How prudent is your bank in technology investments?

Technology encompasses all business processes of an organisation. Its impact is profound. Banks heavily rely on technology and aggressively use same for growth and profitability. Similarly, fintech has become a buzzword for many including banks and vendors although the meaning has an embedded fuzziness as technology for what than how is less explored.

Are we using technology prudently? This is a big question that demands answers from an array of perspectives. As corporate firms globally are demanding above average returns for each dollar invested, managers are under immense pressure both in pre and post implementation phases of technology projects. This article attempts to bring new insights to practicing bankers to make better and informed decisions in this seemingly complex domain of use of technology in banking.

Impact of investment in technology from a banking institution perspective can be measured in many ways. Common indicators include process efficiency, customer satisfaction, profitability, portfolio quality, employee satisfaction and productivity. 

Get the house in order first

Financial intermediation which is the primary role of banks refers to mobilising excess funds from surplus units in the economy and lending back same to deficit units. In doing so, how we attract and retain deposits as well as how we lend back and recover matter. Doing these two functions better than others helps banks to create sustainable competitive advantage. Banks should be vigilant enough in identifying priority areas when they invest in technology in lowering cost and differentiating products. 

Instead fully integrated operations business firms now prefer outsourcing as a measure to get rid of areas outside the value chain and also to lower breakeven levels. We see such moves by banks and sometimes they raise concerns with regard to the justification of strategies.  Being core functions, outsourcing of sales/marketing and recoveries poses serious threats to banks. Certainly, these are areas for banks to identify and develop core competences.

Nice to have versus crucial functions

Automating core-banking using technology is anymore not a choice for banks. Given the complexities in products they handle, regulatory compliances required, volumes of business and faster customer services in competitive environments, automation has become mandatory for banks and financial institutions. Use of technology beyond this is where banks need to be more prudent. Nice to have options to differentiate the offerings is a common attraction. Creating digital channels is probably the most popular technology investment for banks as at present. In addition, banks are compelled to invest heavily in information security to combat the ever increasing cyber and digital crimes.

Over emphasising on digital channels that involves more competition than collaborations with fintech firms can derail banking and financial institutions in safeguarding and improving the core business of intermediation leaving room for competitors to creep in. At a time telecommunication firms, insurance companies, fintech start-ups, crowd funding and crypto currency firms are posing serious threats to banking industry it is vital for banks to understand key areas to protect and remain to be competitive. 

In no way can they forget the role of intermediation entrusted to them through legislations. Processes around this should necessarily be strengthened to ensure sustainability. It is appropriate to ask the question as to why banks are needed than how banks are needed by customers. This is like reminding the drilling machine company that their customers need holes than mere drills. 

How efficiently the add-ons are used? 

Despite the facts that the local banking industry pioneered internet banking in the region the utilisation is less than 5%. Compared to 126% mobile penetration in Sri Lanka it is quite difficult to justify the low adoption rate of mobile banking which is lower than internet banking. What has gone wrong? Are banks investing on products customers do not need? Are the products very complex? Are customers ahead of banks? Are these channels just an icing on the services to get the innovation seal?

As the CEO of a US bank recently mentioned an interesting point to note is that customers of your bank are now not demanding features and functionalities other competing banks offer but look for what organisations such as Google and Amazon are offering. Are you ready to innovate in that phase to impress your tech savvy customer and if so, at what cost are two basic questions to be answered. In addition, banks need to understand the rapid evolution of technologies as their investments can fast become obsolete or add to sunk costs with disruptive technologies being introduced. 

Are we neglecting the fundamentals? 

Do banks track how many customer calls are attended? How many loyal customers are gradually switching to competitors? Are customers bored with too much of automation where they have lost the much needed personal attention? Marketing is all about attracting and retaining customers. Keeping track of all potential and existing customers is not easy. It necessarily demands a technology based solution. Such a solution will provide new insights for better service quality and customer experience. 

Moreover, identification of behavioural patterns can lead to cross selling opportunities and also to avoid vulnerabilities. Commencing from onboarding a customer there are various activities a bank must track to engage the customer for a mutually beneficial and long standing relationship throughout the life cycle. Similarly managing receivables is very important for banks.

Managing receivables

How effectively an organisation is managing its receivable is a crucial factor for sustainability. Given the hyper competitive market conditions where managers are under pressure to relax controls while complying to regulatory requirements the competence is visible through variances in receivables. However, this needs close scrutiny. 

Poor lending quality, substandard KYC and rushing onboarding new clients before your competitors may end up with nonperforming advances. Some cases can be irreversible as well. Needless to say that inability to recover dues from customers will lead to liquidity issues in the bank. As reasons for defaults are not always wilful, banks should have technology solutions to monitor, assess and predict recoveries. 

Having a loyal customer base and a sound customer relationship management process are vital in building a profitable and resilient loan portfolios. With the ever increasing pressure from the VUCA environment where volatilities, uncertainties, complexities and ambiguities are making decision making quite challenging, managers must necessarily be vigilant in managing receivables. 

Sectoral analysis or age wise breakup of the portfolio will not be sufficient. Technology vendors are now integrating predictive capabilities using artificial intelligence, self-learning systems, open banking and big data. Until they become time tested and affordable paying attention to areas where you can optimise results is very important.  

Are we on right track? 

Despite the fact that banking penetration in Sri Lanka is not up to the expectations it is often said that we have too many banks and branch outlets to cater to a relatively small market compared to regional counterparts. Given this as a fact, should we try to create more channels for banking or should we attempt to enhance the utilisation of existing banking infrastructure is a logical question to be raised. The answers and priorities may vary from regulatory and investor perspectives.  Policy makers prefer measures towards financial inclusion whereas individual banks may opt towards higher returns for existing investments. 

In view of critics against widening gap between deposit and lending rates and the common justification by banks citing high provision for nonperforming loans it is timely that banks prioritise technology investments towards delinquency and relationship management to bring down costs and increase profitability.  

As the most vital industry for the economic growth and sustainability of the country how stable the industry impacts all other business organisations. Credit restrictions by banks badly affect business firms so as volatile interest rates. With firm guidelines given by the regulator, should banks use technology to reinforce core business or to differentiate service in a competitive environment is a topic to be addressed sensibly. When resources are scarce the obvious choice would be the former. 

Vital few than trivial many

As the famous Pareto law suggests, we must necessarily pay attention to the vital few than the trivial many in managing organisations. It is fundamental to adhere to this principle in enhancing productivity. Waste of resources including efforts is unavoidable if you lose focus. What is to be solved primarily among many problems is a challenge in today’s business. Smart managers who can prioritise focus will eventually win. 

Coming back to technology alternatives, what matters to you most is a crucial question to be answered. Allowing the customer to do banking from home, extending reach through new channels expecting more clients and volumes, recovering the loans granted and building portfolio quality, monitoring performance of clients and banking behaviour are options managers need to evaluate carefully. How rewarding is such efforts already made, local and global trends, risks and threats in digital expansions as well as how to optimise limited budgets are some of the considerations. 

Conclusion

Given the limited resources available and intensity in competition, banks must prudently select technology investments. Joining the bandwagon with me-too options or digitising for the sake of it has a high opportunity cost. 

Instead, use of technology in further strengthening and reinforcing the basic banking functions that includes getting and keeping customers through better customer relationship management solutions and managing receivables in building more resilient portfolios are better options for long term prosperity and sustainability. 

Needless to say such initiatives can also bring immediate returns in the short run such as low work place stress and better customer satisfaction. To summarise, use technology as a tool to sustain the business first and not as an ornament. 

(Thilina Kumarapathirana has 14 years of experience as a technology marketer in the banking and financial services industry sector. He holds a B Sc degree in Business Management from Monash University, Australia and MBA from the Postgraduate Institute of Management of University of Sri Jayewardenepura. He is a Director and the COO of Avonet Technologies, the CRM and delinquency management solutions company now gaining traction for innovative software in the region. He can be contacted through [email protected].)