Financial services executives know they need to simplify their organizations to support sustainable growth and to adapt to secure a successful tomorrow. But are they approaching simplification in the right way to thrive in the longer term?
Everybody knows that most financial services organizations, apart from the most recent disruptors, in financial services are far too complex. There is a huge amount of legacy which is impairing the ability to adapt and meet the rapidly evolving needs, requirements and expectations of customers. Customers want convenience, efficiency, information, education and seamless, frictionless experience across multiple channels at a time that suits them. They expect rapid deployment of new tools and innovations, which are not just relevant, but also engaging. They are looking for transparency and trust.
Simply put, they want their banking, insurance and investment transactions to be simple. And most of today's financial services organizations are anything but simple.
It's not for lack of trying. Most financial services firms are now executing on dozens — sometimes hundreds — of different initiatives that, ultimately, should simplify the business. Some of these efforts represent unprecedented change agendas, with all of the associated bear traps. KPMG member firms are seeing some banks and insurers replace key elements of their core systems and consolidate their ancillary systems in an effort to rationalize their IT estate, modernize their capabilities, reduce costs and, at the same time, provide the capabilities to adapt and evolve their business models to secure future growth.
Others are working on more focused pain points and complexities. Some are rethinking the fundamentals of their products and their wider portfolio of products. Others are examining their current financial, business and operating models, and outsourcing arrangements. Many are working on simplifying specific client and risk pain points like KYC, claims and remediation.
Simplification is as much about creating and applying the capabilities to support improved customer experiences, innovative propositions, speed and automation, scalability and increased visibility as it is about cost efficiencies. However, dig into the investment case behind many of these initiatives and — interestingly — most are founded on return and efficiency metrics such as Net Present Value (NPV), Internal Rate of Return, and cost and headcount reductions. Of course, these are important metrics: Shareholders expect returns and competitors are differentiating on cost and efficiency, but these should not be the only drivers.
We are seeing some banks and insurers replace key elements of their core systems and consolidate their ancillary systems in an effort to rationalize their IT estate, modernize their capabilities, reduce costs and, at the same time, provide the capabilities to adapt and evolve their business models to secure future growth.
Cost efficiency is far from the only benefit that can be accrued from simplification. Simplifying what you do today doesn't necessarily set you up for future success if the market is changing rapidly and business models are being disrupted. Simplification also has to support changing what you do tomorrow.
A simplified architecture can also support more innovation, for example, developing, testing and launching new propositions and getting to market faster and cheaper. For example, a simplified core banking system would allow firms to make upgrades and integrate new technologies in a fraction of the current time. Entering into new alliances and partnerships will be more feasible and viable for a simpler business.
It should also support scalability, reduce future cost, increase the speed of change and provide improved risk management and resilience. Straightening out the spaghetti bowl of systems and processes also creates better visibility which, in turn, should allow financial services firms to get much close to customers, improve operational resilience and control over performance, and better understand and anticipate risks. Simplified control environments and processes should help organizations adapt quickly to future regulatory changes.
Perhaps most importantly, simplification of the business allows decision-makers to focus their scarce capital on investments that actually matter to the business and its customers. Just imagine the clarity of mind that would come from overseeing a vastly simplified financial services operation. IT budgets would be focused, innovation investments would be highly targeted, and waste and duplication would be eliminated. Every investment dollar would count towards the long-term health of the organization.