Retail Banking 12/15/04 3:28 PM Page 1

Opportunities for Action in Financial Services

Transforming Retail Banking

Processes
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Transforming Retail Banking

Processes

The retail banking environment is undergoing major

change. Retail banking customers are much more
active than they were a decade ago. Over the past
decade, third-party distributors—such as mortgage
brokers and independent financial advisers—have
secured a larger role in distributing retail banking
products. And retail banking customers are demand-
ing more customized products and services. These
changes impose significant new demands on retail
banks—if they are to stay competitive. The answer
lies in reconfiguring their business processes—specifi-
cally, redesigning, automating, integrating, and stan-
dardizing.

For many banks, incremental improvements to end-

to-end processes in business silos will be insufficient.
What’s often required is a more comprehensive trans-
formation that can be achieved by turning to modular,
standardized process models. This proposed modular,
standardized approach is a critical departure from the
traditional end-to-end, product-based process-and-sys-
tem architecture, which encompassed the full value
chain (service, product-administration, and customer-
data-repository tasks) for each product.

Such a transition is especially helpful for scalable

products—such as credit cards, simple loans, and
other “vanilla” banking products. But it may not be
suitable for all players in all circumstances. It is partic-
ularly valuable for retail banks seeking to drive radical
improvements in overall performance. A few leading
banks have already adopted modular, standardized
processes and are now enjoying improved efficiencies
and lower costs.
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The Size of the Prize

The benefits of increasing operational efficiency are

enormous. For example, right now in several major
markets, banks must sell three to four times as many
mortgages as they did ten years ago just to maintain
their profit margins. (See “Banking’s Changing
Dynamics,” BCG Opportunities for Action in
Financial Services, August 2003.) If a bank effectively
transforms its processes, it can reduce its unit costs
between 20 and 40 percent, completely changing its
competitive position.

In addition, financial services business is increasingly

originated by third parties. In an environment in
which banks make less and less of what they sell to
their customers, they need to work more closely with
external partners to succeed in cross-selling and cap-
turing that business. To do so, banks must ease
process integration and data flow (such as customer
information) with their external partners.

Banks need more flexible and more integrated

processes to provide the targeted product and service
offerings that their customers seek. For instance, cus-
tomers now look for more varied mortgage offer-
ings—such as mortgages linked to current accounts
(to reduce interest expense) and reverse mortgages
(to provide cash during retirement). To maintain and
build competitive advantage, banks need to improve
flexibility and reduce costs. If they don’t, specialist
providers are likely to pick apart their best businesses.

Going Modular

Traditionally, retail banks have organized their opera-

tions by product line—such as loans, deposits, and
investments—in individual business silos, each of
Retail Banking 12/15/04 3:28 PM Page 5

which has used different process models. Retail banks

still tend to manage most of these various processes—
from customer acquisition to product service—in-
house. Now that they need to cooperate more with
external partners, banks have to rethink those old
silos and processes. To make the transition to modu-
lar structures, a bank should take its traditional end-
to-end silo organization back to first principles and
then assemble individual modules. (See Exhibit 1.)
This involves peeling processes back to individual
building blocks and then putting them together in
the most efficient way possible—frequently across
product lines. In the back office, this often involves
building scale. In the middle office, it means consoli-
dating separate processes into shared utilities.

However, for some players it may be preferable to run

a separate platform for a particular product—such as
specialist mortgages or current accounts with special
features—when the potential scale benefits of one
central platform are insufficient to warrant the com-
plexities of merging that product’s business processes
into the central platform.

There are two guiding principles in the transition to a

modular structure:

• Modularity: Grouping similar types of tasks and

defining functional building blocks consistently
across different products or channels.

• Commonality: Treating similar modules as one and

considering one common, standard solution.

Applying modularity creates interchangeable process

blocks. For instance, scoring the risk of customer
default is a task conducted for multiple products.
Therefore, it is more efficient to treat this task as an
integrated module rather than having it hard-wired
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Exhibit 1. The Old and the New: Evolving

Process Models
Integrated process model built around silos

Customer Product Product Product

profile application delivery service

Product/Channel A
Customer income
Customer Customer securities
address Product features

Product/Channel B
Customer address Customer securities
Customer income Product features

Product/Channel C
Customer Product Customer income
features Customer securities
address Risk assessment

1 Similar tasks have 2 Common tasks are

different scope exclusively specified

Modular, standardized process model

Customer Product Product Product

profile application delivery service

Product/Channel A
Customer address
Customer income Product features
Customer securities

Product/Channel B
Product features

Product/Channel C

Product features

1 Similarly scoped, 2 Standardized

yet specific modules common tasks

SOURCE: BCG case experience.

Retail Banking 12/15/04 3:28 PM Page 7

into any one particular product or process (such as

credit card origination).

Commonality drives consistency and reduces ineffi-

ciencies due to redundancies. For instance, one soft-
ware program can originate various products. Com-
monality could, for example, include using one
standard method for capturing information about
customers’ assets and income.

Up and Down or Sideways

Retail banks are using different approaches to modu-

larize and standardize their processes. For example,
we have encountered four distinct process models in
our retail banking work. (See Exhibit 2.)

Horizontally Organized. Traditionally, most retail

banks have employed a horizontally organized model,
in which individual platforms support processes for
one product only (such as home loans). Subprocess-
es—such as risk rating, security valuation, and cus-
tomer-specific data—generally are not shared with
other products and product platforms. In this model,
platforms also can be channel specific. We expect this
model to be attractive only for monoline product
providers or for highly specialized products.

Vertically Organized. In a vertically organized model,

functionality is provided across all products. For
instance, one large North American bank now seeks
to consolidate all its customer information and needs
in a customer-capture tier as it builds common origi-
nation and servicing processes across all its retail-
banking products.

Predominantly Horizontally Organized. A predomi-

nantly horizontally organized model has some modu-
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Exhibit 2. Four Modular Process Models

Are Emerging
Horizontally organized Vertically organized
Customer Product Customer
capture Originate specific capture Originate Service Close
Home loans
Personal loans
Credit cards

Predominantly Predominantly
horizontally organized vertically organized

Customer Customer
capture + Specific Product capture + Common Product
origination services specific origination services specific

Home loans Outsourced Home loans

Personal loans Personal loans
Credit cards Credit cards

SOURCE: BCG case experience.

larization within a product-oriented framework. One

large bank, for example, has a product-specific lend-
ing architecture and horizontally dedicated front-end,
service, and product systems. For mortgages, the bank
is combining the front end with other services to
ensure seamless integration with outsourced product
delivery and maintenance.

Predominantly Vertically Organized. Some banks have

adopted a hybrid model that is predominantly verti-
cally organized. For instance, one large commercial
bank in the Southern Hemisphere consolidates front-
end origination and provides common services (such
as risk scoring and pricing) to its various products,
channels, and product-specific systems. All retail prod-
ucts share the same origination and service platform,
allowing consistency in communication with cus-
tomers.
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All four models achieve a certain degree of modulari-

ty and standardization, but none of them meets all
the different needs of all banks (that is, there is no
one-size-fits-all solution). They have to be adapted to
an individual bank’s needs and circumstances.

In choosing and shaping process models, banks may

confront hurdles in several key areas:

• IT Legacy Environment. Often the effort to disentan-

gle a bank’s proprietary systems in order to modu-
larize them or to integrate them with other mod-
ules is prohibitively expensive.

• Legislation. In some markets, legislation may pre-

vent consolidation across products or channels. For
example, sharing customer data outside the con-
text of the original product or transaction may be
prohibited in some countries.

• Lack of External Catalysts. Some markets may lack

the external catalysts to drive modularization. For
instance, the lack of a common standard (data
exchange) for integrating third-party brokers’ orig-
ination processes undermines the benefit of pro-
viding a standardized plug-in module.

• A Bank’s Internal Organizational Structure. If a bank’s

internal organizational structure is based on prod-
uct or customer segments, sharing common func-
tionality and customer data may create governance
conflicts and interfere with accountability.

If banks can overcome these hurdles, they can cap-

ture significant business opportunities. Look at how
the automotive industry benefited when it introduced
the platform strategy—using the same components
(such as drive train parts) for multiple automobile
Retail Banking 12/15/04 3:28 PM Page 10

models. By reducing duplication in products and

processes, automobile manufacturers improved opera-
tional efficiency, increased overall flexibility, and prof-
ited from integration with specialized suppliers.

The retail origination process provides another exam-

ple of the benefits of moving to a modular approach.
Designing a bank’s retail-origination-process model
according to the principles of modularity and com-
monality creates opportunities within the organiza-
tion and beyond. (See Exhibit 3.) By supporting just
one IT environment, a bank can reduce duplication
of development and maintenance efforts. And by
pooling resources, it can capitalize on scale effects.
Standardizing common tasks also promotes consisten-
cy in the customer-bank relationship and maintains
the integrity and accessibility of customer data.
Introducing a modular, standardized process struc-
ture also creates opportunities for cooperation with
external players. It enables a bank to plug in third-
party providers with ease. Scale and scope advantages
also can be achieved. For example, three German

Exhibit 3. The Benefits of Modular, Standardized

Process Models in the Origination Process

1 “Dock on” specialized players

(such as mortgage brokers)
2 Consolidate with utility
Specialized Product providers (such as
players application mortgage companies)

Retail Customer Product Product Product

banks profile application delivery service

Other Customer Product Product Product

institutions profile application delivery service
Consolidation Product
players delivery

SOURCE: BCG case experience.

Retail Banking 12/15/04 3:28 PM Page 11

banks consolidated their home-loan-processing enti-

ties into one unit to drive down costs and improve
efficiencies.

Building the Model

When a bank builds a modular, standardized process

model, it is critical to align the IT architecture prop-
erly. To do so, the bank must consider six central ele-
ments of the IT platform and design them to be con-
sistent with its chosen business-process model. (See
Exhibit 4.)

Customer Information Platform. This is the informa-

tion database that provides frontline staff and cus-
tomers with up-to-date information—for example, on
how a customer connects with and uses accounts and
product holdings as well as on how the customer
interacts with the bank’s relationship managers.

Exhibit 4. Organizing the Six Central Elements

of the IT Platform
Customer Product Product Product
profile application delivery service

Front-end origination Specific services Product systems

Customer data capture Risk assessment Account
Exposure data capture maintenance
Loan details Security validation
Statements
Security data capture Product feature +
Servicing test pricing suite

Data repositories

Customer
data repository Product accounts

Process support
Workflow
Document management (imaging)
Document generation

SOURCE: BCG case experience.

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Origination System. Consolidating front-end systems

to support the origination of different products (such
as home and personal loans) provides significant
opportunity. The customer information platform and
the origination system need to be closely integrated—
or delivered as one solution—since customer-related
data are essential to product innovations.

Specific Services. Individual system components

should provide specific functionality. For instance,
risk assessment, which may differ by customer seg-
ment, is best provided by a dedicated module.

Data Repositories. It is essential to separate customer

data from product data so that valuable customer
information can be shared across products.

Process Support. Tools that support process execution

should not be customer or product specific. They
should be provided as independent building blocks.

Product Systems. Systems designed to maintain the

products that the bank originates must be highly scal-
able (able to ramp up volumes rapidly).

Making informed decisions about these six key ele-

ments should allow the bank to move toward a more
modular and standardized approach, bringing sub-
stantial efficiencies and cost savings.

Seven Key Steps

As retail banks seek to modularize and standardize

their process models, they should take seven key steps:

• Group similar process steps within individual product

end-to-end processes. Be sure to “cut” these groups
similarly in terms of scope and task.
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• Assess commonality among these groups of process

steps. To what extent are the underlying processes
similar across products, across channels, and along
the end-to-end process?

• Drive to standardize business rules for common

tasks. Question the relevance of differences. Often
differences are the result of arbitrary decisions and
have no specific business justification.

• Combine the groups into process modules—and

clearly define input, output, and processing for
these modules.

• Assess strategic, operational relevance for each mod-

ule. Does that module need to be accessible to or
does it need to integrate with external players? Is
that module a utility service and therefore not a
basis for competitive differentiation?

• Understand your IT, legal, and regulatory constraints.

• Designate specific IT tools to support each process

module.

* * *

In summary, modular, standardized business-process

models offer retail banks the chance to achieve
greater efficiencies and to team more effectively with
outside players. They are a new and considerable
source of advantage in a consolidating and increasing-
ly competitive industry.

While modularization can lead to overstandardization

and, if it reduces the number of systems, to bottle-
necks, banks that succeed in making the transition
can achieve considerable improvements. Banks that
master modular, standardized business models can
Retail Banking 12/15/04 3:28 PM Page 14

substantially improve their unit costs, significantly

upgrade customer service, and create the flexibility
needed to introduce new products and services. Two
North American banks, for example, have experi-
enced marked increases in customer satisfaction as a
direct result of embedding modular process capabili-
ties into their products (specifically mortgages and
consumer loans). Modular processes also can halve
the time to get new products to market. Banks that
ignore modular, standardized processes may be over-
taken by their rivals.

Thomas Reichert
Andy Maguire
Michael Spellacy
Guido Kuehnelt

Thomas Reichert is a vice president and director in the

Sydney office of The Boston Consulting Group. Andy
Maguire is a vice president and director in the firm’s
London office. Michael Spellacy is a manager in BCG’s New
York office. Guido Kuehnelt is a project leader in the firm’s
Sydney office.

You may contact the authors by e-mail at:

reichert.thomas@bcg.com
maguire.andy@bcg.com
spellacy.michael@bcg.com
kuehnelt.guido@bcg.com

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www.bcg.com/subscribe.

© The Boston Consulting Group, Inc. 2004. All rights reserved.

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