Insights, banking

How a realignment on the customer is leading banks to reduced operational costs

Modulr By Modulr on 20 January 2021   •   10 mins read
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To think of a bank is to think of an institution seemingly synonymous with operational efficiency, but that's not always the case.

Many banks and building societies are struggling to keep up with the pace of technological change and rising customer expectation; hampered by a legacy of costly and cumbersome technology.

The reality is that much of the traditional banking infrastructure, and the payments processes that sit within it, is simply no longer fit for purpose, leaving many banks challenged with delivering new world solutions, using old world practices.

Research carried out by agency LoudHouse and thinktank TechPros on behalf of Modulr into the hard and hidden costs of payment operations at UK businesses today, has shown that the costs of payment processes are spiralling.

And, while 68% of traditional banks surveyed anticipate that the hard costs of operating payments will rise in the next 24 months, the greater concern for payment professionals in decision making roles is the hidden impact and cost of these outdated payment processes. 56% of traditional retail banks agree that the hidden costs of payment inefficiency actually outweigh the hard costs of payment processes; with the biggest hidden cost being the impact it has on customer experience and satisfaction, as cited by 51% of traditional banks.

What’s clear is that by not shedding legacy technology and shoring up operational efficiency, traditional banks are following an increasingly risky strategy, and one which will only have a greater impact on their wider business, over time. Because change is coming.

As the industry evolves and technology advances, new innovations and payment systems will become possible. The gulf between traditional banks, with their legacy systems, and the new, more efficient and digitally evolved kids on the block, will get even more pronounced.

Traditional banks who take a proactive approach and address the inefficiencies at the heart of their business today, will be better placed to move forward, tomorrow.

The true operational costs of banking – overrun by manual processes

Banking infrastructure as we know it today comes with inefficiencies that are hangovers of the legacy era, leaving many banks dealing with the significant overheads of running their own payments infrastructure together with all the associated project costs, resources and time required to build, manage and operate either indirect or direct payment scheme access. This is compounded by the regular changes mandated by each payment scheme and further still, as we transition to ISO 20022 and the New Payments Architecture.

When it comes to the hard costs attached to payment processing itself, the largest, according to 44% of those in the traditional banking sector is incurred by the team hours spent on manual processes.

We may be well into the Fourth Industrial Revolution (or Industry 4.0 as it’s known), characterised by the ongoing automation of many traditional practices, yet many banking payment processes both in-house or outsourced are firmly rooted in another, infinitely slower and more manual, era, characterised by spaghetti technology and mainframe infrastructure.

Firstly, there’s the manual processes required to execute payments themselves and, as these are run in batch, the benefits of real time processing aren’t realised. This will only get more pronouced as technology evolves and systems get faster and less suitable for batch processing.

Then there’s the manual reconciliation that’s required for inbound payments, meaning that funds are not cleared into accounts quickly and balances are not updated in real time, which in turn puts pressure on customer service teams who have to deal with the resultant enquiries.

The limited potential and compatibility for automation on legacy technology means most traditional banking payments processes are labour-intensive and fragmented. And, for the smaller, specialist banks and building societies who rely on procuring services from their major competitors in the form of agency banking, there’s an added layer of complexity; resulting in a complicated technology stack which is to the further detriment of customer experience, software flexibility and overall efficiency.

Beware the Hidden inefficiencies

As well as adding cost and delay, these manual processes also result in hidden inefficiencies which have now been shown to have a wider impact, relating to agility, customer, employee and supplier experience and ultimately the success of a business.

Hidden inefficiencies are somewhat different to hard costs. For example, the hard cost is the salary paid against the quantifiable hours spent on the manual process, while the hidden cost is where those hours could have been better spent. The top hidden cost, according to 51% of traditional banks surveyed, was the impact those hours could have had on customer experience and satisfaction.

Without the modern API platforms that drive the Instant Economy - an economy characterised by the instant experiences, instant information and instant services that have sprung up in the last five years - traditional retail banks are being left behind in the wake of more flexible, responsive, technologically switched-on FinTechs and challenger banks who are offering disruptive solutions that have raised the bar when it comes to customer expectation and experience.

How banks are reducing operational costs

With 59% of traditional retail banks surveyed agreeing that they have outgrown traditional banking infrastructure, and 46% citing operational cost reduction as their biggest goal around payment processes, there’s clearly a recognition of the need for more efficient operating processes. But, when asked what the main challenges were with regards to the implementation of new systems, traditional banks cited lack of skills in the business as the biggest obstacle. 

What’s clear is that, faced with a lack of skills and internal resource, banks are challenged with how best to realise their digital transformation ambitions. The good news is that the Open Banking directive and the emergence of Banking as a Service (BaaS), have disrupted the market, allowing traditional banks to address the infrastructure inefficiencies at the heart of their business and embrace digitisation.




Reimagine the banking stack, without paying to reinvent it

Successful banks are opting to embed custom-built solutions into their core banking systems and network infrastructure, so that they can reimagine their technology stack without paying to reinvent it. They realise that they’ll miss out on new features if they try to retrofit current practices and processes, and that they need to integrate with forward thinking partners in order to unlock these.

This can be done by working with a range of technology providers for a best-of-breed approach. Or, they can further reduce complexity by partnering with one - such as Modulr - who can provide a single-point of access, for maximum efficiency gain.

For example, since inception we’ve invested in the lengthy and costly process of becoming directly connected to Faster Payments and Bacs, with settlement accounts at the Bank of England, so we can offer our customers access to payments and card schemes equivalent to that of a large systemic bank. This eliminates the need for our partners to operate their own payments infrastructure and manage a complex and costly network of suppliers themselves. It also gives smaller, specialist banks an attractive alternative to the agency banking model, so they can deliver a modern customer experience that outcompetes the competition, rather than relying on it.

With a consolidated approach, banks can replace complex technical interfaces with simple APIs. Core banking systems can be integrated onto the one platform, incurring lower overall running costs. Such platforms are highly scalable and with payment scheme compliance obligations and ongoing maintenance requirements outsourced in this way, banks can focus on activities that grow customer base and revenue such as new products and services, rather than building out an operational team.

And a large part of a bank working out how to deliver differentiated services and products to customers should fundamentally address the systemic technology at their core. This is no mean feat and one that can all be done far quicker than it would if a bank were to embark on the digital transformation journey alone which can be both expensive and incredibly time consuming. The length of internal technological development pipelines and testing timescales mean that it can often take years to sign-off, with planned technology upgrades out of date before they’ve even begun. Working with a specialist, like Modulr, means that banks can complete this process in a matter of months.

Automate to innovate

Automation and systems integration are key to reducing operational cost and increasing efficiency by replacing manual, error-prone and time-consuming processes with real-time, responsive digital ones.

With modern APIs, banks can incorporate intelligent payment flows, eliminating the error-prone batch files and manual transaction processing of legacy payment solutions. These more efficient processes free up team hours and allow staff to be redeployed in more productive ways. And, payments can be made 24 hours a day, all year round and often fulfilled within seconds; allowing forward-thinking banks to deliver a superior customer service and affording an important competitive advantage over regular banks.

Operational cost savings (and improved customer experience) are there for the taking, for banks that act now

So, research shows, traditional retail banks and building societies are increasingly challenged as they try to navigate between investing in the technologies that will enhance the customer experience on one side and cutting costs on the other.

What’s clear is that banks wanting to reduce operational costs need to look at the processes sitting at the very heart of their proposition, the payments. Failure to do so could mean that they are paying a high price, not just in terms of the hard costs but also the hidden inefficiencies that these outdated processes bring. Payments innovation is the key to minimising operational cost and maximising efficiency. And, while most banks are not yet taking full advantage of the opportunities payments innovation brings, many of those who have successfully done so have harnessed API-driven platforms, like that offered by Modulr. This has enabled them to eliminate the need to operate their own payments infrastructure so that they can focus instead on delivering a superior service and customer experience, all while reducing both complexity and operational cost.

Concluding takeaway - how to take advantage of embedded custom-built solutions in 4 ways

  1. The costs of outdated payment processes are rising, and rising dramatically

  2. Payments inefficiency incurs both hard and hidden costs; with the biggest hidden cost being the impact it has on customer experience and satisfaction, as cited by 51% of traditional banks.

  3. With much of the traditional banking infrastructure simply no longer fit for purpose, banks are challenged with how to address the fundamental infrastructure inefficiencies at the heart of their business and embrace digitisation and meet customer expectation.

  4. Successful banks are looking to third party providers to embed custom-built solutions into their core banking systems, eliminating the need to operate their own payments infrastructure, for maximum efficiency, productivity and profitability gains.

To find out how other banks are overcoming the hidden inefficiencies within their payment processes, read our research which benefits from the views of 200 payments professionals.