This is the 4th article in the blog series on Digital Transformation and Business Strategy for Financial Institutions, written by the Q-Lana Team. We have conducted our observations and analyses of prevalent trends, integrated with our experience, to shape the series’ structure and content. Our approach is grounded in common sense and a steadfast belief in evolutionary development. We kick off the series with insights into effectively navigating the realm of Digital Transformation. From there, we delve into compelling ideas for crafting a dynamic Business Strategy, tailored specifically for financial institutions. While our work so far focused on financial markets in lower and middle-income countries, it’s worth noting that the overarching concepts we present are universally applicable across all financial markets.
In this article, we develop a Business Strategy around Customer Centricity and Risk Management and assess the concepts and tools that build the necessary framework for that strategy. Developing a business strategy is the cornerstone for navigating digital transformation.
While some advocate a digital strategy as the sole justification for digital business investments, we believe it’s crucial to first address the broader strategic positioning of financial institutions before determining the right upgrades in the various stages of digital transformation.
Recent developments in the FinTech market present timely opportunities for established financial institutions to enhance their market positions in the digital space. Urgency is paramount.
Traditionally, financial institutions are associated with services like deposits, loans, payment services, wealth management, and trade finance. However, in this blog, we will delve into three enduring economic functions of financial institutions. First, banks assume and profit from risks, particularly in the direct loans segment, a core function despite some competition from direct lenders and platforms. Second, banks aggregate and allocate liquidity, collecting deposits of varying sizes and maturities and providing loans in differing amounts. Lastly, banks transform maturities, leveraging statistical principles to offer long-term loans despite short-term deposits. Considering these functions and the potential of Digital Transformation, let’s explore a potential business strategy.
Client-Centric and Risk-Savvy Strategy: Many commercial banks are adopting a client-centric strategy to enhance their business model, recognizing the value of long-term customer relationships, especially for local and regional institutions. This proprietary customer knowledge enables tailored customer journeys and individualized products, fostering mutually beneficial relationships. Effective customer-centricity strategies drive value beyond service quality, reducing risks and costs while increasing sales and margins for both the institution and its customers. The second strategic component leverages this customer knowledge to measure and manage risk effectively.
Local and regional banks possess unique insights into their customers, often underutilized. Their close relationships, local familiarity, and customer trust position them well for risk assessment and collection services. By developing structured risk assessment methodologies and early warning systems, institutions can identify potential problem loans before default. With this foundation, banks can confidently price risk, attract investors, and share risk through mechanisms like risk-sharing funds while maintaining collection responsibilities. This approach optimizes revenue generation, risk minimization, and equity capital utilization.
To implement a customer-centric and risk-savvy approach, financial institutions must embrace associated concepts and organizational structures. These concepts provide the necessary framework for successful business model execution, ensuring long-term advantages. We will explore these concepts in detail in dedicated sessions.
Strategic Framework for Financial Institutions: Structuring data analytics and processes, managing risk, embracing client-centricity, and optimizing physical presence are key components of a forward-looking strategy. These elements drive customer-focused banking, risk management, and operational agility.
- Data Analytics: Structuring data analytics in a financial institution requires careful planning and strategy for effective data utilization in decision-making. Start by defining objectives and addressing data governance and management for regulatory compliance. Topics to cover include data collection, integration, quality assurance, storage, tools, infrastructure, team structure, skills, security, training, executive buy-in, and financial considerations.
- Process Structure: Standardizing processes simplifies product development, risk assessment, and data utilization. A platform that supports simplicity and customization while integrating data analytics and customer-centric concepts can be beneficial.
- Risk Appetite Concept: Continuous risk evaluation based on data and client interaction, setting risk limits for counterparties based on categories and size. Manual processes are reserved for excess requests, boosting speed, flexibility, and transparency.
- Relationship Pricing: Pricing models focused on overall relationships, real-time calculations of revenues, and dynamic client-specific pricing adjustments foster mutually beneficial relationships.
- Optimized Physical Footprint: Evaluating branch networks and integrating technology for omnichannel distribution ensures branches become adaptable and tech-empowered hubs.
- Agile Operations: Transitioning to agile work methodologies promotes responsiveness, collaboration, and alignment among teams, facilitating faster task execution.
- Tools: Implementing the right tools, including a platform for workflows and analytics, enables rapid development, deployment, and adjustments. Q-Lana, based on a low-code platform, offers flexible configuration and integration capabilities.
- Product Development Processes: Agile product development processes support rapid idea generation and modular construction, enabling fast delivery of personalized products.
- Partnerships: Collaborating with implementation and risk-sharing partners familiar with the business model, concepts, and systems is recommended for effective execution.
- Implementation Partners: Implementation experts can help navigate challenges and ensure successful execution.
- Risk-Sharing Partners: Collaborating with funding providers or risk-sharing managers can optimize risk reduction strategies and investment fund structuring.
With these components, financial institutions can build a customer-centric and risk-conscious entity that leverages advanced data analytics. Subsequent blog chapters will delve deeper into each aspect of this business strategy.
Below, you can also find the video version of this article.
