Almost overnight, industries across the nation were forced over the innovation tipping point by the pandemic, intensifying the need for digital transformation acceleration. The changes in consumer behavior – including the lack of face-to-face contact with businesses – pushed organizations to shift their processes to a digital-first mindset in order to keep customers engaged. Meanwhile, the sudden move to home working has put momentous pressure on businesses to digitize internal systems.
For the world of banking, the accelerated drive for innovation is not a new pressure, but it is an ever-increasing one. Challenger banks, such as Monzo, Revolut and Starling, continue to trigger waves of disruption within the financial services industry, due to their digital-first approaches. These brands, which operate nearly completely online, are considerably ahead of other companies that are still bound by legacy systems in place.
However, even these banks haven’t been immune to the vast impacts of Covid. Operating on a digital-first model is no longer enough in its entirety, as consumers become more and more tech-savvy. In the current competitive environment, banks must modernize their technology functions to support both the front and back ends of their businesses.
That said, in such a competitive environment with rising cost pressures, innovation of this kind can feel out of reach for banks. After all, banks are often a low-growth environment, and optimizing the cost of operations can typically take at least five years or more. Other key sticking points for banks when pursuing innovation are the added complexity and cost surrounding regulation. Unfortunately, regulation is part and parcel for any financial service. And new innovations and product offerings will only increase the need for compliance.
So, with myriad challenges facing the industry, how can banks compete in the race to innovation?
The importance of optimizing costs along the way
To be able to invest in a digital-first future, the journey begins with the procurement function. Whilst it is impossible to have complete control over revenue, one thing a business can control is cost.
Effectively optimizing operational and business costs will be key to freeing up valuable liquidity to fund new digital initiatives. But this requires a proactive approach to supplier management. Rather than relying on supplier rebates once a deal is done, the CPO (Chief Procurement Officer) must effectively influence and ensure efficiency from the beginning of a relationship to achieve significant savings.
For existing suppliers, a step change may be required in order to steer this initiative. Getting the right supplier onboard and having forward-looking conversations about new trends in the market will be pivotal. After all, these suppliers will be key to driving digital plans forward. Suppliers providing products and services for which demand is declining should not be neglected. Chances are, because of the trends in the market, they are keen to maintain and gain as much business as possible, meaning preferable deals may be available.
In addition to effective supplier management, a review of internal systems is urgently needed to reduce costs on a long-term basis. Traditional banks are often made up of a range of complex legacy systems that allow for very little flexibility in a new digital age. The key here will be to simplify these systems, whilst integrating solutions such as robotics, AI, and SaaS to ensure they are running as efficiently as possible.
Data holds the key to innovation
To be successful on any cost-reduction mission, however, the CPO must be aided by accurate, up-to-date, intelligent data. Without it, the long-term, sustained change needed to outmaneuver new market entrants, simply cannot be achieved.
After all, the intelligence derived from good, high-quality data provides the CPO with much-needed visibility around which informed decisions over cost-reduction can be made. It is only with this visibility that organizations can identify opportunities and deliver efficiencies that lead to sustained cost savings.
Architecture that can effectively connect to anything, anywhere, will be an essential tool to ensure the CPO is presented with all the relevant data – for example, linking enterprise databases, data warehouses, applications, legacy systems, and Cloud services to comparable systems at partners and suppliers. Integrating with apps, wearables, and mobile devices at an individual user level, and using an enterprise mobility strategy to link to employees and contractors and third party ‘big data’ sources, will also help to provide a complete view.
Ways businesses can effectively utilize data
Data is vital for procurement; however it can be overwhelming to be faced with it all at once – and it may actually hinder performance if it is not captured and interpreted correctly. Enterprise Resource Planning (ERP) and other finance-based systems capture huge amounts of data, but it is not being effectively analyzed. Efficiencies are consequently missed, and the organization remains motionless in the digitalization journey. To take full advantage of available data, the procurement team must ensure it has the right talent in place, with access to the necessary skills. Additional training or consultancy may be required to leverage data effectively and to perform successfully in today’s agile and fast-paced environment.
In order to keep up with competitors, banks must hand over some of the power to the procurement team. With the right tools and responsibility, the CPO and overall procurement function can work towards the strategic targets set out across the business.
Strong data, alongside effective procurement capability, will provide financial services companies with a much-needed boost. Compared to challenger brands running a 400-metre sprint in terms of digitalization, traditional banks are in the middle of a marathon. Stamina and effort to develop long-term efficiencies will be crucial to win in a race of innovation.
Toby Munyard, Vice President, Efficio Consulting