Retail Banking

12/15/04

3:28 PM

Page 1

Opportunities for Action in Financial Services

Transforming Retail Banking

Processes

Retail Banking

12/15/04

3:28 PM

Page 3

Transforming Retail Banking

Processes
The retail banking environment is undergoing major
change. Retail banking customers are much more
active than they were a decade ago. Over the past
decade, third-party distributorssuch as mortgage
brokers and independent financial advisershave
secured a larger role in distributing retail banking
products. And retail banking customers are demanding more customized products and services. These
changes impose significant new demands on retail
banksif they are to stay competitive. The answer
lies in reconfiguring their business processesspecifically, redesigning, automating, integrating, and standardizing.
For many banks, incremental improvements to endto-end processes in business silos will be insufficient.
Whats often required is a more comprehensive transformation that can be achieved by turning to modular,
standardized process models. This proposed modular,
standardized approach is a critical departure from the
traditional end-to-end, product-based process-and-system architecture, which encompassed the full value
chain (service, product-administration, and customerdata-repository tasks) for each product.
Such a transition is especially helpful for scalable
productssuch as credit cards, simple loans, and
other vanilla banking products. But it may not be
suitable for all players in all circumstances. It is particularly valuable for retail banks seeking to drive radical
improvements in overall performance. A few leading
banks have already adopted modular, standardized
processes and are now enjoying improved efficiencies
and lower costs.

Retail Banking

12/15/04

3:28 PM

Page 4

The Size of the Prize

The benefits of increasing operational efficiency are
enormous. For example, right now in several major
markets, banks must sell three to four times as many
mortgages as they did ten years ago just to maintain
their profit margins. (See Bankings Changing
Dynamics, BCG Opportunities for Action in
Financial Services, August 2003.) If a bank effectively
transforms its processes, it can reduce its unit costs
between 20 and 40 percent, completely changing its
competitive position.
In addition, financial services business is increasingly
originated by third parties. In an environment in
which banks make less and less of what they sell to
their customers, they need to work more closely with
external partners to succeed in cross-selling and capturing that business. To do so, banks must ease
process integration and data flow (such as customer
information) with their external partners.
Banks need more flexible and more integrated
processes to provide the targeted product and service
offerings that their customers seek. For instance, customers now look for more varied mortgage offeringssuch as mortgages linked to current accounts
(to reduce interest expense) and reverse mortgages
(to provide cash during retirement). To maintain and
build competitive advantage, banks need to improve
flexibility and reduce costs. If they dont, specialist
providers are likely to pick apart their best businesses.

Going Modular
Traditionally, retail banks have organized their operations by product linesuch as loans, deposits, and
investmentsin individual business silos, each of

Retail Banking

12/15/04

3:28 PM

Page 5

which has used different process models. Retail banks

still tend to manage most of these various processes
from customer acquisition to product serviceinhouse. Now that they need to cooperate more with
external partners, banks have to rethink those old
silos and processes. To make the transition to modular structures, a bank should take its traditional endto-end silo organization back to first principles and
then assemble individual modules. (See Exhibit 1.)
This involves peeling processes back to individual
building blocks and then putting them together in
the most efficient way possiblefrequently across
product lines. In the back office, this often involves
building scale. In the middle office, it means consolidating separate processes into shared utilities.
However, for some players it may be preferable to run
a separate platform for a particular productsuch as
specialist mortgages or current accounts with special
featureswhen the potential scale benefits of one
central platform are insufficient to warrant the complexities of merging that products business processes
into the central platform.
There are two guiding principles in the transition to a
modular structure:
Modularity: Grouping similar types of tasks and
defining functional building blocks consistently
across different products or channels.
Commonality: Treating similar modules as one and
considering one common, standard solution.
Applying modularity creates interchangeable process
blocks. For instance, scoring the risk of customer
default is a task conducted for multiple products.
Therefore, it is more efficient to treat this task as an
integrated module rather than having it hard-wired

Retail Banking

12/15/04

3:28 PM

Page 6

Exhibit 1. The Old and the New: Evolving

Process Models
Integrated process model built around silos
Customer
profile

Product
application

Product
delivery

Product
service

Product/Channel A
Customer income
Customer securities
Product features

Customer
address

Product/Channel B
Customer address
Customer income

Customer securities
Product features

Product/Channel C
Customer
address

Product
features

Customer income
Customer securities
Risk assessment

2 Common tasks are

exclusively specified

1 Similar tasks have

different scope

Modular, standardized process model

Customer
profile

Product
application

Product/Channel A
Customer address
Customer income
Customer securities

Product features

Product
delivery

Product
service

Product/Channel B
Product features

Product/Channel C
Product features

1 Similarly scoped,
yet specific modules
SOURCE: BCG case experience.

2 Standardized
common tasks

Retail Banking

12/15/04

3:28 PM

Page 7

into any one particular product or process (such as

credit card origination).
Commonality drives consistency and reduces inefficiencies due to redundancies. For instance, one software program can originate various products. Commonality could, for example, include using one
standard method for capturing information about
customers assets and income.

Up and Down or Sideways

Retail banks are using different approaches to modularize and standardize their processes. For example,
we have encountered four distinct process models in
our retail banking work. (See Exhibit 2.)
Horizontally Organized. Traditionally, most retail
banks have employed a horizontally organized model,
in which individual platforms support processes for
one product only (such as home loans). Subprocessessuch as risk rating, security valuation, and customer-specific datagenerally are not shared with
other products and product platforms. In this model,
platforms also can be channel specific. We expect this
model to be attractive only for monoline product
providers or for highly specialized products.
Vertically Organized. In a vertically organized model,
functionality is provided across all products. For
instance, one large North American bank now seeks
to consolidate all its customer information and needs
in a customer-capture tier as it builds common origination and servicing processes across all its retailbanking products.
Predominantly Horizontally Organized. A predominantly horizontally organized model has some modu-

Retail Banking

12/15/04

3:28 PM

Page 8

Exhibit 2. Four Modular Process Models

Are Emerging
Horizontally organized
Customer
Product
capture Originate specific

Vertically organized
Customer
capture Originate Service Close

Home loans
Personal loans
Credit cards
Predominantly
horizontally organized
Customer
capture + Specific Product
origination services specific
Home loans

Outsourced

Predominantly
vertically organized
Customer
capture + Common
origination services

Product
specific
Home loans

Personal loans

Personal loans

Credit cards

Credit cards

SOURCE: BCG case experience.

larization within a product-oriented framework. One

large bank, for example, has a product-specific lending architecture and horizontally dedicated front-end,
service, and product systems. For mortgages, the bank
is combining the front end with other services to
ensure seamless integration with outsourced product
delivery and maintenance.
Predominantly Vertically Organized. Some banks have
adopted a hybrid model that is predominantly vertically organized. For instance, one large commercial
bank in the Southern Hemisphere consolidates frontend origination and provides common services (such
as risk scoring and pricing) to its various products,
channels, and product-specific systems. All retail products share the same origination and service platform,
allowing consistency in communication with customers.

Retail Banking

12/15/04

3:28 PM

Page 9

All four models achieve a certain degree of modularity and standardization, but none of them meets all
the different needs of all banks (that is, there is no
one-size-fits-all solution). They have to be adapted to
an individual banks needs and circumstances.
In choosing and shaping process models, banks may
confront hurdles in several key areas:
IT Legacy Environment. Often the effort to disentangle a banks proprietary systems in order to modularize them or to integrate them with other modules is prohibitively expensive.
Legislation. In some markets, legislation may prevent consolidation across products or channels. For
example, sharing customer data outside the context of the original product or transaction may be
prohibited in some countries.
Lack of External Catalysts. Some markets may lack
the external catalysts to drive modularization. For
instance, the lack of a common standard (data
exchange) for integrating third-party brokers origination processes undermines the benefit of providing a standardized plug-in module.
A Banks Internal Organizational Structure. If a banks
internal organizational structure is based on product or customer segments, sharing common functionality and customer data may create governance
conflicts and interfere with accountability.
If banks can overcome these hurdles, they can capture significant business opportunities. Look at how
the automotive industry benefited when it introduced
the platform strategyusing the same components
(such as drive train parts) for multiple automobile

Retail Banking

12/15/04

3:28 PM

Page 10

models. By reducing duplication in products and

processes, automobile manufacturers improved operational efficiency, increased overall flexibility, and profited from integration with specialized suppliers.
The retail origination process provides another example of the benefits of moving to a modular approach.
Designing a banks retail-origination-process model
according to the principles of modularity and commonality creates opportunities within the organization and beyond. (See Exhibit 3.) By supporting just
one IT environment, a bank can reduce duplication
of development and maintenance efforts. And by
pooling resources, it can capitalize on scale effects.
Standardizing common tasks also promotes consistency in the customer-bank relationship and maintains
the integrity and accessibility of customer data.
Introducing a modular, standardized process structure also creates opportunities for cooperation with
external players. It enables a bank to plug in thirdparty providers with ease. Scale and scope advantages
also can be achieved. For example, three German

Exhibit 3. The Benefits of Modular, Standardized

Process Models in the Origination Process
1 Dock on specialized players
(such as mortgage brokers)
Specialized
players

Product
application

2 Consolidate with utility

providers (such as
mortgage companies)

Retail
banks

Customer
profile

Product
application

Product
delivery

Product
service

Other
institutions

Customer
profile

Product
application

Product
delivery

Product
service

Consolidation
players

SOURCE: BCG case experience.

Product
delivery

Retail Banking

12/15/04

3:28 PM

Page 11

banks consolidated their home-loan-processing entities into one unit to drive down costs and improve
efficiencies.

Building the Model

When a bank builds a modular, standardized process
model, it is critical to align the IT architecture properly. To do so, the bank must consider six central elements of the IT platform and design them to be consistent with its chosen business-process model. (See
Exhibit 4.)
Customer Information Platform. This is the information database that provides frontline staff and customers with up-to-date informationfor example, on
how a customer connects with and uses accounts and
product holdings as well as on how the customer
interacts with the banks relationship managers.
Exhibit 4. Organizing the Six Central Elements
of the IT Platform
Customer
profile

Product
application

Front-end origination
Customer data capture
Exposure data capture
Loan details
Security data capture
Servicing test

Product
delivery

Product
service

Specific services Product systems

Account
Risk assessment
maintenance
Security validation
Statements
Product feature +
pricing suite

Data repositories
Customer
data repository

Product accounts

Process support
Workflow
Document management (imaging)
Document generation
SOURCE: BCG case experience.

Retail Banking

12/15/04

3:28 PM

Page 12

Origination System. Consolidating front-end systems

to support the origination of different products (such
as home and personal loans) provides significant
opportunity. The customer information platform and
the origination system need to be closely integrated
or delivered as one solutionsince customer-related
data are essential to product innovations.
Specific Services. Individual system components
should provide specific functionality. For instance,
risk assessment, which may differ by customer segment, is best provided by a dedicated module.
Data Repositories. It is essential to separate customer
data from product data so that valuable customer
information can be shared across products.
Process Support. Tools that support process execution
should not be customer or product specific. They
should be provided as independent building blocks.
Product Systems. Systems designed to maintain the
products that the bank originates must be highly scalable (able to ramp up volumes rapidly).
Making informed decisions about these six key elements should allow the bank to move toward a more
modular and standardized approach, bringing substantial efficiencies and cost savings.

Seven Key Steps

As retail banks seek to modularize and standardize
their process models, they should take seven key steps:
Group similar process steps within individual product
end-to-end processes. Be sure to cut these groups
similarly in terms of scope and task.

Retail Banking

12/15/04

3:28 PM

Page 13

Assess commonality among these groups of process

steps. To what extent are the underlying processes
similar across products, across channels, and along
the end-to-end process?
Drive to standardize business rules for common
tasks. Question the relevance of differences. Often
differences are the result of arbitrary decisions and
have no specific business justification.
Combine the groups into process modulesand
clearly define input, output, and processing for
these modules.
Assess strategic, operational relevance for each module. Does that module need to be accessible to or
does it need to integrate with external players? Is
that module a utility service and therefore not a
basis for competitive differentiation?
Understand your IT, legal, and regulatory constraints.
Designate specific IT tools to support each process
module.
* * *
In summary, modular, standardized business-process
models offer retail banks the chance to achieve
greater efficiencies and to team more effectively with
outside players. They are a new and considerable
source of advantage in a consolidating and increasingly competitive industry.
While modularization can lead to overstandardization
and, if it reduces the number of systems, to bottlenecks, banks that succeed in making the transition
can achieve considerable improvements. Banks that
master modular, standardized business models can

Retail Banking

12/15/04

3:28 PM

Page 14

substantially improve their unit costs, significantly

upgrade customer service, and create the flexibility
needed to introduce new products and services. Two
North American banks, for example, have experienced marked increases in customer satisfaction as a
direct result of embedding modular process capabilities into their products (specifically mortgages and
consumer loans). Modular processes also can halve
the time to get new products to market. Banks that
ignore modular, standardized processes may be overtaken by their rivals.
Thomas Reichert
Andy Maguire
Michael Spellacy
Guido Kuehnelt

Thomas Reichert is a vice president and director in the

Sydney office of The Boston Consulting Group. Andy
Maguire is a vice president and director in the firms
London office. Michael Spellacy is a manager in BCGs New
York office. Guido Kuehnelt is a project leader in the firms
Sydney office.
You may contact the authors by e-mail at:
reichert.thomas@bcg.com
maguire.andy@bcg.com
spellacy.michael@bcg.com
kuehnelt.guido@bcg.com

To receive future publications in electronic form about this

topic or others, please visit our subscription Web site at
www.bcg.com/subscribe.

The Boston Consulting Group, Inc. 2004. All rights reserved.

Retail Banking

12/15/04

Amsterdam
Athens
Atlanta
Auckland
Bangkok
Barcelona
Beijing
Berlin
Boston
Brussels
Budapest
Buenos Aires
Chicago
Cologne
Copenhagen
Dallas
Dsseldorf
Frankfurt
Hamburg
Helsinki
Hong Kong

3:28 PM

Houston
Istanbul
Jakarta
Kuala Lumpur
Lisbon
London
Los Angeles
Madrid
Melbourne
Mexico City
Miami
Milan
Monterrey
Moscow
Mumbai
Munich
Nagoya
New Delhi
New York
Oslo
Paris

Page 16

Prague
Rome
San Francisco
Santiago
So Paulo
Seoul
Shanghai
Singapore
Stockholm
Stuttgart
Sydney
Taipei
Tokyo
Toronto
Vienna
Warsaw
Washington
Zrich

BCG
www.bcg.com

12/04