaders such as DBS, BBVA, JPMorgan Chase, and Capital One establish that developing a winning cycle in technology means following strong and constant efforts that could simplify and modernise the areas that matter the most.