Back-office digitisation more profitable than front-end for banks

European banks investing in back-office digital technologies are reaping high profit margins

European banks that have invested in back-office digital technologies, such as automation software, are reaping higher profit margins than those focused on transforming front-end digital infrastructures.

The research from McKinsey found that investments in technology, such as back-office automation, document management digitisation, automated credit decisions and big data analytics, are more profitable than investments such as multichannel integration which often have no clear return on investment.

“While correlation does not necessarily imply causation, it is interesting to see that more profitable banks have been investing in a few common areas," said McKinsey.

"The areas with the highest correlation with profit­ability were product back-office automation, digitisation of document management and automation of credit decisions, and big data analytics applied to sales campaigns. The profit margins of banks with high levels of digital enablement in these areas were, on average, twice as high as the profit margins of other European banks."

"Investments in multichannel integration do not appear to have been as effective for these banks.”

But the report said this does not necessarily mean companies should not invest in these areas.

Banks need to change how they measure success of IT investments and look beyond return on investment (ROI).

Speaking to Computer Weekly last year, when announcing a trial of in-branch touchscreen devices in branches, Barnaby Davis, managing director of UK branches at Barclays, said this investment does not necessarily need a ROI because Barclays is eager to demonstrate its digital credentials.

“We did not have a traditional business case, but we had a strategic intent to demonstrate our digital credentials,” he said at the time.

McKinsey said CIOs should be selective where they invest and attempt to free up budget through cutting the costs of day-to-day operations and application development.

To this end, Dutch bank ING is cutting thousands of staff in its back offices, call centres and IT department over the next three years as it reduces its number of IT systems through automation.

The bank said it is moving to simplified IT systems and automation at a cost of €200m for two years from 2015. It expects to save €270m per year from 2018.

It is cutting 1,700 full-time employees and reducing the number of contractors it employs by 1,075.

“To improve the customer experience and enhance operational excellence, ING will take measures to further expand digital banking, strengthen local advisory capabilities in the branch network and make additional IT investments in its Dutch retail banking unit," said the bank.

In October, Lloyds Banking Group confirmed it will cut 9,000 jobs and close around 150 branches to focus more on its digital strategy and increase automated processes.

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