For the past five years or more, banks have invested billions of dollars in efforts to digitize operations. However, some financial institutions are aware that their digital efforts are underperforming. Nearly 50 percent around the world say that their latest digital investments are failing to generate returns greater than the costs of capital (Exhibit 1). And few banks are generating $1 billion—or even $500 million—in annual bottom-line impact from their digital transformations.
We reflected on banks that are generating significant returns from digitization—call them the “benchmark banks”—to understand how they achieved what others could not. We found that they share the following three relatively straightforward characteristics:
- They consistently harvest the idle capacity that results from ongoing digitization—and fund new initiatives with the savings.
- As they digitize the front-end customer experience, they capture the resulting productivity unlocked in their legacy operations.
- They extend digitization beyond the customer experience and apply it to non-customer-facing operations, such as finance, HR, and other corporate functions.
Benchmark banks are further set apart by their relentlessness and discipline in applying these tactics, to the point where they cohere into an ongoing capability for capturing value from digitization. We think of this as the digital-economic version of a flywheel, the mechanical device that stores and distributes energy—in this case, to the tune of a potential $1 billion in recurring bottom-line impact or ten-percentage-point improvement in cost-efficiency ratio1 (Exhibit 2).
Harvest idle capacity from ongoing digitization and fund new initiatives with the savings
Digital initiatives are expensive. They require a cash outlay up front, and returns—when they come at all—are typically deferred. Funding is usually the first challenge bank executives address before they kick off a digital transformation.
Benchmark banks start by self-funding—at least in part—their digital initiatives. Specifically, they go after the productivity benefits already unlocked by digitization and latent in their system. For example, although branch usage in the United States decreased by 16 percent between 2011 and 2016,2 not all banks reduced teller-staffing levels meaningfully. This productivity benefit—a by-product of customers’ growing acceptance of digital channels—is sizeable and ready to capture now. A North American bank recently discovered that 15 percent of its branch-teller workforce had become idle; by swiftly reducing teller-staffing levels network-wide, it freed up cash to fund future digital investments.
There are other, more traditional, nondigital opportunities, including tighter expense management, reduced third-party spend, and optimized spans and layers, to find digital investment dollars quickly. To be clear, these methods are unlikely to fund a bankwide digital transformation fully, but they can be meaningful sources of funding and quick ways to set the digital flywheel in motion.
Capture productivity in legacy operations unlocked by digitizing front-end customer experience
According to new McKinsey research, banks are predominantly applying digitization to the front-end customer experience through customer-facing tools, interfaces, and the like. Only 16 percent of banking executives consider productivity and cost reduction to be high priorities for their digital strategies (Exhibit 3). Digitization of the front-end customer experience is, of course, an important part of any bank’s offering today; but alone, it will not be a source of long-term competitive advantage.
Benchmark banks are taking a different approach. As they digitize the front-end customer experience, they consistently tap the productivity benefits unlocked in their legacy operations. In a recent example, a global bank had developed a new, digital onboarding tool for online customers. Not satisfied with just customer-experience improvements, the bank looked for other areas in which this tool could unlock productivity. It made a modified version of the tool available to its more than 4,000 sales advisors in branches and provided intensive coaching and frontline training to drive adoption. The result was a 25 percent lift in sales advisors’ productivity.
Another bank, this one in Asia, invested heavily in bolstering its online capabilities but went a step further to maximize the returns: it instituted a “no tolerance” mind-set for paper statements. Within eight weeks, it signed up two million customers for e-statements, resulting in a 45 percent reduction in paper-statement spending.
A third benchmark financial institution redesigned its call center interactive-voice-response system with embedded digital tools to increase customer self-service. But it didn’t stop there. As customers started resolving most simple inquiries unaided, the financial institution pivoted its back-office operations to handling complex inquiries. It streamlined the complex-inquiries workflow front to back, freeing up more than 40 percent productivity in addition to improving customer experience.3
Such improvements are not low-hanging fruit. These banks had to reconfigure their ongoing digital efforts meaningfully to go after the productivity benefits. They had to invest resources and take risks. But as they continued to pursue these opportunities, they became more disciplined in their execution and more confident about the ROI of their next digital investment.
Extend digitization beyond customer experience and apply it to non-customer-facing operations
A staggering 85 percent of executives at financial institutions say that their middle and back offices do not support the front office in meeting customer expectations.4Benchmark banks are challenging this trend by using digitization to unlock significant productivity benefits. A North American bank identified more than 30 percent in productivity improvements in its finance function through robotic process automation, natural-language processing, and machine learning. A global bank is using digitization to uncover and eliminate shadow HR functions in its business units.
More broadly, benchmark banks are taking a step back and rethinking the operating model for their non-customer-facing operations. What is the minimum efficient scale for digitally enabled corporate functions, such as finance and compliance? How can the HR function redesign the employee-onboarding journey for the digital age? These are critical design questions whose answers will shape the future of productivity in middle- and back-office operations.
Organize to win
Banks that have seen significant returns from their digital investments use the common-sense strategies we previously detailed. But they also go a step further to work at consistently and repeatedly applying these capabilities. The result is a kind of muscle memory for getting the most out of their digital initiatives.
Benchmark banks share the following common organizational practices, in addition to the three strategies, to ensure success:
- Full-potential approach. Arbitrary, annual cost-reduction targets of 3 to 5 percent are no longer applicable. So how should a bank set productivity levels for its individual units? Successful banks benchmark productivity based on facts and set aspirational targets so that every unit—front, middle, and back office—aims for top-quartile performance.
- Gold-standard scale out. Benchmark banks deploy a robust, test-and-learn methodology and construct intensive, full-scale pilots that test the true productivity potential of their efforts. They apply adult-learning principles to bring change to the front lines and set up mechanisms to ensure that pilot successes are sustained at scale.
- Productivity war room. A transformation nerve center measures cost and productivity bankwide. It focuses on how digital initiatives in one area of the bank can unlock productivity in another area. It challenges lines of business on their productivity aspirations and ensures that those benefits do not leak away. One bank’s productivity war room was staffed with more than 30 highly skilled employees led by a senior leader who was assigned by the CEO.
- Flywheel mind-set. Benchmark banks don’t treat productivity as a one-time project. They think of it as an evolving capability—a flywheel that can be turned for the next ten years or more. And it shows in how they run the bank: business cases for digital investments have productivity benefits built in, employees are trained in productivity disciplines and reskilled as jobs evolve, and leaders all speak the productivity narrative and consistently model the right mind-sets and behaviors.
Banks that earn significant returns from their digital investments have a broader conception of what digitization can achieve. For these leaders, success is more than a slick, new customer interface or a one-time productivity boost. They recognize that real gains come from applying digitization as broadly as possible across the organization and from building an ongoing capability for capturing digital value.