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Banks should focus digital investments on back office - McKinsey

09 December 2014  |  13919 views  |  3 Business meeting finger pointing on chart close up

Banks looking for a pay-off from investments made in digital processes should focus on back office automation projects and steer clear of multi-channel integration, according to research from McKinsey.

McKinsey's findings appear to be at odds with the digital investment strategies being adopted by most established banks, as they pour money into front-end, customer facing applications.

McKinsey looked at the impact of digital investment on cost/income ratios and levels of enablement provided by IT in end-to-end automation of processes.

The areas with the highest correlation with profit­ability were product back-office automation, digitisation of document management and automation of credit decisions, and big data analytics applied to sales campaigns.

"The profit margins of banks with high levels of digital enablement in these areas were, on average, twice as high as the profit margins of other European banks," says the consultancy.

In contrast, investments in multichannel integration and sales dialogue support appeared not to yield a clear payback.

"Investing more in multi­channel integration may be advisable for banks whose integration between channels is poor," says McKinsey. "But the complexity of their architectures may cause an escalation of project expenses and delays, therefore reducing overall return on investment."

In the absence of limitless funding for IT projects, McKinsey says banks can strecth their budgets by adopting strict cost control, rigorous project prioritisation, advanced sourcing practices, and standardisation of IT infra­structure and application architecture.

"Banks urgently need to digitise their businesses, but they should invest selectively in areas where recent research indicates the best payoff," states the firm. "To meet IT budget pressures, CIOs have many opportunities to fund investments by cutting the costs of day-to-day operations and appli­cation development."

Comments: (3)

A Finextra member
A Finextra member | 09 December, 2014, 11:02

I totally agree. Leverage digital capability that is already available, to remove friction from existing processes. Digital instalment loan processing is a great example where the whole lifecycle can be fully automated - front and back-office. Maximise your return on existing investment now, generating revenue for future investment later.

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Barry Kislingbury
Barry Kislingbury - ACI Worldwide - London | 09 December, 2014, 12:02

I also agree, targeted investment in back office automation means that banks can gain efficiencies, freeing up budget which can then be used for more innovation.  The alternative is you just keep systems working while piling on more channels and making the cost to income ratios even worst.

The targeted approach is not big bang and can be smaller less costly projects and will also gives clients better information and service levels.  

 

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Bo Harald
Bo Harald - ZEF, Transmeri, Demos, Real Time Economy Program - Helsinki Region | 10 December, 2014, 10:16

I would put most of the emphasis on payment value chain automation. This is where value creation opportunities for the SME mass markets is huge - a customer and staff-inspiring vision that can be achieved with very small investments (white-label cloud services bolted onto e-banking via single-sign-on). 

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