Business Process Improvement Trends in Financial Services

Guillermo KoppVice President

Financial Services Strategies and IT Investments, TowerGroup

Agenda

Macro Drivers in Financial Services

Regulatory Mandates and Enterprise Processes

Leveraging Six Sigma, Lean and BPM

Business Performance and Process Management

Business Process Improvement Trends in Financial Services

Source: Harvard Business Review

Macro Drivers in Financial ServicesMacro Drivers in Financial Services

Average = 60.3%

Operational Efficiency at Diversified FSIs: Simplicity and Standardization

Source: TowerGroup

UBS

Bank of America

JP Morgan Chase

Wells FargoRBS

HBOS

Santander

Société GénéraleBNP

Citigroup

Merrill Lynch

Unicredit

RBC

Gruppo MPS

Caisse d’Epargne

Deutsche Bank

HSBC

Wachovia

BBVA

Lloyds TSB

Cost / Income Ratio

IT S

pen

din

g

(Bubble size proportional to Operational Expense)

Significant Change 2003–2004

Improvement

Deterioration

Mergers Are Concentrating on Growing Asset Size While Reducing Expense

Citigroup 1,437 13.7% BB&T 99 9.3%

JPM 1,157 5.5% Fifth Third 95 3.5%

B of A 1,110 20.8% BONY 95 2.3%

Wachovia 493 8.8% Keycorp 91 7.5%

Wells 428 10.3% Regions 84 4.5%

US Bancorp 195 3.2% PNC 80 16.9%

SunTrust 159 8.2% MBNA 62 4.4%

National City 139 6.1% M&T 53 6.2%

Total Assets (USD in Billions) 12/31/2004, Growth 2004/2003

4.4 4.6

5.2

5.8

2001200220032004

Total Assets >$50 Billion(USD Trillions)

CAGR =9.6%

Bank One (326)

Fleet (200)

SouthTrust (52)

National Commerce (22)

Provident (17)

Union Planters (32)

Source: TowerGroup

14.3%

14.1%

12.8%

10.2%

Consumer Banking

Overall FSI

Securities & Investments

Wholesale Banking

Revenue Growth (Full Year 2004 versus Full Year 2003)

Consumer Banking and Wealth Management Drive Revenue Growth (in Local Currency)

Source: TowerGroup

16%

17%

22%

31%

11%Wholesale

Consumer

Total Bank

Wealth & AssetManagement

Cards

Revenue Velocity (1st half 2004 versus 1st half 2003)

Who Owns the Customer?FSIs Tap a Virtuous Circle of Value Creation

Customer

BehavioralTraits

Knowledge FairTreatment

Responsiveness

Ethics

FSICulture

ValuedExperience

Governance

Vision

Simplicity

RelationshipPricing

Easy Access(24 X 7)

TrustNetwork Network

OperatorsOperators RetailersRetailers

Service Service ProvidersProviders ManufacturersManufacturers

Leadership

ProactiveAlerts

Source: TowerGroup

Regulatory Mandatesand Enterprise Processes

Regulatory Mandatesand Enterprise Processes

Source: NASA

Risk Management and Compliance: Mindless Regulations or FSIs Out of Control?

Culture and EthicsCorporate Governance

Reputation and TrustRegulatory Capital

Regulatory Mandates

Public and Government Scrutiny

Policies and Procedures

Business Processes

Technology Solutions

IT and Operational Infrastructure

Overall Value

Enterprise Risk Management

Business, Product, and Location Silos

Enterprise Resilience

Relationship Pricing

Real-Time Architecture

Economic Capital

Source: TowerGroup

Penalties and Losses

Redundancy

Data Integrity

2004 2005 2006 2007 2008

IT Business Operations Penalties and Losses

$53 billion

$277 billion

$62 billion

Basel II and Enterprise Risk Management:Economic Capital versus Regulatory Capital

Source: TowerGroup

$107 billion Compliance

Waste

$25 billion Capital

3-year History

ERM Solution Layers Must Fulfill a Compelling Business Purpose

Source: TowerGroup

Business Goals

Reporti

ng

Model

ing

Rules

Transa

ctio

ns

Business Processes

IT Infrastructure

Applications

Data

Enterprise Strategies

ERM

Source: European Southern Observatory

Leveraging Six Sigma, Lean, and BPMLeveraging Six Sigma, Lean, and BPM

Enterprise Architectures Provide a Road Map for Efficiency and Alignment

Regulation ProductInnovation

NetworkedServices

Location

Product

Line of Business

Relationship

CustomerProcess

Risk

Offering

Inefficient processes and ITInefficient processes and IT

Source: TowerGroup

Enterprise Processes

Enterprise Processes

Risk

Relationship

Customer

Customers

Holistic View of Business and Technology

Customer Acquisition and

Relationship Management

Product Processing

and Analytics

Sales and Customer Service

Knowledge Management

Financial Managementand Control

Business Process Management

Enterprise Integration Architectures

Technology Capabilities

Expectations and Perceptions of Financial Services Customers Are Shifting

Personalization - Multimedia - Self-Service

Real-Time Delivery Channels - High Touch

Enterprise RiskManagement

Lead and ReferralManagement

Straight Through Origination

Dynamic Products and Pricing

Real-Time DataIntegration

15% Gap in Customer Satisfaction15% Gap in Customer Satisfaction

Source: TowerGroup

Discrete Business Processes Give Rise to Specialized Functional Components

Business ProcessOutsourcing (BPO)

Source: TowerGroup

Current Examples:

IBM: Component Business Model

Unisys: 3D-Visible Enterprise

Modular Implementation

Policies and Procedures

Business Processes

Technology Solutions

IT and Operational Infrastructure

Holistic Functionality

Estimated Global IT Spendingby FSIs in 2010:USD 450 Billion

Estimated GlobalBPO Market Opportunity

by FSIs in 2010:USD 100 Billion

• Insurance Policy Administration• Claims Processing• Mortgage Origination and Servicing• Payments Transaction Processing• Collateral Management• Investment Funds Administration• Trade and Securities Services

(Verticalized)

Account Opening:FSIs Improve Core Processes

Superior client experience Client signs only once Broader and deeper

relationships Wider range of products Consistent and streamlined

process Higher productivity and

information accuracy Most client data are prefilled

(once and done) Flexibility to add new

accounts and products Fewer errors and

documentation exceptions 0

1

2

3

4

5

6

7

8

1 2 3 4

Baseline Improved

Accounts

Eff

ort

(h

ou

rs)

80% Reduction

Source: TowerGroup

Business Performanceand Process Management

Business Performanceand Process Management

Source: NASA

A Holistic Dimension of Optimized Business Processes Maximizes Customer Value

LocationsCards

Mortgages

Trade Finance

Liquidity

Structured Fin.

Asset Mgmt.

Legacy SystemsCards

Mortgages

Trade Finance

Liquidity

Structured Fin.

Asset Mgmt.

Cards

Mortgages

Deposits

Retail Banking

Trade Finance

Liquidity

Credit

Wholesale Banking

Structd. Fin.

Asset Mgmt.

Brokerage

Wealth Management

Settlement

Batch

Online

Payments

Enterprise Workflow Management

Exception Management Utilities

Streamlined Business Processes

CUSTOMER

Value

Enterprise

Integration

Source: TowerGroup

Overall Value

Loan Processing

Vertical Process Improvements Add Value Holistically Across the Enterprise

Policies and Procedures

Business Processes

Technology Solutions

Infrastructure

Holistic Functionality

Source: TowerGroup

Retai l

Weal th

Wholesale

Payments

Enterprise

Overall Value

ExpenseRevenue

SatisfactionProductivity

Quality

Representative Providers Across BPM and Vertical BPO, Financial Services (2005)

HORIZONTAL BPO: Human Resources, Finance & Accounting, Procurement

INSURANCE MORTGAGES CARDS ASSET

MGMT.RETAIL

BANKING

TRANSACTION PROCESSING

PRODUCT ADMINISTRATION

CUSTOMER SERVICE

BUSINESS PROCESS MANAGEMENT (LAYERS)

BUSINESS SERVICES

Source: TowerGroup

3Q’071Q’05 3Q’05 1Q’06 2Q’05 4Q’05 2Q’06 3Q’06 4Q’06 1Q’07 2Q’07 4Q’07

Customer Interaction

Branch Automation

C D E F Call Center Enhancements

C D E F

F Multichannel Delivery

C D E

IT Governance and Tactical ProjectsIT Governance and Tactical Projects

Maintenance and Production SupportMaintenance and Production Support

Enterprise ERM and Financial Management

C D E F

D Design ConceptC E Execution F FinishProject Phases:

F Multimedia Alerts

D EC

Enterprise Transformation Road Map:Core Banking Takes Center Stage

F Business Intelligence

D EC

F Business Process Management

D EC

Deposits, Lending, Treasury, Trade Finance, Asset Management

C D E F

Core Banking

(Projects and Timelines are Indicative)

Source: TowerGroup

Questions…

gkopp@towergroup.com

Thank You!

Business Process Improvement Trends in Financial Services

Guillermo KoppVice President

Financial Services Strategies and IT Investments, TowerGroup