In a series of three articles, I first describe why the digitalization of business processes in the financial industry is becoming a licence to operate. I then move on to the how and enact ten rules to avoid the main pitfalls as well as apply best practice. And in a third text on the by whom, after taking a harsh look at the role of traditional business consultants, I try to define a novel way to combine external advice with internal competence build-up.
Let’s now start by defining what it is all about and present the benefits it brings, with a focus on the new elephant in the room: interoperability. In particular I argue that, although efficiency gains have so far been its prime driver, interoperability (plug-and-play modularity with real time connections for all the main processes and sub-processes), by enabling business transformation agility, will soon prevail as the main incentive for the digitalization of business processes in the financial sector.
It is all about data management
The financial industry sector has in common the offering of immaterial products and services: whether it is an insurance, a loan or an investment fund, the only thing that is produced and moved around is data and its more elaborate form, information. A financial business process is therefore a sequential series of tasks, or workflow, that takes a set of data to a finished state. Apart from the customer relationship which in certain cases still needs to be handled physically, the financial industry is therefore essentially about sourcing, processing, analysing and storing data.
Process efficiency is (nearly) synonymous with process digitalization
In this respect, digitization should not be mixed up with digitalization. Digitization is the action of converting information into a digital (i.e. computer-readable) format whilst the digitalization of a process is its adaptation so that it can be operated with the use of computers and the internet. Hence digitization is generally the first step in the journey towards the digitalization of a process. In turn, process efficiency aims at improving a process (to be faster, cheaper, more reliable, etc.) which can be done in many ways, including simply redesigning it or off-shoring it, but in a data driven industry, it also generally ends-up involving its digitalization.
The financial industry relies on a few key processes
It starts with the customer interface to handle bilateral communications and extends to the underlying processes to support it (identification and authorisation, execution of a customer request, display of information about the status of the relationship, etc). Another one relates to the customer life cycle management which, in a highly regulated industry, has an inflated role since it is strongly linked to compliance, from customer onboarding, KYC (Know Your Customer) and AML (Anti Money Laundering) procedures, until possibly exit scenarios. I can also mention the end-to-end processes related to the offering, delivery and administration of financial products and services, as well as all the processes supporting risk management.
The many facets of process efficiency
Process efficiency means different things depending on the type of process. In the customer interface, it is generally a portal accessible from a computer or designed as a mobile app. It should be easy to log-in, have a clear interface, display all the relevant information, guarantee a secure communication, give access to a document library and allow you to handle all usual requests, not to mention the fast improving chatbots. In addition, the portal should be connected to all the corresponding internal systems to maximise the level of automation. With corporate customers, the interface should be complemented by APIs so that the systems of the customer can directly communicate with those of the financial service provider.
For other processes, such as AML or the administration of transactions, a high level of automation is usually pursued, with only exceptional cases surfacing to be handled by a human. In addition, some processes, like the credit decision making for corporate customers, require the cooperation of a large number of units inside the organisation. In this case, a iBPMS (intelligent Business Process Management System) can be the solution, integrating in an overall platform the required subprocesses (for instance sourcing the data related to outstanding credit exposures, or the delivery of the credit rating).
In fact, some argue that the implementation of a iBPMS is the solution for all process implementations, with applications and data sources below this layer. It doesn’t need to be the only interface but should be connected and responsible for them.
Benefits go well beyond lower costs, faster processes and fewer errors
The most immediate benefit of streamlining and digitalizing an end-to-end process is the resulting improvement in internal efficiency with a faster process, a quicker decision making and ultimately lower internal costs. All of this with a consistency in quality, more predictable execution times and a better auditability, the latter point being key in the highly regulated financial industry. Another benefit is that it allows to create a modern digital communication channel with customers such that it is not just a digital user interface requiring manual work on the back of it but a real end-to-end integrated process.
A digitalized process also produces new data which can be used by management, for instance related to cost transparency or potential bottlenecks, and supports the prioritisation of internal development portfolios and workforce capacity planning. In addition, an automated process means that the operations, and in particular tailored client solutions, are more scalable.
Interoperability is the new elephant in the room
Streamlining and digitalizing a single process, even end-to-end, is an achievement. However, a financial institution will only get the full benefits if all the efficiency efforts are coordinated at company level. In particular, it is only when the overall technological architecture allows a plug-and-play modularity with real time connections for all the processes and sub-processes, that it will reach the interoperability level needed for an effective business model transformation.
In practice, it will allow to break internal silos and build platforms that can support multiple segments, markets and activities. For instance, my experience is that units serving the retail segment have had their own processes and systems supporting them, distinct from those serving the corporate segment, falsely justified by the fact that the two business models are so different. But when each sub-process is transformed into a micro-service that can be plugged into other micro-services through APIs, most of them can be used in both segments.
Externally, the benefits of interoperability are even larger. It starts with making optimal use of the cloud and other vendors services. It greatly facilitates outsourcing and using shared service centres (for instance asset servicers and custodians in the wealth management sector). It also lowers the barrier to partner with Fintechs, technology vendors or data providers. Even the collaboration with competing firms, for example when building a joint Know Your Customer (KYC) data gathering platform, is greatly facilitated.
Corporate customers will also increasingly demand the possibility to connect through APIs with the systems of their financial service provider. For instance, corporate treasurers looking at automating their operations prefer to be able to handle cash management or trade finance related tasks directly from their system, without having to manually log into the bank’s customer portal.
From process efficiency to business transformation agility
Efficiency gains have so far been the prime driver of efforts to streamline and digitalize business processes, if only because it is easier to build an internal business case to obtain a development budget when you can use easily measurable parameters, such as cost reduction, time saving or fewer errors.
I however believe that, as interoperability brings business transformation agility and in many instances is becoming a licence to operate, it will soon prevail as the main incentive for the digitalization of business processes in the financial sector.
In the next article, I will put together a quick guide on how to carry-out the streamlining and digitalization of business processes, describing how to avoid the main pitfalls and apply best practice.