Wholesale banking taking the driving seat
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23 October 2009
Some recent quarterly bank results show that profits are shifting to the wholesale domain. To adapt their IT infrastructure and make it resilient to this business trend, banks should look for a reference in the automotive industry. Volvo, Scania, Iveco, Hitachi, are manufacturers of special purpose/ heavy duty vehicles (e.g., buses, trucks, excavators) and are all doing relatively well in a business characterized by a relatively low variability in production demand, and targeted customizations (e.g., accessories). The model life cycle is around 10 years. At the opposite, manufacturers of commercial vehicles (e.g., automobiles) such as GM, Chrysler, Fiat, Toyota, are in bad shape. Market wants continuous upgrades, newer versions, with a product shelf life of about 3 years. The wholesale banking marketplace can be illustrated by the first class of manufacturers: a profitable business based on low risk transactions (i.e., financial supply chain) and targeted customizations (i.e., structured finance). Retail banking is, instead, associable to the commercial vehicle manufacturers, as it is based on customer intimacy and product variability, with shrinking profit margins. Let's now push this concept forward, and use it as a reference to analyze the influence of the production model on the investment in infrastructure. That is, plant equipment, R&D investments, and manufacturing capabilities for automakers. Information technology for banks. Truck-makers compete on product/ service feature differentiation (e.g., duty life efficiency; equipment functional richness; near-real time spare parts management). The highly engineered and specialized product sets that characterize their business require a mostly-internally-owned infrastructure. Commercial automobiles makers compete on body design, price, and lifestyle options. The supporting infrastructure which allows the production of common-chassis-platform (i.e., no difference under the hood), cost-effective, full-option vehicles is generally outsourced to external partners. Moving to the banking parallel, the IT infrastructure for wholesale must support mainly low-frill, user friendly, heavy duty back/ middle-office transactions processing platforms. Wholesale banking profit is linked to internal effectiveness. Indeed a significant similarity with the truck makers' universe. Retail banking demands an IT infrastructure that handles front-office portal-like platforms, where the norm is continuous change, touch-and-feel to ensure customer loyalty, and competition from non-banks (e.g., retailers, postal services). Profit is linked to internal efficiency and customer loyalty. Not too distant from the experience of the consumer auto makers class. Bottom line for banks In order to better serve your customers' needs, plan to outsource IT (i.e., minimize costs) for your retail business, and build/ partner (i.e., increase effectiveness; leverage partner's expertise) for wholesale. Bottom line for corporates Be informed on your bank's IT investment plans, and use this as an indicator of their true propensity to deliver customer-centric value. Question to the reader Do you see this as an area that deserves more investigation and research?