FINANCIAL SERVICES

Optimizing banking
operating models
From strategy to implementation

September 2012

kpmg.com

KPMG INTERNATIONAL
 Contents
Executive summary 1

The challenges facing the

banking sector 2
Regulations and regulators 2
Economic environment 3
Changing customers 3
The march of technology 3

How will these changes affect the

universal banking operating model? 4
The end of universal banking 4
Disintegration of the value chain 5
Cost efficiency is key in developing new operating models 6
New IT architectures are essential 6

What banks need to do 8

Seizing this once-in-a-life-time transformation opportunity 8
Developing an innovative operating model to overcome
loss of scale and cost issues 9
Implementing long-term sustainable cost
reduction measures 10
Implementing an iterative and collaborative approach
to a complex, multi-faceted problem 11

Making it to the finish line 13

© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
 Optimizing banking operating models | 1

Executive summary
A s the world emerges from what has been described as the greatest crisis in the history of finance
capitalism, banks must adapt to radical new regulations, technologies, customer expectations and
economic environments.
The current universal bank operating model is bordering on collapse and changes will be needed in three major
areas to prepare for the challenges of the future:
1. Banks will become smaller, fragmented and decentralized.
2. Banks across the world must acclimatize to a negative or low growth environment in the developed
world for the foreseeable future – compelling them to cut costs.
3. A complex IT architecture will be needed to accommodate these new operating models and handle
greater demands for data.
In this ‘new normal’, banks will not only have to worry about classic performance measures such as Return
on Equity (RoE) and Earnings per Share (EPS). They will also have to focus on regulator driven measurements,
such as delivering minimum capital and liquidity ratios and complying with new resolvability requirements.
Banks adapting quickly to these changes will emerge as winners in the marketplace. Solutions must be found
which encompass new business models, operating models, customer demands and legislative constraints.

Reducing costs Global challenges

To overcome inevitable loss of scale and cost issues, banks Across the globe, the banking sector in different jurisdictions
must devise innovative operating models. An imaginative is grappling with the same challenges.
approach is needed to cut costs and control a disintegrated
In the UK, the government has fully accepted the findings
value chain. Innovation can be encouraged by lateral ‘outside
of the Independent Commission on Banking (ICB), set up
the box’ thinking, based around preemptive rather than reactive
to investigate the possibility of permanently separating
processes. Furthermore, banks must introduce cost-reduction
retail from investment banking. Many banks have already
measures which are both long-term and sustainable.
begun the process of transforming their operating models
Three strategies in particular could have a high impact while by decentralizing operations, slashing costs and introducing
being versatile and scalable and improving customer practice more cost efficient processes and technologies.
(more detail can be found on page 10).
In Asia-Pacific, authorities are developing a stricter
regulatory approach and encouraging local banks to
develop stronger standalone capabilities. With lower
labor costs, the major focus for banks here is on process
Straight Through Greater self-service Reducing costs
standardization and efficiency.
with the three
Processing (STP) – channel usage – strategies
in other words, specifically, more In the US, banks are repositioning their products and
minimizing human customers carrying out
routes to market to replace lost revenues. Central to this
input to make staff their own banking
savings, which transactions is moving more low-value transactions to self-service
currently represent without staff channels such as ATMs, online banking and mobile. More
Reducing
more than half of a intervention. flexible and user-friendly treasury management systems
costs
bank’s costs.
are also being introduced to support a renewed focus on
corporate in place of retail banking.
First-Time Resolution (FTR) – Australia, meanwhile, has seen banks looking to
because fewer points customer-centric industries such as fast-moving
of contact between
customers and staff consumer goods (FMCG), with beginning-to-end lines
translates to lower costs. of responsibility. Staff must accept new skills, training,
cultures and behaviors, otherwise it is the banks which
will suffer.

© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
2 | The challenges facing the banking sector

The challenges facing

the banking sector
The past two years have been a time of unprecedented pressure
in the banking sector. Customers have become ever more
demanding – and less forgiving; regulators’ risk management
expectations are more onerous than ever before; investment in
new technology has become a business-critical decision; and
new players, like Virgin Money, Metro Bank, Fidor Bank and
Jibun Bank, are providing more options for customers.

T
here may have been national instance, the Coalition government The Financial Stability Board (FSB)
banking crises in the past has fully accepted the findings of the is pursuing a similar agenda for the
that were more severe. The Independent Commission on Banking 29 global systemically important financial
unfathomably complex transactional (ICB), set up to investigate the possibility institutions (GSIFIs), while in Asia-Pacific,
relationships between banks all over of permanently separating retail from Australia, China and Singapore are
the world meant that the shocks to the investment banking. In a similar vein, implementing faster and greater capital
financial system in 2008 reverberated many countries are limiting the future reforms than Basel III (although this is
across the globe, and the impact was size of banks to limit their danger to the not necessarily the case elsewhere in
not confined to the banking sector economy if they fail. ING, for example, has the region).
itself, but shook the international been ordered to sell its global insurance
Moreover, it is not only the regulations
economy to its core. operations, its investment management
that are driving change, it is the approach
business and its US online bank.
The crisis has left the banking sector with of the regulators themselves. Facing a
a series of challenges: In the US, the Dodd-Frank Wall Street slew of new regulatory responsibilities,
Reform and Consumer Protection regulators are making ever more onerous
Regulations and regulators Act, or Dodd-Frank Act, is the most demands on banks, for example in terms
comprehensive financial regulatory of transparency and risk management.
Authorities around the world are reform measure since the Great For example, one major US-based global
determined to avoid a repeat scenario of Depression. Its specific impacts are still bank estimated it would cost £4.2 billion
the banking crisis, with the result that a being defined, but the act is expected to comply with demands from the UK
whole slew of regulatory changes are in to herald major changes to systemic regulator to increase the transparency of
the offing, or have already started to be risk aversion and consumer protection, its risk management.
implemented, with a view to tightening up among other areas.
regulation and avoiding another ‘too big to
fail’ situation. There’s also the expected tightening up
on capital reserves. In the UK, the ICB
In the EU, Basel III is already putting proposed that the biggest UK banks
bank models under the spotlight, but should have enough capital and loans
the full impact of the ongoing regulatory to cope with losses equal to one-fifth Arguably the greatest crisis
revolution has yet to be felt. Similarly, at of their global balance sheet. Although
a global level, successive G20 summits in the history of finance
it looks likely that the proposal will be
will seek to redefine the boundaries of slightly watered down on implementation capitalism.
acceptable banking practice. to cover only the UK balance sheet, it
still represents a major change to banks’ The Turner Review, 2009
Reviews are under way in a number of
jurisdictions which could forcibly break financial structures.
up banking institutions. In the UK, for

© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
 Optimizing banking operating models | 3

Economic environment Changing customers The march of technology

The global economy is entering its fourth In the aftermath of the economic Finally, many banks are burdened with
year of reduced growth, if not downright meltdown, banks are finding customers out-of-date IT systems. As competition
recession in parts, due almost entirely to behaving more warily towards them. As heats up to win back customers and
the aftershock of the banking crisis and well as the public bail-out of the banks, increase internal efficiency, systems
ensuing financial chaos. four years of ‘bank-bashing’ in the media will need upgrading across the board.
and changing perceptions about the Many banks are assessing core system
Operating successfully in such a shaky
banking industry in general, mean that upgrades to bring more flexibility
economic environment in itself requires
banks’ reputations have never been lower. and configurability to their product
a new approach from the banks. They
Customers are less trusting, less forgiving development and pricing capabilities.
are still reluctant to lend money, despite
and have higher expectations about how
political calls to lend more freely, and Technology is further complicated by the
banks do business.
this scenario is not expected to improve rapid rate of change and the introduction
anytime soon. Currently, the low-interest Adding to the skepticism is the mis-selling of new channels and technologies, such
environment has prevented more in many countries, including the UK and as mobile banking and social media.
insolvencies from occurring during the the US, of products such as payment The sheer pace of change suggests that
recession. Once interest rates start protection insurance and consumer IT architectures will require significant
to rise again, an increasing number of investment products. Customers will feel re-engineering to support a complete
insolvencies could act as a further brake further disenfranchised by the additional re-working of the traditional banking
on lending. fees many banks will expect them to pay operating model.
to offset the squeeze on banking profits.
Financially, the Eurozone is still in However, modernizing IT architectures
unprecedented crisis, too. If the US is At the same time, cross-selling of will require vast levels of investment.
dragged into the panic, a new world products to existing customers remains While some banks understand the lead
recession could follow. More banks will the most effective way of increasing sales time and are making the appropriate
collapse sending shockwaves through and retaining customers. Somehow, the level of investments, many banks are
markets, further tightening credit and trust lost during the global banking crisis finding it difficult to support investments
triggering more defaults and insolvencies. must be won back, which could take four where the benefits may not accrue
or five years. for many years and are often difficult
In developed economies, real income has
to quantify. Their reluctance to drive
not grown for six years. A consumer-led
forward a modernization agenda should
recovery is therefore highly unlikely. And
not therefore be surprising. But this
as a further hindrance to growth, austerity
same reticence to internally invest will
measures in Western countries are
leave banks lumbered with patchwork IT
depriving economies of massive levels
compromises, rather than the efficient
of investment.
and integrated systems they need to
thrive in the new banking reality.

Regulations Technology

Changing customers Economic environment

© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
4 | How will these changes affect the universal banking operating model?

?
How will these changes affect the
universal banking
operating model
Given the unprecedented challenges, it is not surprising that the
universal banking model is teetering on thebrink of collapse. We
believe the changes revolutionizing the banking sector will impact
traditional banking operating models in four fundamental areas,
triggering a chain reaction which will leave its mark on every area of
the current banking model.
The end of universal banking
The financial crisis demonstrated that must accept a broader and more in- Although there are still some grey areas,
large, complex and interconnected depth range of measures to mitigate especially in the realm of commercial/
financial institutions can generate these risks and avoid such wide-ranging corporate banking, one thing is certain:
disproportionate risks to financial impacts in the future. this is just the beginning of a long and
stability (and tax payers’ money). As painful surgical operation to separate
One of the main tools to address this is to
a result, regulators and other policy ‘conjoined twins’ who for decades have
forcibly separate basic banking activities
makers have agreed that systemically shared the same funding resources,
from more complex and more risky
important financial institutions (SIFIs) liquidity and capital base.
corporate and investment banking.

What will be the impact on operating models?

For the last two decades, universal banks have – almost without exception – pursued the same strategy:

Exploitation of internal
Economies of scale
synergies through
through centralization Increased
consolidation of core
of services on a national, efficiency
systems and horizontally-
regional or global level
integrated operations
centers

We believe that the era of centralization back where they belong – into individual domestic jurisdictions. For instance, two
and single-platform strategies is drawing business units. Additionally, one US bank Nordic banks trying to establish cross-
to an end. Increasingly, shared services has recently disbanded a centralized IT border shared services have struggled to
entities will be decentralized, either group and installed mini-IT units within its get a green light from regulators in their
by disbanding them altogether, or by lines of business. primary jurisdictions.
restructuring. One major SIFI in the UK
Banks will also come under pressure to
is considering disbanding its central
repatriate core activities from regional or
operations and putting the activities
global shared services to their respective

© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
 Optimizing banking operating models | 5

Disintegration of the value chain current accounts and transfer them to be assigned to their new bank on the
Lloyds instead, or even protect them as central system, rather than having to go
Splitting the universal banking model into
a standalone entity. This could be done through the current bureaucratic and
retail and investment banking is not the
quickly, almost overnight if necessary, time-consuming process of opening a
end of the journey, however.
and customers themselves would suffer new bank account.
Banking regulators are keen to destroy the relatively little inconvenience. It would in
concept of banks ‘being too big to fail’. essence be the same product, but with a What will be the impact on
different badge. operating models?
One way to achieve this is to divide ring-
New operating models need to be flexible
fenced banks into smaller components Such a system would require
enough to function successfully in this
along product lines, spreading the risk fundamental changes, not only in bank
new environment. Banks therefore
between separate locally-resolvable operating models but also in the way
need to consider componentized
entities. For example, in the UK, the FSA the industry operates. For example,
operating models supported by flexible
has identified 25 components, so-called it’s likely that a sector-wide payments
and configurable architectures. Each
economically critical functions, including entity will be necessary (see page 6)
component should be able to operate
retail deposits, payments and retail and, by default, all customers would
independently, or at least only loosely
mortgages. automatically be on the system. So
connected to other components and
if one bank failed, it wouldn’t affect
The aim is clear. If a bank gets into trouble, industry hubs.
the whole payments system – their
these components can be ‘unplugged’
customers could simply be ‘reassigned’ This is a very long journey and will
and transferred to another entity. For
on the central system. If a customer fundamentally define pacesetters and
example, if RBS encounters difficulties
wanted to move banks, they could laggards in the new banking era.
again, the regulator could take all its

The FSA has identified 25 separate economic functions that a bank’s services can be broken down into.
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© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
6 | How will these changes affect the universal banking operating model?

Is a new sector wide payments entity needed? Similar to the ‘Mambo’ project that ran in Australia between 2007 and
2011, it will probably be a public sector organization servicing payments across the whole sector. This payments entity
would process and route all incoming and outgoing money transfer orders via a Money Transferring Account (MTA). If
a bank runs into trouble, its MTAs can be transferred to a new bank, and the routing platform can be programmed to
reroute all incoming and outgoing transactions accordingly. If the scale of such a switch is problematic, the payments
entity itself could even take over the payment services from the failing bank.

Cost efficiency is key in in a similarly decentralized environment. will require industry-wide data standards.
developing new operating These are significant challenges for For example, customer data held by
banks, but they must be overcome. one bank must be held in a format that
models
enables it to be processed simply and
Firstly, banks must recognize that
The consistent theme that underlines accurately by any other bank, as well as
existing tightly-integrated core platforms
many of the challenges facing the by any potential new structures, such as
won’t be able to meet these new
universal banking model in the coming a central payments facilitator.
operating models. They should revisit
years is cost reduction.
Service Oriented Architecture (SOA) Thirdly, reporting requirements (mainly
However, traditional downsizing strategies principles, including cloud computing, driven by the regulatory agenda) are
are unlikely to be enough to deliver the and try to identify the best roadmap for already stretching banks’ IT resources.
cost base reductions needed. We believe a componentized, service-oriented IT A disintegrated value chain and
that banks should start thinking about architecture. componentization will bring additional
implementing longer-term sustainable complexity into this picture which
Secondly, having a componentized value
cost reduction measures, such as straight- banks need to tackle swiftly.
chain and corresponding IT architectures
through processing, first-time resolution
and self-service channels. There is some
movement along these lines in the
IT architectures must be capable of operating in a decentralized environment
US, as banks strive to eliminate paper,
automate processes and retire physical
infrastructure to right size their operating Problem Solution
environments.
Tightly-integrated core platforms Revisit Service Orientated
won’t meet new operating models Architecture (SOA) principles
New IT architectures are
essential Each bank must be able to manage Industry wide standards
For the banking industry to achieve the and process data in the same way
necessary degree of separation and
componentization, its underlying IT Componentization will inevitably Redesign of management info.
architecture must be capable of operating lead to more complex reporting.

© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
 Optimizing banking operating models | 7

US: Chasing lost revenues

Operational efficiency. Cost One of the aims is to move high How do you
reduction. Regulatory impact. volume, lower value transactions advertise a particular channel to a
Revenue replacement: the four away from branches and into lower particular audience? What happens
engines driving change in the US cost self-service channels, such as if a customer in a branch wants to
banking sector. ATMs, online banking and mobile. In conduct a low value transaction with
theory, customers that use a self- a teller rather than an ATM – how you
Many US banks are already
service ATM, or access their account recoup that cost?
rationalizing their IT expenditure;
over the internet, where costs are
trying to do more with less. They Another key strategy is the renewed
lower, will access a different set of
recognize that to succeed in the new focus on corporate banking, rather
services than if they go into a branch
banking environment, they need than retail. With revenue growth on
and talk to an advisor in person.
more flexible IT architectures and the retail side at a standstill, banks
more agile operating models. Banks like PNC, Bank of America and are refocusing their investment
Chase are currently grappling with into the modernization of corporate
At the same time, banks are
the challenge of turning theory into platforms and portals to enhance
repackaging their products and their
practice, however, not least in terms processing capabilities and
routes to market to try and replace
of the implications for technology, increase agility and transparency
revenue lost through regulatory
data and the operating model of transactions across the Treasury
changes, such as FATCA and
itself. How do you identify the right Management and lending functions.
Dodd-Frank.
customers for a particular channel?

Asia Pacific: Ramping up the regional focus

In light of the regulation coming out structured locally, such as the level of In terms of changing
of the UK and the US around capital, autonomy they have and their ability to customer needs, the
transparency, structure and business make investment decisions, to enable biggest focus for banks
resilience, authorities in Asia Pacific themselves to be more reactive to the is their ability to process
are also beginning to develop a more local and regional market. payments from various
robust regulatory approach. and emerging channels, such as
The result is more regional
mobile payments. It is an area
One aspect being considered is the consolidation, with many banks
where local and domestic banks
impact on a local bank if its US or overhauling their sourcing and
have a slight advantage, as they
UK counterpart fails. This is leading outsourcing strategies to reduce
have been using this technology
to some regulators wanting a more costs, and a more pragmatic
for some time through necessity.
intra-Asia focus on operations, approach to entering or exiting
For example, emerging countries
which could have a big impact on the markets. For example, a number of
like Vietnam, the Philippines and
structure and operations of banks. global banks in Asia have identified
Indonesia have been using mobile
that it is too expensive to maintain
Increasingly, it is no longer about payments for some time as the local
a banking license in certain markets
having the right mandatory infrastructure has not been in place
and so will exit.
documentation (such as agreements to enable the effective use of more
and service levels), but about how There is not the same regulatory traditional channels.
banks can maintain standalone pressure to restructure, for example
Cost efficiency is still a big factor, but
operations regionally, rather than just by decentralizing, as the size and
given the relatively low labor costs in
focusing on the global picture. Banks scale of local banks (except for China)
Asia Pacific, the real focus is process
are looking at their operating models is not comparable to those in more
standardization and efficiency – the
(people and structure, process, mature markets. However, local
ability to build critical mass and scale
technology) and trying to understand regulators do want to make sure that
quickly. The market in China, for
how this regulation could actually from a governance and accountability
example, has over 1.3 billion people.
impact on their day to day operations. perspective, banks do not stretch
To really make a dent in this market
They are reviewing how they are themselves too thinly.
banks need to be able to scale up fast.

© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
8 | What banks need to do

What banks
need to do

The severity of the banking crisis has to be matched

by the severity of the response. It is not simply a case
of fixing the banks and then getting back to business
as usual. The repercussions have been so wide and so
deep that banking as we know it – or have known it for
the past half a century – will change dramatically.

N
ew business and operating models will In this ‘new normal’, banks should not only optimize
emerge; banking value chains will be RoE and EPS. They must also focus on regulator-
disintegrated; new industry structures driven strategies, such as delivering minimum capital
will arise. Classical performance measures, and liquidity ratios and increasing their flexibility to
such as RoE or EPS will no longer be the only comply with resolvability requirements. Indeed,
measure of success. And shareholders will it may be the first time that regulators have taken
not be the only stakeholders to which boards an active part in the formulation of new business
are accountable – they will be responsible to strategies. We believe such strategies may include:
taxpayers, too.

Seizing this once-in-a-life-time transformation opportunity

We believe that the new regulations are here to stay Banks should mobilize all parts of the business (sales,
and they will change the sector for good. Banks that marketing, products, operations, risk, finance, IT,
adapt quickly to this shift – those that see challenges compliance and more) to make this transformation
as opportunities and can transform their business the number one priority on everyone’s agenda,
and operating models accordingly – will emerge as starting from the members of the board.
winners.

© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
 Optimizing banking operating models | 9

Developing an innovative operating model to overcome loss of scale and cost issues

Existing approaches to the development of operating models reducing costs, coping with a complex and disintegrated value
are based on traditional, linear problem solving techniques. chain and addressing new data requirements, while at the same
This type of approach can be very effective when uncertainty time delivering excellent customer service. We believe therefore
and complexity are low and when the new design doesn’t need that a new approach is needed for designing innovative operating
to be radically different than the current one. However, they models to address all these challenges.
can not address the needs of the current highly fluid, uncertain
One way of doing this is to look at the field of design, and borrow
environment, where banks need to radically change their
proven practices to foster innovation and creativity. This approach
operating models in order to survive.
should encourage creators of new operating models to think
All the traditional levers, such as economies of scale, single laterally – and to accelerate the process, crucial to the new world
platforms and shared services, must be cut back, or at least can’t in which we find ourselves.
be exploited as before. So, banks really need to find new ways of

Iterative approach Where design is done

KPMG Rapid Target Operating Model (TOM) Design Approach

Design process starts

right from the beginning

Develop potential OM concepts

Develop business case &
Understand need & shape Evaluate & engineer implementation roadmap
design requirements Assess current state best concept

© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
10 | What banks need to do

Implementing long-term sustainable cost reduction measures

We believe banks should find new ways of reducing costs b. Self-service channel usage
while increasing the quality of their customer service. We By giving customers more power and responsibility for
have identified three cost reduction strategies that can carrying out their own banking activities, there will be
also make bank operating models more scalable while less need for human input from the bank, with obvious
dramatically improving customer service. cost implications. However, banks should remember
a. Straight Through Processing (STP) that moving a process to a self-service channel without
On average, more than 50 percent of banks’ costs relate adequate planning risks inadvertently increasing the
to staffing – the sheer number of people necessary to cost. Inviting customers to bank online increases the
process customer transactions. This is mainly due to a number of transactions carried out. If you don’t automate
lack of complete automation of the service processes. these processes, eventually you will need more people
simply to handle the increased number of transactions.
STP, therefore, is about paring back to an absolute
minimum the human input required to process c. First-time resolution (FTR)
transactions. For example, if a customer creates a This means that processes are resolved immediately at
standing order online, with STP the whole process is the first point of contact with the customer, whether it is
automated from start to finish and no human input is a branch or a contact center. For example, if a customer
required. Banks should identify their STP throughput wants to open an account, they are able to do it there
rates and try to dramatically increase them. and then in one go, without needing multiple contacts
with a bank employee or contact center to complete the
transaction. This contrasts with the current centralized
model, where the vast majority of transactions end up in
central operations. Again, FTR will only work effectively
Straight Through Greater self-service Reducing costs if the underlying transactions abide to STP principles.
with the threeOtherwise, the same strategy can increase costs.
Processing (STP) – channel usage – strategies
in other words, specifically, more
minimizing human customers carrying out By pursuing these three strategies, the need for
input to make staff their own banking shared centers will fall. Middle and back-offices will
savings, which transactions handle only exceptions, fewer people will be needed,
currently represent without staff
Reducing customer service levels will increase, and costs will
more than half of a intervention.
costs dramatically drop.
bank’s costs.

First-Time Resolution (FTR) –

because fewer points
of contact between
customers and staff
translates to lower costs.

The five lenses of transformation.

Strategic Operational Regulatory

• What will your business model look • How will you continue to drive • How do you align your approach with
like in the new world and how does operational efficiency whilst meeting the broader regulatory agenda?
this fit with your strategic goals? regulatory requirements? – Determining a best-fit solution
– Understanding the impact on – Developing
an operating model in the context of the continually
customers and changes to the through which you are able evolving and multi-jurisdictional
way in which you do business to demonstrate certainty of regulatory agenda.
with them in the future. continuity of support during – Ensuring the right balance
– Assessing the extent to which periods of stress. between maximizing the
regulatory change presents new – Building compartmentalization regulatory dividend (i.e. reducing
strategic opportunities that can into new legal entity structures regulatory capital surcharges)
be exploited and where it leaves whilst maintaining economies and extent to which the firm
you versus your competitors. of scale. crosses the regulatory threshold.

© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
 Optimizing banking operating models | 11

Implementing an iterative and collaborative approach to a complex,

multi-faceted problem

The transformation of universal banks into banks savings, investments and insurance, largely due to
fit for this new environment involves new business legacy product-centric IT platforms. Each business
models, new operating models, new legal unit was responsible for its own activities, such as
structures, regulatory constraints and new financial sales, marketing, servicing and support.
and non-financial measures. Changing one without
Faced with the new environment they operate in,
considering its impact on others may result in
banks are now restructuring their operations around
ineffective solutions or unforeseen consequences
a horizontally-integrated model based on common
elsewhere in the business.
services and activities, rather than products. So the
Many of the leading banks have already started model would be based on service-led business units
along this transformational path, beginning the responsible for a particular part of the value chain
gradual process of restructuring their operational across the whole product range (where possible),
models to suit the ‘new normal’. The vertically such as customer proposition management, product
integrated model that until very recently held sway development, strategic marketing, or distribution,
across the industry was developed around individual with non-core products, such as investment
product business units, such as mortgages, banking, products, being outsourced.

OPERATING MODEL EVOLUTION OF BANKS Time

Evolution is a
continuum;
Vertically Vertically Horizontal Horizontal Full horizontal
phases are
integrated integrated integration integration integration
representative
individual aggregated with product with activity
snapshots in
product BUs product BUs focus focus
time

Few clients have ever undertaken transformation strategy, operations, legal entities, regulatory
projects on such a scale. Understandably, constraints and financial outcomes, with all parts
many experience challenges in coordinating of the puzzle being addressed simultaneously.
their activities and delivering real value. Banks The advantage of this approach is that it unites all
should transform themselves by simultaneously parties and drafts a holistic roadmap for progress.
redesigning their business models, operating They can start their journey by asking a series of
models and legal structures. Each element needs strategic questions through the five lenses.
to be considered through five distinct ‘lenses’:

Structural Financial

• How will you balance the need • How do you build a financial
for structural separation with the model that supports regulatory
commercial need for an integrated requirements whilst delivering a
and efficient global group? compelling equity story?
– Working out whether or not the – Determining how to create an
‘Group’ or ‘Center’ has any future acceptable return for investors.
role in the business. – Maintaining an efficient tax
– Establishing where synergies in profile throughout the changes
the various interactions across to the business’s structure and
the Group exist currently and financial arrangements.
which may disappear.

© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
12 | What banks need to do

Australia: View from down under

Like many other banking markets, in functions leveraging Lean and other different parts of
Australia the traditional, pre-crash driver customer centric interventions. The the value stream,
of bank growth was credit growth. formation of ‘centers of excellence’ such as product
People were borrowing more and more also provides opportunities to baseline development,
each year, generating ever increasing performance targets against better operations, technology, risk
revenue for retail financial services practice that is currently achievable management, forward-thinking banks
providers. Similarly, the effectiveness within the bank, rather than entering are implementing a more holistic
of sales teams and the operating model into lengthy debates as to what is approach, with a single owner taking
to support them was never tested as ‘theoretically’ possible as tends to end-to-end responsibility for a particular
a ready supply of willing consumers occur when peer benchmarks are value stream, such as deposits or small
always existed. But those days are used. In this journey, banks are dealing business banking. It is a similar idea
gone. In the mid-2000s credit growth in with the tradeoff between the holistic to the ‘brand manager’ approach of
Australia was about 20 percent a year. autonomy of brands and entities and common in FMCG markets, where a
Today the figure is around 3.5 percent, the need to drive efficiency and genuine very customer-centric brand manager
leading to huge pressures on bank customer value. has responsibility for a brand right the
incomes and shining a spotlight on the way through R&D, manufacturing,
At the same time, banks are having
need to drastically reduce costs. distribution, and sales and marketing.
to work harder to attract and retain
The Australian regulatory environment customers. Generation Y will It is not only about customers, though.
is also testing. Banks are having to make up around 33 percent of the Bank employees themselves are on the
comply with around six times as Australian workforce by the end of the front line of this revolution. Rethinking
much regulation as they did seven decade, and they have very different delivery models and channel usage
or eight years ago, both global and transacting behaviors to traditional bank will require new skills, training and
local, including anti-money laundering, customers: For example, they are much behaviors for bank staff. A branch-
various credit reforms, APS210 and higher users of online banking and based bank teller carrying out high
changes to liquidity and capital rules, mobile banking; less frequent users of volume, low value transactions is a very
not to mention various local regulatory branches; and much less likely to use different role to an informal ‘drop-in’
changes. a branch for traditional low value, high environment, where the emphasis is on
volume transactions. sales and after-sales service more than
Australian banks are looking
actually carrying out transactions on
strategically at their cost base and Some leading banks are taking ideas
behalf of customers.
operating models as they adjust to from markets with a much stronger
the ‘new normal’ levels of income customer-centric approach – such as Like their peers all around the globe,
growth. Many banks are looking to fast moving consumer goods – and Australian banks that cannot rethink
further consolidate functions that are applying them to banking. For example, their strategy to address these
duplicated across the group (often as rather than a fragmented structure fundamental changes risk becoming
a result of historic acquisitions) and common in most banks, whereby commercial dinosaurs.
develop ‘centers of excellence’ for key different departments look after

© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
 Optimizing banking operating models | 13

Making it to the
finish line
Developing a new operating model will not, in itself, position a bank to succeed in
the new market. The operating model is only part of the challenge. No matter how
robust or sophisticated the operating model may be, if the implementation process Business advisory council
does not have an effective governance framework, driven by strong, central design
Change board
authority, the operating model will never fully achieve what it was designed for.
The real test is in how effectively the operating model is implemented – and this is
an area where KPMG can add substantial value. KPMG’s target operating model
methodology has effective, coherent implementation at its heart. Governance
Implementing a new operating model might mean introducing a new technology
infrastructure, moving towards new processes, or changing the operational structure
of the business – major changes that need to be pushed through the organization
effectively, without compromising the objectives of the operating model. DESIGN
To help achieve this, KPMG’s approach is to work with clients right from the design AUTHORITY
stage through to implementation.
It does this by co-opting senior members of the operating model design team – from
the business, from the technology side, from the TOM design team at KPMG – onto
a central design authority. The role of the design authority is to oversee not only the Strategic
governance framework, but the practical implementation of the operating model.
All changes are reported back to the design authority. It reviews what is being
architecture
implemented at each stage to verify it is in line the new operating model – is this
implementing what the design specifies, or has it changed? If it has changed,
was there a good reason? The main objective of this method is to not be a
policing authority but be a guiding light that drives towards ‘zero defect’ during
implementation.
This consistent, end-to-end approach is what makes KPMG different. Our
involvement does not stop with the design of a new operating model. We work
alongside the client on the governance and, crucially, the implementation,
capitalizing on our specialist knowledge and industry insights to ensure the
theory is actually translated into practice.

It would be unwise to underestimate the impact of the banking crisis on the

industry. It would be equally short-sighted to underestimate the necessary
response. It is not simply a case of finding a quick fix then returning to
business as normal. The face of banking has changed forever. New business
and operating models will be needed, and indeed should be embraced.
Traditional value chains will disintegrate. New industry structures will emerge.
How quickly will banks adapt to this new landscape? And how effectively will
these new models then be implemented? How readily will they adopt new
business and operating models? These questions will determine which banks
emerge from the current crisis as winners, and which fall to the wayside,
unable or unwilling to adapt to the new reality.

© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
Contact us
David Sayer Mike Conover
Global Head of Banking Global Head of Capital Markets
KPMG in the UK KPMG in the US
T: +44 20 73115404 T: +1 212 872 6402
E: david.sayer@kpmg.co.uk E: mconover@kpmg.com

John Hallsworth Daniel Knoll

KPMG in the UK KPMG in Australia
T: +44 20 78964840 T: +61 2 9455 9148
E: john.hallsworth@kpmg.co.uk E: danielknoll@kpmg.com.au

Rajesh Gosain Andrew Dickinson

KPMG in the UK KPMG in Australia
T: +44 20 78964293 T: +61 2 9335 8952
E: rajesh.gosain@kpmg.co.uk E: adickinson@kpmg.com.au

Giles Whittam Mitch Siegel

KPMG in the UK KPMG in the US
T: +44 20 76948190 T: +1 404 222 3263
E: giles.whittam@kpmg.co.uk E: msiegel@kpmg.com

James O’Callaghan David Montes

KPMG China KPMG in the US
T: +85221438866 T: +1 404 979 2115
E: james.ocallaghan@kpmg.com E: dlmontes@kpmg.com

kpmg.com

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© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent
firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to
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Designed by Evalueserve.
Publication name: Optimizing banking operating models
Publication number: 120709
Publication date: September 2012