Bill Waid, Chief Product and Technology Officer for FICO, shares how a platform approach to decisions can be critical to the success of a bank’s digital transformation
All banks now have digital transformation programmes in place, and many have several initiatives underway. However, not all of these programmes are on track to improve bank profitability: In fact, on an aggregate basis, industry experts at McKinsey, Boston Consulting Group, Ernst & Young, KPMG and Bain & Company collectively found that the success rate is in the 20-30% range Banks need to measure their success to ensure they are heading towards the necessary payoff, and that begins with setting a target for improved efficiency ratios.
An industry-accepted calculation, efficiency ratio scores a bank’s profitability and is an important measure of financial stability. The goal is to have a low score, which indicates that a bank is spending less to generate every dollar of income. Efficiency ratios are calculated by dividing bank expenses by net revenues, and a ratio of under 50 is optimal indicating that every US$1 of expenses results in US$2 of revenue.
As an example, a bank with a net revenue of US$100m and expenses of US$65m, has a 65% efficiency ratio: US$65m/US$100m = 0.65 = 65%
65% is a good — but not great — efficiency ratio. I would encourage a bank with a score like that to use their in-house data to focus on more efficient customer service and retention strategies, such as offering new financial products, cross-selling and up-selling efforts focused on existing customers, which can be done at a dramatically lower cost than new customer acquisition programmes, which can be five times greater than retention programmes
Nine Success Factors that Help Drive Efficiency Ratios Lower
Having an end-goal like improving your efficiency ratio is important, but to meet that kind of target you have to understand how a digital transformation program can make this happen. How can you set up more specific objectives to guide your work and measure your progress?
In FICO’s experience with banks around the world, we have found nine success factors for digital transformation projects that address business goals.
- Driving additional lending and improved risk management through enhanced decisioning using previously siloed customer and product data across division. Emphasis is on revenue generation, with customer retention, profit per customer and lending per customer improved.
- Driving down long-term structural IT costs using cloud innovation and more flexible technology solutions. Emphasis is on cost control, improving income ratios and cutting costs per account and per application.
- Quickly assessing and seizing strategic and tactical opportunities, pivoting initiatives where necessary in an increasingly volatile economic climate. Emphasis on revenue generation and cost control, with the speed of change increasing speed and the cost decreasing.
- Reducing losses through next-generation collections and recovery capabilities. Emphasis on cost control, with improved customer outcomes, increased capacity and take-up rates alongside decreased charge-offs and agent call times.
- Improving the customer experience by delivering targeted omnichannel communications and AI-informed customer relationship management (CRM)/next best action. Emphasis on revenue generation and cost control, with increased customer engagement scores, reduced costs to service accounts and reduced attrition.
- Rapidly deploying analytic advancements using new data sources. Emphasis on revenue generation, cost control and compliance, with new models and strategies deployed and effective marketing employed.
- Moving important decisions to real time, including the continuous evaluation of customer exposure. Emphasis on revenue generation and cost control, with increased profitability per customer and reduced cost to serve.
- Maintaining regulatory compliance through a customer-level view of decisions, preferences and responses. Emphasis on compliance, reducing the cost of governance and reputational risk, and reducing regulatory penalties.
- Adopting enterprise fraud management, minimising the cost and negative customer experience of multichannel fraud patterns like account takeover (ATO). Emphasis on revenue generation, cost control and compliance, reducing credit and operational losses.
The focus here is on digital transformation that directly impacts everyday customer interactions, such that every decision you take drives your strategic outcomes. To do this means moving beyond today’s legacy systems, which perpetuate a fragmented, poorly managed customer experience, and generate slow and sub-optimal decisions with increased requirements to maintain data across multiple platforms. What’s needed is a single decision management platform, which enables real-time data streaming and connected, centralised decisioning.
Within a cloud-based platform, upgrading data is simple and inexpensive and new data sources can be easily absorbed into the decisioning framework. Such a platform also moves control of change from IT to the business, enabling cheaper, faster response to changing market conditions. The shift to a digital-first, 365 × 24 × 7 model for consumers to interact with the bank becomes easier, meaning banks can quickly meet customers’ changing expectations and requirements.
An enterprise decisioning platform revolutionises how organisations automate the process of making decisions and applying intelligence across the customer lifecycle. The FICO platform provides an open architecture and an integrated set of composable capabilities that span the applied intelligence value chain — from organising your data, to discovering deep new insights, putting this into motion with actions to achieve the desired outcomes.