As banks follow the trend of digitalisation in the financial services industry, they should choose wisely the areas of investments, says consulting firm McKinsey & Company. In it's recent research, the firm shows that not all digital investments pay off, and that banks should automate their back office instead of front office to attain the highest profitability.
With digital technology transforming the financial services industry, banks face the challenge of following this trend and digitising their businesses. McKinsey & Company recently released a new research* into the automation of banking processes and states that as not all investments in digital pay off, banks must take on a selective approach and decide where to invest into.
The consulting firm correlated the cost/income ratio with the level of digital enablement and found that the profitability of banks is related only to specific areas of IT digitisation. The research shows that the areas with the highest correlation with profitability are product back-office automation, digitisation of document management and automation of credit decisions, and big data analytics applied to sales campaigns. As the profit margins of banks with high levels of digital enablement in these areas were higher than the profit margins of other banks, the firm argues that digital investments are best placed in the automation of back-office processes and sales-side analytics, instead of in multi-channel integration and front-end and customer facing applications.
Although investing in multi-channel integration does not show much correlation with profit margins, McKinsey states that this kind of investments may still be advisable for banks whose integration between channels is poor, but also warns that “the complexity of their architectures may cause an escalation of project expenses and delays, therefore reducing overall return on investment.”
Financing digital investments
In the absence of limitless funding for IT projects, banks should create spending headroom within the IT budget by cutting costs. According to McKinsey, banks can save on day-to-day IT operations by cost control, rigorous project prioritisation, advanced sourcing practices, and relentless standardisation of IT infrastructure and application architecture. The research shows that banks that manage these areas well will spend, on average, 41% less on day-to-day IT operations than banks that are experiencing deficiencies in these fields.
Practices in application maintenance and architecture, which are often considered drivers of savings, appear not to be directly linked to lower IT spending. However, these practices may, according to the firm, help smooth operations without being a strong differentiator for spending management.
McKinsey concludes: “Banks urgently need to digitise their businesses, but they should invest selectively in areas where recent research indicates the best payoff. To meet IT budget pressures, CIOs have many opportunities to fund investments by cutting the costs of day-to-day operations and application development.”
*In the research, McKinsey measured factors across four dimensions: the level of digital enablement provided by IT, the level of IT spending, the maturity of IT practices, and the bank’s level of overall cost and profitability.