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Case Study: Will a Bank’s New Technology Help or Hurt Morale?

• Leonard A. Schlesinger

A CEO weighs the growth benefits of AI against the downsides of impersonal decision making.

Beth Daniels, the CEO of Michigan’s Vanir Bancorp, sat silent as her chief human resources officer and chief financial officer traded jabs. The trio had founded their community bank three years earlier with the mission of serving small-business owners, particularly those on the lower end of the credit spectrum. After getting a start-up off the ground in a mature, heavily regulated industry, they were a tight-knit, battle-tested team. But the current meeting was turning into a civil war.

• Leonard A. Schlesinger is the Baker Foundation Professor at Harvard Business School, where he serves as chair of its practice-based faculty.

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Case Study 7: The Digital Transformation of Banking—An Industry Changing Beyond Recognition

• First Online: 06 February 2020

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• Hubert Tardieu 6 ,
• David Daly 7 ,
• José Esteban-Lauzán 8 ,
• John Hall 9 &
• George Miller 10  

Part of the book series: Future of Business and Finance ((FBF))

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Partly as a result of the rise of FinTechs, banking is a sector that is facing significant disruption. In this case study, we identify some of the innovations that are being made both by young start-ups and long-established banks. We explore emerging opportunities in terms of business models, as well as how new operating models will boost customer-centricity and optimize costs through intelligent automation. The challenges of strategy, leadership, and attracting and retaining digital talent are analyzed. Finally, we conclude with a discussion of how platforms will enable new ecosystems of partners to work together to create and capture customer value.

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Accenture. (2018). Beyond north Star gazing . https://www.accenture.com/_acnmedia/pdf-85/accenture-banking-beyond-north-star-gazing.pdf . Accessed October 26, 2019.

Bain. New bank strategies require new operating models . https://www.bain.com/contentassets/a97b9014afc84a76ae9fb723d3e94ead/bain_brief_new_bank_strategies_require_new_operating_models.pdf . Accessed October 26, 2019.

The Financial Brand. Is the banking industry prepared for a world without bankers ? https://thefinancialbrand.com/86253/banking-future-of-work-training-digital-trends/ . Accessed October 26, 2019.

Capgemini. (2017, October). The digital talent gap . https://www.capgemini.com/wp-content/uploads/2017/10/report_the-digital-talent-gap_final.pdf . Accessed October 26, 2019.

Efma. (2018, September). World retail banking report 2018 . https://www.efma.com/study/detail/28603 . Accessed October 26, 2019.

EY. (2018, June). How convergence in banking could be an opportunity for growth . https://consulting.ey.com/convergence-banking-opportunity-growth/ . Accessed October 26, 2019.

EY. (2016). Global consumer banking survey . https://eyfinancialservicesthoughtgallery.ie/wp-content/uploads/2016/10/ey-the-relevance-challenge-2016.pdf . Accessed October 26, 2019.

IDC. (2018, March). The business value of the stripe payments platform . https://stripe.com/files/payments/IDC_Business_Value_of_Stripe_Platform_Full%20Study.pdf

KPMG. (2019, July). The future of digital banking: Banking in 2030. https://home.kpmg/au/en/home/insights/2019/07/future-of-digital-banking-in-2030.html . Accessed October 26, 2019.

McKinsey. (2018, August). The lending revolution: How digital credit is changing banks from the inside . https://www.mckinsey.com/business-functions/risk/our-insights/the-lending-revolution-how-digital-credit-is-changing-banks-from-the-inside . Accessed October 26, 2019.

OnDeck. (2019). https://www.ondeck.com/home5-lendstart . Accessed October 26, 2019.

Quartz. (2019, August). Digital banks are racking up users, but will they ever make money ? https://qz.com/1679197/when-will-digital-banks-like-n26-and-revolut-start-making-money/ . Accessed october 26, 2019.

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Tardieu, H., Daly, D., Esteban-Lauzán, J., Hall, J., Miller, G. (2020). Case Study 7: The Digital Transformation of Banking—An Industry Changing Beyond Recognition. In: Deliberately Digital. Future of Business and Finance. Springer, Cham. https://doi.org/10.1007/978-3-030-37955-1_28

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Digital Transformation of a Retail Bank: A Case Study

• Retail Banking

Digital Transformation of a Retail Bank – A Case Study

Most bank customers are willing to try a financial product from a non-banking provider, particularly the Fintechs and the tech giants (like Amazon, Google, et al.).  The percentages increase among the younger citizenry that grew up as digital natives.

The digital transformation of retail banking is not a quick fix or putting on a band-aid.  Typically, an outside-in and inside-out transformation requires a multipronged approach and starts with the commitment of the C-Suite and involves changes at culture, strategy, operating model, business models, talent, processes, and execution.

Also, there are structural imbalances. A new generation of Fintechs does not have legacy landscape, and many are circumventing the complex licensing and regulatory protocols by partnering.

Hence, a digital transformation of a retail bank is a fundamental remaking or a reincarnation, if you will.  Let’s examine by taking a fictitious case study of a bank to showcase how a retail bank can rethink, re-imagine, re-engineer, re-platform and renew themselves for the digital age.

The fictitious bank is BankMe, a sizeable multiline bank with operations across the United States, but a significant portion of the branch footprint on both coasts.  BankMe serves over 20 million customers.  It offers general banking products and services – deposits, loans, mortgages, commercial lending, life insurance, and essential brokerage services.

BankMe’s chairman, and CEO is Ryan Paul, and he is a veteran of banking with experience across the banking value chain and has built BankMe over the years through both organic growth and acquisitions.

As with most legacy banks, BankMe is a retail banking operation replete with convoluted processes, arcane governance norms, antiquated systems landscape, and employees from different eras. Change is slow, the culture is rooted in resistance to change, and everything takes an enormously long time.

Inflection Point:

The perfect storm of a new wave of startups, the eroding trust and value among the customer base, and the potential emergence of giant technology companies into the banking realm was the impetus for embarking on a digital transformation of the bank.

Transformation Vision for Retail Banking:

In conjunction with the board and a strategic transformation team, Paul and company have come up with an overarching theme for a multi-year and comprehensive transformation of the bank. The transformation program – MADE , which stands for Mobile and Digital Everywhere – has been a catalyst for an invasive and intensive change across the spectrum of the bank.  The company’s tagline “Desirable bank for the Digerati” has galvanized the team.

Retail Banking Digital Strategy Pillars:

Paul and team have come up with six vital strategic pillars to drive the transformation program and built a roadmap anchored to these guiding principles.

• Digital First, Mobile First, and Cloud First approach
• Rapid innovation matters – Do it and iterate
• Buy where you can, Partner when you must, Build only as a last resort
• Sacrifice short-term profits for long-term customer centric gains
• Provide APIs based access and build an open banking platform
• Make or Break things; the status quo is not acceptable

The Budget:

The board approved a special transformation budget of $5 billion over 2-years, which is over and above the business as usual spend.  The governance of the transformation budget was simple – funding will only be given to projects that have 90% digital quotient. The digital quotient is a measure of meeting specific criteria – cloud-based, API-enabled, open architecture, experience-driven and unlocking the value from data.  These five guiding principles funded projects big and small across the bank’s value chain and in a multitude of capability areas.

BankMe leadership also has instituted a key value driver – that the digital transformation projects will have the right of way and will be prioritized over business as usual programs.

Cultural Change:

As the saying goes, culture eats strategy for breakfast. So, a shift in culture, psyche, and mindset is an essential ingredient for success. Furthermore, in most transformation programs, change management is often an afterthought and typically under-funded and launched too late in the cycle to make any material difference.

BankMe leadership realized the importance of culture and change management to compete effectively against the digital natives. The banking transformation team has prioritized both the cultural aspects and the change management aspects into a holistic change program.

In addition to the business side, the technology teams had embraced the concept of creating an IT Strategy for the digital age.

The change management framework and the change management plan went a long way in fostering a new ethos and approach to doing, thinking, and being.

BankMe digital transformation team has come up with a roadmap that is across the board and involved capabilities, people, process, technology, and experience.

The transformation team has created the following key deliverables:

• A digital capabilities model to understand the depth, variety, and nuance of digital capabilities
• A banking capabilities model that spans the critical areas of the value chain
• Customer Journey Maps to capture the current state of stakeholder workflows
• A data model that will serve as a lynchpin in unlocking the value from data
• A Target State Conceptual Architecture
• Rationalized Requirements Anchored to Business Capabilities
• Effort Estimation
• Digital Transformation Roadmap
• Implementation Sequencing and Incremental Delivery of Capabilities
• A Rollout Plan

• For every bank or non-technologist, hire two technologists
• Focus on hiring technologists who know banking or bankers who understood technology
• Acqui-hires are not an asset acquisition play or an M&A strategy per se but a talent building strategy.

With this strategy, BankMe has been able to recruit data scientists, technical architects, and software programmers and increase the technology workforce by 20%.

Core Banking Transformation :

Account opening:.

Account opening is the gateway experience for a new client or existing client opening a new account. BankMe revamped the account opening process and created customer journey maps to understand the nuances of how a customer feels.  Account opening transformation was a key enabler.

Deposits are the lifeline of any bank and BankMe is no exception.  BankMe digital transformation efforts focused on the following in this core banking area.

BankMe introduced an app to help clients ladder savings in different vehicles to balance liquidity and yield.  For example, emergency funds in checking, short-term liquidity needs by term deposits and savings accounts, and rainy-day funds into various brokerage accounts, and nest egg into IRAs and other retirement accounts. By doing so, BankMe has expanded the footprint of clients into seldom used short-term instruments and gain the loyalty of the clientele a simple but essential piece of advice.

BankMe partnered with a Fintech to help customers round off purchases and save the dollars.

Also, the mobile check capture, online payroll deposit sign up, and access to a low-cost pay advance startup are some of the steps that BankMe has taken to advance the digital agenda.

Personal Loans, mortgages, car loans are critical to the success of BankMe and other retail banks.  Innovations in the loans space have been few and far between.  Now, as a part of its transformation of core banking services, BankMe has introduced a slew of changes and modified loan offerings thanks to improved user experience and more holistic underwriting.

Non-traditional Underwriting : With the advent of big data and machine learning, lenders are no longer limited to using traditional credit bureau scoring. Instead, a more holistic profile of the clients – using their social, demographic, financial and employment data to make instant credit decisions has allowed BankMe to speed up the underwriting process and make lending decisions on the fly. Also, scouring through the client data has permitted BankMe to prepopulate the loan amount and the terms to many clients upon login and through outreach.

Also, BankMe has changed the way it collects information online and channels the workflow. Many fields are pre-filled, particularly for existing customers, and others through data aggregation technologies.

BankMe also partnered with a microloans platform to underwrite loans based on a predetermined set of rules to fund the “unbanked” customers.

Commercial Lending:

The commercial banking team has introduced several changes to make the entire loan process smooth and easy.  Leveraging machine learning and text analytics, BankMe has introduced the spreading of financial statements automatically. Similarly, using credit card data, business receipts, and expense data, BankMe has been able to determine the viability and amount of working capital a particular business needs and offer the terms online for immediate action by the client.

Also, BankMe partnered with an ML-based lending platform and has joined a few marketplaces to be a part of an emerging ecosystem.

Payments and Transfers:

This is the journey of BankMe, a legacy bank with friction, inertia, complexity, and cost built into every part of the business. However, with the right leadership and appropriate changes to the culture and ethos, BankMe has been able to cross a chasm and digitally transform the core banking services.

How does your job compare to the experience of BankMe? Has your bank went through digitalization and transformation using digital and cognitive technologies? Please share your banking digital transformation journey with us.

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TymeBank Case Study: The Customer Impact of Inclusive Digital Banking

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This publication is also available in French  and Spanish .

Executive Summary

This case study presents insights from customer research with TymeBank clients that bolsters CGAP’s hypotheses around how digital banks can support the mission of financial inclusion. As a fully digital South African bank that disproportionately serves low-income rural customers, TymeBank has created a suite of basic products that cater to the essential financial needs of those customers, namely a low-cost transactional account and a high-yield savings account. Judging from product uptake and client testimonials, these products add to a compelling value proposition that not only resonates with customers but improves their lives.

TymeBank’s distribution network, which is based on its partnerships with the nationwide Boxer and Pick n Pay (PnP) grocery store chains, helps to keep operational costs low and passes cost savings onto customers in the form of more affordable services. A clear majority of the bank’s customers cite affordability as a key source of value and the reason they opened a TymeBank account. The distribution network also extends the bank’s reach to areas that are underserved by traditional players. The affordability and accessibility likely explain why underserved segments, such as low-income women and rural customers, are over-represented in TymeBank’s (active) customer base as compared to the overall banked population in South Africa.

Despite having access to other banking options, TymeBank customers overwhelmingly see no compelling alternatives in the market. Crucially, the value customers see in the bank appears to be inversely related to income, with poorer customers reporting higher levels of satisfaction.   

In today’s high-tech financial services landscape, which is often dominated by headlines about fintech startups and tech giants, it is easy to overlook the role banks can play in advancing financial inclusion. The high cost of running brick-and-mortar branch networks has traditionally inhibited banks from serving less profitable client segments, including the low-income groups that are the focus of financial inclusion. Banks have also been slow to adapt the digital innovations that have helped some newcomers reach these segments at lower cost. It is no surprise that some observers have questioned whether banks are even relevant to financial inclusion.

However, there are reasons to believe that banks can play an important role in financial inclusion if they overcome the challenges of their legacy systems and processes and digitize operations. In fact, banks have advantages over other types of financial services providers (FSPs) that may allow them to have an outsized impact on financial inclusion – if they are willing to expand down- market. Most importantly, banks do not face the same regulatory constraints as other providers. Whereas mobile money providers and fintechs generally cannot provide a wide array of financial products (ranging from savings to credit), banks can. License to intermediate retail deposits further plays to a bank’s advantage in the arena of digital credit. Banks can fund their lending portfolios with retail deposits that are typically cheaper than the other funding sources pure lenders use, which further reduces the cost of reaching low-income customers with credit.

CGAP previously presented three emerging business models in banking that we consider to be particularly promising for financial inclusion (Jeník and Zetterli 2020). These models are fully digital retail banks, marketplace banks, and Banking-as-a-Service (BaaS) (see Box 1). We conclude that they have the potential to deepen financial inclusion by:

• Lowering the cost of financial services; 
• Improving access to a greater variety of services;
• Creating services that better meet the needs of various customer segments; and 
• Improving the customer experience. 1

We analyzed several fully digital retail banks in a series of detailed case studies (Jeník, Flaming, and Salman 2020). One of these cases focused on TymeBank in South Africa. TymeBank is a fully digital retail bank founded with financial inclusion as a core business objective. Since its 2018 launch, the bank has onboarded over 4 million customers.

TymeBank offers low-income customers simple products at low prices, such as checking accounts, savings accounts, and debit cards – all through a distribution network that combines online and offline customer interaction based on partnerships with grocery store chains Boxer and PnP. In the area of credit products, TymeBank only offers a “buy now, pay later” option called MoreTyme. This case study provides a compelling example of how challenger banks can leverage digital technology to reach excluded customer segments with more affordable and useful products.

This paper builds on the TymeBank case study by examining the impact the bank’s services have had on low-income customers. By combining a quantitative analysis of TymeBank customer data with a phone-based survey of a randomly selected sample of low-income customers, the paper addresses the following questions:

• Does TymeBank serve low-income customers?
• Are its products relevant to low-income customers?
• What impact do the bank’s products have on low-income customers’ lives, in their own words?

The aim of this research is to shed light on the potential of digital banks to deepen financial inclusion in a way that improves the lives of low-income customers. CGAP is conducting additional research with other providers to better understand the impact of new financial services business models on customers. 2

TymeBank’s main value proposition consists of (i) simple, affordable, and accessible products; (ii) fast and automated onboarding; and (iii) incentive programs that appeal to target segments (e.g., the SmartShopper loyalty program). These are the qualities we would expect customers to point out when talking about the benefits of using TymeBank.

They are also important features that respond to three frequently cited barriers to financial inclusion: (i) expensive services, (ii) limited access points, and (iii) prohibitive know-your-customer (KYC) requirements. 3

Product affordability relies on TymeBank’s ability to maintain low operational costs and proportionally reduce them further as the bank grows. Current cost efficiency is due to the bank’s technology and microservice architecture (Flaming and Jeník 2020), its branchless model, and digitally facilitated onboarding. TymeBank onboards approximately 110,000 customers per month: about 93,500 through kiosks at an estimated cost of US$3 per customer, and about 16,500 via web at approximately US$0.60 per customer. 4

SOUTH AFRICA 5

South Africa enjoys relatively high levels of financial inclusion, including a banked adult population of approximately 85 percent in a market dominated by the country’s well-established commercial banks. However, many customers only use their bank account to receive government benefits; other use cases lag. There is little to no use of non-bank mobile money wallets.

Across demographic, socioeconomic, and geographic factors, financial inclusion levels positively corelate with higher age (people aged 18–29 are among those least included), urban areas, income level and regularity. Only 38 percent of individuals who reported having no income are banked, while 31 percent are entirely excluded.

METHODOLOGY

For the qualitative analysis based on customer interviews, 1,162 customers were screened from an overall sample of 10,000. The aim was to reach those TymeBank customers living in poverty (i.e., 70 percent or more likely to be living on less than US$5.50). Ultimately, 278 customers were identified for in-depth interviews. The screener surveys were conducted partly through interactive voice response (IVR) surveys and partly through live phone calls.

The quantitative analysis used customer data from TymeBank to assess the potential impact of the bank’s offering on its customer base, particularly individuals from groups that generally exhibit lower levels of financial inclusion. The data examined spanned a nine-month period from July 2020 to March 2021. The analyzed data correlated to active EveryDay account customers, defined as those who had performed a transaction within the past 30 days. Various sets of proxies were applied to estimate income level (e.g., onboarding location, outstanding balance, frequency of transactions, average size of transactions).

The analysis considered several important caveats:

a) We recognize that TymeBank is not representative of all fully digital retail banks in South Africa or elsewhere. The findings presented in this paper should not be interpreted as automatically applicable to other digital banks without careful consideration.

b) The research was conducted during the COVID-19 pandemic; some findings were or could be affected (e.g., as customer behavior changes in response to the pandemic).

c) Despite our best efforts to exclusively focus the analysis on low-income segments, we were unable to identify customers based on their stated income levels since TymeBank does not collect that information. Customer segmentation was performed through the previously mentioned set of proxies for the customer data analysis and through the screening questionnaire for the customer interviews. 6

d) The quantitative analysis focused on active customers with at least one transaction performed over the past 30 days, unless otherwise noted.

e) Where customers stated they had been financially excluded before opening a TymeBank account, we did not identify the underlying cause(s) of financial exclusion.

Key Findings

Does tymebank serve low-income customers.

Our research showed that TymeBank serves a higher proportion of low-income customers than the typical bank in South Africa, and a significantly higher portion of the most financially excluded segment.

Low-income customers in South Africa are relatively highly banked, although they are under-represented. South Africans earning US$200 per month or less constitute 47 percent of the population but only 41 percent of the banked population. 7 However, we estimate that this segment represents 48 percent of TymeBank’s active user base. 8

Among the three-quarters of TymeBank customers for whom data are available, 58 percent live in metropolitan areas and 42 percent in rural areas. This compares to South Africa’s rural population of 35 percent (as of 2016); we estimated this share to be even lower in 2021 (approximately 30 percent). 9 Hence, rural customers appeared to be noticeably overrepresented in the TymeBank user base.

Young, rural, low-income women comprise the most financially excluded and underserved segment in South Africa. This group forms 2.3 percent of South Africa’s banked population but 7 percent of TymeBank’s active base – nearly three times as much. 10 Finally, 13 percent of TymeBank’s active customers are first-time bank customers. 11

From a more general perspective, women in the low-income segment represent a higher-than- average share of the bank’s overall customer base sample (65 percent versus 57 percent),12 which suggests that low-income women particularly benefit from TymeBank’s services.

These findings lead us to conclude that TymeBank customers disproportionately seem to come from traditionally unbanked and underserved segments. In fact, the evidence suggests that the bank’s customer base may particularly skew toward the most underserved segments.

DOES TYMEBANK OFFER PRODUCTS THAT ARE RELEVANT TO LOW-INCOME CUSTOMERS?

Customers find TymeBank’s products useful and act upon features designed to promote certain behaviors.

The bank’s customers particularly value the low cost of its services and the convenience of access and usage. The lower their income, the more value customers seem to derive from its services. While the vast majority of TymeBank customers have previously held bank accounts, 67 percent say they see no good alternative to TymeBank (Figure 4). This response is despite the fact that, as of the time the research was conducted, the bank still only had a relatively modest payments and savings offering and had yet to launch credit products. (TymeBank has since launched MoreTyme, a “buy now, pay later” consumer credit product.) Customer endorsement seems driven by the strength of the bank’s value proposition and the low cost of its services. When asked, customers specifically appreciate the low fees (48 percent) and the high-yield savings account (38 percent).

Importantly, women make up a larger share of the total number of GoalSave (savings account) users compared to their representation in the overall customer base (3 percentage points higher). This finding suggests that female customers find value in the product, although they had slightly lower savings per user than men (US$58 versus US$59). The number of their deposits exceeds the number of withdrawals.

We did not find any significant differences in usage and product lifecycle patterns across income groups (aside from the frequency and size of transactions that correlate with income level), which suggests that TymeBank covers its customers’ essential needs across segments. The similarities in lifecycle (behavior patterns across products, such as most frequently performed type of transaction and their change over time) indicate that customers across income levels increase their engagement as they grow confident with the products.

However, important nuances do exist. For instance, the most excluded segment uses till machines for cash-in and cash-out transactions that are free-of-charge (and perhaps more accessible in certain areas), compared to the ATMs other segments prefer. This may be explained by price sensitivity that drives the preference for free till point withdrawals compared to ATM withdrawals, which are charged at US$0.61 per part of US$70.

The value generated for low(er) income customers will hopefully further expand as TymeBank expands its product offering (e.g., insurance and diverse credit products).

WHAT IMPACT DOES TYMEBANK HAVE ON CUSTOMERS’ LIVES?

Most customers report positive life changes due to their use of TymeBank. Importantly, levels of customer satisfaction increase as customer income decreases. This suggests that the TymeBank value proposition tailored to lower-income customers resonates well.

We relied on the actual voices of customers from the demand survey to gauge the impact the TymeBank offering had on its users. When asked, 73 percent of customers reported a positive change in quality of life attributable to TymeBank. The change could be associated with multiple factors. For instance, 80 percent of interviewed customers reported a decrease in the amount spent on bank fees, which is crucial for low-income segments that have historically experienced cost as one of the biggest barriers to financial inclusion. Nearly a third (31 percent) of customers who reported life improvement said that their access to financial services had expanded thanks to TymeBank. Customers also reported an improved ability to digitally transact and receive money (51 percent and 55 percent of all interviewees, respectively).

One of the most important findings concerned the ability to save. Seventy-three percent of interviewed customers reported an increase in their savings balance due to TymeBank. Savings likely drove customers’ ability to achieve their financial goals (68 percent) and improve financial resilience (32 percent).

These findings support our overall hypothesis that digital banks are well placed to deepen financial inclusion with cheaper, better products that reach beyond payments and are relevant to improving the lives of low-income customers.

It is critical to note that the high-interest yield on the GoalSave savings account was among the reasons most prominently cited by customers as driving them toward TymeBank. Our finding that female and young TymeBank customers were more likely to save using the bank service compared to what nationwide averages suggest was also important. While the national numbers show a 9 percentage point gap in formal savings between men and women (35 percent versus 26 percent), the gap among TymeBank customers favored women by 10 percentage points (45 percent versus 55 percent).

Our findings also revealed areas for improvement. Perhaps not surprisingly, TymeBank customers have not been spared the surge of fraud in South Africa. Ten percent of customers reported challenges concerning security and protection of funds. Six percent of respondents mentioned delays in service delivery and nearly the same share complained of issues related to digital access. Complaints were related to system downtime, clearing time (TymeBank is planning to offer real-time clearing), and the general concerns first-time users may have about their funds.

When asked about potential improvements, the presence of physical branches scored the highest (11 percent), followed by improved security (9 percent) related to the challenges mentioned in the previous paragraph and improved digital services (5 percent).

While these findings are encouraging, more research is needed before conclusive statements can be made about the broader role of digital banks in advancing financial inclusion. We encourage other experts to undertake similar research and add to the emerging evidence on the impact of digital banks on financial inclusion.

Acknowledgments

This case study features insights from research commissioned by CGAP and conducted by 60 Decibels and Genesis Analytics under the leadership of Ivo Jeník.

The author thanks CGAP colleagues Gayatri Vikram Murthy and Mehmet Kerse for reviewing this paper, and Gcinisizwe Andrew Mdluli for contributions and insights. Peter Zetterli and Xavier Faz oversaw the effort. Andrew Johnson led the editorial work.

This paper would not have been possible without the time and dedication of the team from TymeBank and TymeGlobal.

Flaming, Mark, and Ivo Jeník. 2020. “ How Does Tech Make a Difference in Digital Banking ?” CGAP blog post, 11 November.

Jeník, Ivo, Mark Flaming, and Arisha Salman. 2020. “ Inclusive Digital Banking: Emerging Markets Case Studies .” Working Paper. Washington, D.C.: CGAP.

Jeník, Ivo, and Peter Zetterli. 2020. “ Digital Banks: How Can They Deepen Financial Inclusion? ” Slide deck. Washington, D.C.: CGAP.

Download a PDF of this Case Study >>

1 To assess bank inclusivity, we developed and implemented a four-dimensional framework focused on cost, access, fit, and experience (CAFE). See Jeník and Zetterli (2020), page 42. In a business-to business (B2B) model, BaaS providers have other FSPs as their customers. Thus, their impact on end users is indirect.

2 see collection of cgap research on fintech and new financial services business models: www.cgap.org/fintech, 3 world bank global findex database (2017)., 4 atm-like machines placed in partner grocery stores – mainly pnp and boxer – allow for automated customer onboarding in less than five minutes., 5 this section is based on data from the finmark trust finscope (south africa) 2018 database., 6 the quantitative analysis used the average monthly inflows of customers originated at pnp value stores (us$271) and boxer stores (us$224) to estimate income level. the qualitative analysis estimated that 35 percent of tymebank’s customers live on less than us$5.50 per day, based on the screener survey findings., 7 the finmark trust finscope (south africa) 2018 database., 8 using place of origination (pnp value and boxer stores) as a proxy for low income., 9 south africa gateway .  , 10 the finmark trust finscope (south africa) 2018 database., 11 n = 1,162., 12 comparing screened customers (n = 1,162) and interviewed customers (n = 278)., related resources, inclusive digital banking: emerging markets case studies, digital banks: how can they deepen financial inclusion, related research, gender-intentional credit scoring, bolstering women’s climate resilience and adaptation through financial services, global landscape: data trails of digitally included poor (dip) people.

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Bank becomes a future-ready profitable lender

• Call for Change
• When Tech Meets Human Ingenuity
• A Valuable Difference
• Related Capabilities

Call for change

The hardest part about applying for a business loan is the waiting. The longer and more manual that process is, the more costly and resource-intensive it becomes for the lender.

That’s why one of the largest consumer and commercial banking groups in North America decided to upgrade its commercial lending business processes.

The bank’s leaders believed that with faster, more efficient underwriting and approval processes they could generate enough savings to fund new loans for existing customers at a record pace. For example, the bank’s average end-to-end turnaround time for commercial loans was 53 days—well below top quartile performance.

To better serve its largest customers, the bank also needed to provide a more personal customer experience. A key element of its strategy would involve bringing in new digital capabilities that would connect and harmonize its many lending processes while driving better experiences and continuous innovation.

Making its lending process faster and easier would be critical for the bank to survive and keep its loyal customers.

When tech meets human ingenuity

Working with Accenture, the bank developed a flexible roadmap for its lending transformation. To create an intelligent banking operating model, the team used SynOps, a cloud-enabled platform that orchestrates the optimal combination of technology and human ingenuity. The new model introduced new ways of working. It also provided access to data and insights that could improve the speed and quality of decisions.

Importantly, the new operating model included a new cloud-based commercial lending solution that brought together the bank’s core processes on a single platform and made data available in one central place. SynOps identified transactional tasks that could be performed by more than 60 automation bots, eliminating many of the bank’s point solutions and manual-based processes. This freed up the bank’s lending experts to spend more time interacting with customers.

New analytics measure the strength and profitability of the bank’s loan portfolio, prioritize forecast volumes and boost customer retention by predicting loan pre-closure propensity.

A new AI-based intelligent spreading solution powered by machine learning and optical character recognition gathers documentation and digitizes processes to speed up credit decisions.

A quality control framework improves controls and compliance by helping the bank fulfill requirements for quality assurance demands.

A valuable difference

Increase in commercial lending productivity and 26% drop in approval times (from 53 to 39 days).

3X faster processing of loans under US$350,000.

in bottom-line savings.

In addition, predictive analytics helped the bank identify pre-closure loan exposure of US$2 billion. With these types of time and cost savings, relationship managers can deliver better customer experiences and retain the most valuable customers.

The new quality control framework has also enhanced the bank’s controls and compliance by improving business outcomes and insights. Compliance adherence climbed from 93% to 100%. And increased visibility of process gaps and bottlenecks helped the team address more than 99% of the bank’s compliance-fulfillment backlog.

In the future, as the organization continues to lend money more efficiently and in ways that leave customers happier, its technology transformation will produce even more savings and even better customer and employee experiences. Those are benefits it can take to the bank.

Related capabilities

Banking bps, compliance bps.

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Case Studies

A bank takes steps to be net-zero by 2050.

• 10 Sep, 2021
• Theme The Path to Net Zero
• Segment Banking

The Client: A large global investment and commercial bank

Users: The enterprise risk, sustainability, and quantitative analysis teams

Back in 2016, S&P Global Ratings issued a report warning that banks could face credit rating downgrades if they failed to address risks associated with climate change. 1  If a bank’s business activities were concentrated in an area that could be marred by climate change, the report said, this could weaken its business position and put its creditworthiness under pressure. As environmental, social, and governance (ESG) issues continue to gain the attention of investors and other stakeholders around the world, the warning is even more relevant today. 

This global investment and commercial bank is one of the larger financers of fossil fuels around the world. In response to the Paris Agreement, the bank committed to attain the goal of net-zero by 2050 and needed to develop a strategy to make that happen. The enterprise risk, sustainability, and quantitative analysis teams were tasked with the first step in this journey — understand the bank’s current level of financed emissions in its investment portfolio.

Pain Points

Carbon footprinting is a typical starting point for assessing the greenhouse gas (GHG) emissions associated with a portfolio, as it offers a baseline from which to mitigate risks. Carbon intensity (CI) is a measure that scales GHG emissions by company revenue to facilitate comparisons of emissions across entities of different sizes. Companies with lower CI values generate fewer tons of GHG emissions per $1 million USD of revenue than those with higher CI values. The teams lacked this data to quantify financed emissions in a way that was both meaningful and actionable and needed information to:

• Review all the securities in the portfolio and determine the Scope 1, 2, and 3 emissions for each company in tons of CO 2 per year.
• Determine carbon emissions for small-and medium-sized enterprises (SMEs) that don’t disclose this information.
• Assess the bank’s ownership of each company based on the value of holdings in the portfolio as a percentage of the company’s market capitalization.
• Link environmental data to the company’s customer base.

Team members also wanted to easily access data via a desktop solution, plus an efficient data feed option. They began discussions with S&P Global Market Intelligence (“Market Intelligence”) to learn more about the firm’s offering.

The bank was committed to attaining the net-zero goal laid out by the Paris Agreement and needed to understand its current carbon footprint as a starting point.  

Looking for ESG insights tailored to you?

The solution.

Market Intelligence discussed a wide range of capabilities that included data from S&P Global Trucost, a sister division that assesses risks relating to climate change, natural resource constraints, and broader ESG factors. These capabilities would give the teams the ability to:

Evaluate the carbon footprint of the portfolio

S&P Global Trucost Environmental Data contains information on over 16,000 companies, 2  covering Scope 1, 2, and 3 with metrics on quantities and intensities of carbon-equivalent emissions (tCO2e, tCO2e/US$ revenues) and their estimated damage cost equivalents (US$), along with impact ratios. It includes sector revenue data that gives revenues and percentages of company revenues derived from each of 464 business sectors. Data goes back to 2005, where available.

Estimate carbon data when not reported

Private Company Data covers 16 million private companies around the globe, 10 million private with financial statements, and 500,000+ early stage companies supported by data from Crunchbase. With this in hand, users can compare private companies against similar ones that are publicly available to estimate emissions. 

Bring in company financials

S&P Capital IQ Premium Financials provides standardized data for over 5,000 financial, supplemental, and industry-specific data items for over 150,000 companies globally, including over 95,000 active and inactive companies across multiple industries. Data is available at numerous frequencies and point-in-time representations of a financial period include press releases, original filings, and restatements.

Access data as needed

A desktop solution for quick access would be available alongside Xpressfeed TM that automates the download and management of Market Intelligence data. Xpressfeed enables delivery as needed in a ready-to-query relational database to link to internal applications.

Easily manage integration with internal data

Company Relationships is a global database of all relationships that exist between companies in the S&P Capital IQ universe. It can be used to build a corporate family tree to determine the ultimate parent of a company.  

Global Instruments Cross Reference Service enables users to easily link a security to its ISIN, CUSIP/CINS, and more to understand which securities are issued by the same firms. 3

Get comprehensive data intelligence

Key benefits.

Members of the enterprise risk, sustainability, and quantitative analysis teams were impressed with the depth of the Trucost environmental data and the ability to link it to financial details and other capabilities offered through Market Intelligence. This would enable team members to multiply their ownership percentage by the relevant carbon emissions for a company and sum all companies to create the overall carbon footprint of the portfolio. This would serve as the baseline from which to measure improvements over time. In particular, the teams saw value in having:

• A comprehensive environmental data set with many links already in place to core line items of interest to the bank.
• Renowned financial data that has been adjusted for nonrecurring charges to enhance cross-company comparability and that can be easily traced back to the source documents.
• The ability to estimate carbon intensity for non-reporting firms using private company data that has been standardized to facilitate comparisons with both public and private firms.
• Improved workflows with easy integration of data with internal applications using a powerful data feed solution and cross-referencing capabilities. 

The teams subscribed to the solutions to set up their net-zero roadmap. They will eventually use the information in internal credit risk models and as a guideline for the business as it helps with the transition to a green economy.

We’re here to help you accelerate your sustainability journey. Get connected with an ESG specialist who can advise you on your next steps.

Learn more about how "the quality imperative" differentiates our essential sustainability intelligence., uncover risk scenarios, reveal transition pathways, and optimize your net zero opportunities., find out more about the data sets and solutions used in this case study..

1 “S&P: Banks that ignore climate risk face credit downgrade,” S&P Global Ratings, June 5, 2016, www.climatechangenews.com/2016/05/06/sp-banks-that-ignore-climate-risk-face-credit-downgrade/. Credit ratings are prepared by S&P Global Ratings, which is analytically and editorially independent from any other analytical group at S&P Global. 2 All data as of February 2021. 3 ISIN=International Securities Identification Number; GICS=Global Industry Classification Standard.

• The Path to Net Zero

Related Insights

Actions to reduce emissions at an asian financial services firm, a bank relies on extensive energy data to guide its path to net zero, a bank looks to take a lead position on climate action.

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HDFC Bank Case Study 2021 – Industry, SWOT, Financials & Shareholding

by Jitendra Singh | Mar 4, 2021 | Case Study , Stocks | 1 comment

HDFC Bank Case Study and analysis 2021: In this article, we will look into the fundamentals of HDFC Bank, focusing on both qualitative and quantitative aspects. Here, we will perform the SWOT Analysis of HDFC Bank, Michael Porter’s 5 Force Analysis, followed by looking into HDFC Bank’s key financials. We hope you will find the HDFC Bank case study helpful.

Disclaimer: This article is only for informational purposes and should not be considered any kind of advisory/advice.  Please perform your independent analysis before investing in stocks, or take the help of your investment advisor. The data is collected from  Trade Brains Portal .

Table of Contents

About HDFC Bank and its Business Model

Incorporated in 1994, HDFC Bank is one of the earliest private sector banks to get approval from RBI in this segment. HDFC Bank has a pan India presence with over 5400+ banking outlets in 2800+ cities, having a wide base of more than 56 million customers and all its branches interlinked on an online real-time basis.

HDFC Limited is the promoter of the company, which was established in 1977. HDFC Bank came up with its 50 crore-IPO in March 1996, receiving 55 times subscription. Currently, HDFC Bank is the largest bank in India in terms of market capitalization (Nearly Rs 8.8 Lac Cr.). HDFC Securities and HDB Financial Services are the subsidiary companies of the bank.

HDFC Bank primarily provides the following services:

• Retail Banking (Loan Products, Deposits, Insurance, Cards, Demat services, etc.)
• Wholesale Banking (Commercial Banking. Investment Banking, etc.)
• Treasury (Forex, Debt Securities, Asset Liability Management)

HDFC Bank Case Study – Industry Analysis

There are 12 PSU banks, 22 Private sector banks, 1485 urban cooperative banks, 56 regional rural banks, 46 foreign banks and 96,000 rural cooperative banks in India. The total number of ATMs in India has constantly seen a rise and there are 209,110 ATMs in India as of August 2020, which are expected to further grow to 407,000 by the end of 2021.

In the last four years, bank credit recorded a growth of 3.57% CAGR, surging to $1698.97 billion as of FY20. At the same time, deposits rose with a CAGR of 13.93% reaching $1.93trillion by FY20. However, the growth in total deposits to GDB has fallen to 7.9% in FY20 owing to pandemic crises, which was above 9% before it.

Due to strong economic activity and growth, rising salaries, and easier access to credit, the credit demand has surged resulting in the Credit to GDP ratio advancing to 56%. However, it is still far less than the developed economies of the world. Even in China, it is revolving around 150 to 200%.

As of FY20, India’s Retail lending to GDP ratio is 18% , whereas in developed economies (US, UK) it varies between 70% – 80%).

Michael Porter’s 5 Force Analysis of HDFC Bank

1. rivalry amongst competitors.

• The banking sector has evolved very rapidly in the past few years with technology coming in, and now it is not only limited to depositing and lending but various categories of loans and advances, digital services, insurance schemes, cards, broking services, etc.; hence, the banks face stiff competition from its rivals.

2. A Threat by Substitutes

• For services like mutual funds, investments, insurances, categorized loans, etc., banks are not the only option these days because a lot of niche players have put their foot in the specialized category, surging the threat by substitutes for the banks.
• Another threat for the traditional banks is NEO Banks. The  Neo Banks  are virtual banks that operate online, are completely digital, and have a minimum physical presence.

3. Barriers to Entry

• Banks run in a highly regulated sector. Strict regulatory norms, huge initial capital requirements and winning the trust of people make it very tough for new players to come out as a national level bank in India. However, if a company enters as a niche player, there are relatively fewer entry barriers.
• With RBI approving the functioning of new small finance banks, payment banks and entry of foreign banks, the competition has further intensified in the Indian banking sector.

4. Bargaining Power of Suppliers

• The only supply which banks need is capital and they have four sources for the capital supply viz. deposits from customers, mortgage securities, loans, and loans from financial institutions. Customer deposits enjoy higher bargaining power as it is totally dependent on income and availability of options.
• Financial Institutions need to hedge inflation, and banks are liable to the rules and regulations of the RBI which makes them a safer bet; hence, they have less bargaining power.

5. Bargaining Power of Customers

• In modern days, customers not only expect proper banking but also the quality and faster services. With the advent of digitalization and the entry of new private banks and foreign banks, the bargaining power of customers has increased a lot.
• In terms of lending, creditworthy borrowers enjoy a high level of bargaining power as there is a large availability of banks and NBFCs which are ready to offer attractive loans and services at low switching and other costs.

HDFC Bank Case Study – SWOT Analysis

Now, moving forward in our HDFC Bank case study, we will perform the SWOT analysis.

1. Strengths

• Currently, HDFC Bank is the leader in the retail loan segment (personal, car and home loans) and credit card business, increasing its market share each year
• The HDFC tag has become a sign of trust in the people as HDFC has come out as a pioneer not only in banking, but loans, insurances, mutual funds, AMC and brokerage.
• HDFC Bank has always been an institution of its words as it has, without fail, delivered its guidance and this has created a strong brand loyalty in the market for them.
• HDFC Bank has very well leveraged the technology to help its profitability, only 34% transaction via Internet Banking in 2010 to 95% transaction in 2020.

2. Weaknesses

• HDFC bank doesn’t have a significant rural presence as compared to its peers. Since its inception, it has focused mainly on high-end clients. However, the focus is shifting in the recent period as nearly 50% of its branches are now in semi-urban and rural areas.

3. Opportunities

• The average age of the Indian population is around 28 years and more than 65% of the population is below 35, with increasing disposable income and rising urbanization, the demand for retail loans is expected to increase. HDFC Bank, being a leader in retail lending, can make the best out of this opportunity.
• With modernization in farming and a rise in rural and semi-urban disposable income, consumer spending is expected to rise. HDFC Bank can increase its market share in these segments by grabbing this opportunity. Currently, the bank has only 21% of the branches in rural areas.
• A lot of niche players have set up their strong branches in respective segments, which has shown stiff competition and has shrined the market share and profit margin for the company. Example – Gold Loans, Mutual Funds , Brokerage, etc.
• In-Vehicle Financing (which is HDFC Bank’s major source of lending income), most of the leading vehicle companies are providing the same service, which is a threat to the bank’s business.

Asian Paints Case Study 2021 – Industry, SWOT, Financials & Shareholding

HDFC Bank’s Management

HDFC Bank has set high standards in corporate governance since its inception.

Right from sticking to their words to proper book writing, HDFC has never compromised with the banking standards, and all the credit goes to Mr. Aditya Puri, the man behind HDFC Bank, who took the bank to such great heights that today its market capitalization is more than that of Goldman Sachs and Morgan Stanley of the US.

In 2020, after 26 years of service, he retired from his position in the bank and passed on the baton of Managing Director to Mr. Shasidhar Jagadishan. He joined the bank as a Manager in the finance function in 1996 and with an experience of over 29 years in banking, Jagadishan has led various segments of the sector in the past.

Financial Analysis of HDFC Bank

• 48% of the total revenue for HDFC bank comes from Retail Banking, followed by Wholesale Banking (27%), Treasury (12%), and 13% of the total comes from other sources.
• Industries receive a maximum share of loans issued by HDFC bank, which is 31.7%, followed by Personal Loans and Services both at a 28.7% share of the total. Only 10.9% of the total loans are issued to Agricultural and allied activities.
• HDFC Bank has a 31.3% market share in credit card transactions, showing a growth of 0.23% from the previous fiscal year, which makes it the market leader, followed by SBI.
• HDFC Bank is the market leader in large corporate Banking and Mid-Size Corporate Banking with 75% and 60% share respectively.
• In Mobile Banking Transaction, the market share of HDFC bank is 11.8%, which has seen a degrowth of 0.66% in the current fiscal year.
• With each year, HDFC Bank has shown increasing net profit, which makes the 1-year profit growth (24.57%) greater than both 3-year CAGR (21.75%) and 5-year CAGR (20.78%).
• Capital Adequacy Ratio, which is a very important figure for any bank stands at 18.52% for HDFC Bank.
• As of Sept 2020 HDFC, is at the second position in bank advances with a 10.1% market share, which has shown a rise from 9.25% a year ago. SBI tops this list with a 22.8% market share, Bank of Baroda is at the third spot with a 6.68% share, followed by Kotak Mahindra Bank (6.35%).
• HDFC Bank is again at the second spot in the market share of Bank deposits with 8.6%. SBI leads with a nearly 24.57% market share. PNB holds 7.5% of the market share in this category, coming out as the third followed by Bank of Baroda with 6.89%.

HDFC Bank Financial Ratios

1. profitability ratios.

• As of FY20, the net profit margin for the bank stands at 22.87%, which has seen a continuous rise for the last 4 fiscal years. This a very positive sign for the bank’s profitability.
• The Net Interest Margin (NIM) has been fluctuating from the range of 3.85% to 4.05% in the last 5 fiscal years. Currently, it stands at 3.82% as of FY20.
• Since FY16, there has been a constant fall in RoE, right from the high of 18.26% to 16.4% as of FY20.
• RoA has been more or less constant for the company, currently at 1.89%, which is a very positive sign.

2. Operational Ratios

• Gross NPA for the bank has fallen from FY19 (1.36) to 1.26, which a positive sign for the company. A similar improvement is also visible in the Net NPA, currently standing at 0.36.
• The CASA ratio for the bank is 42.23%, which has been seeing a continuous fall since FY17 (48.03%). However, there has been a spike rise in FY17 as in FY16, it was 43.25 and in FY18, again came to the almost same level of 43.5.
• In FY19, Advance Growth witnessed a massive spike from 18.71 level in FY18 rising to 24.47%. However, in FY20, it again fell nearly 4 points, coming down to 21.27%.

HDFC Bank Case Study – Shareholding Pattern

• Promoters hold 26% shares in the bank, which has been almost at the same level for the last many quarters. In the December quarter a years ago, the promoter holding was 26.18%. The marginal fall is only due to Aditya Puri retiring and selling few shares for his post-retirement finance, which he stated.
• FIIs own 39.95% shareholding in the bank, which has been increasing for years in every quarter. HDFC bank has been a darling share in the investor community.
• 21.70% of shares are owned by DIIs as of December Quarter 2020. Although it is less than the SeptQ2020(22.90%), it is still far above the year-ago quarter (21.07).
• Public holding in HDFC bank is 12.95% as of Dec Q2020, which has tanked from the year-ago quarter (14.83%) as FIIs increasing their share, which is evident from the rising share prices.

Closing Thoughts

In this article, we tried to perform a quick HDFC Bank   case study. Although there are still many other prospects to look into, however, this guide would have given you a basic idea about HDFC Bank.

What do you think about HDFC Bank fundamentals from the long-term investment point of view? Do let us know in the comment section below. Take care and happy investing!

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A best-practice model for bank compliance

Compliance risk has become one of the most significant ongoing concerns for financial-institution executives. Since 2009, regulatory fees have dramatically increased relative to banks’ earnings and credit losses (Exhibit 1). Additionally, the scope of regulatory focus continues to expand. Mortgage servicing was a learning opportunity for the US regulators that, following the crisis, resulted in increasingly tight scrutiny across many other areas (for example, mortgage fulfillment, deposits, and cards). New topics continue to emerge, such as conduct risk, next-generation Bank Secrecy Act and Anti-Money Laundering (BSA/AML) risk, risk culture, and third- and fourth-party (that is, subcontractors) risk, among others. Even though a lot of work has been done to respond to immediate pressures, the industry needs a more structural answer that will allow banks to effectively and efficiently mature their risk-and-control frameworks to make them more robust and sustainable over time.

The traditional compliance model was designed in a different era and with a different purpose in mind, largely as an enforcement arm for the legal function. Compliance organizations used to promulgate regulations and internal bank policy largely in an advisory capacity with a limited focus on actual risk identification and management. However, this model has offered a limited understanding of the business operations and underlying risk exposures, as well as of how to practically translate regulatory requirements into management actions. Even if a compliance testing program was established, it frequently borrowed heavily from the late-20th-century operational-risk playbook by emphasizing a bottom-up, subjective process of control testing versus a more objective, risk-based monitoring of material residual risks. Frequently, business managers are left to their own devices to figure out what specific controls are required to address regulatory requirements, typically leading to a buildup of labor-intensive control activities with uncertain effectiveness. Many banks still struggle with the fundamental issues of the control environment in the first line of defense such as compliance literacy, accountability, performance incentives, and risk culture. Finally, compliance activities tend to be isolated, lacking a clear link to the broader risk-management framework, governance, and processes (for example, operational-risk management, risk-appetite statement, and risk reporting and analytics). More often than not, the net result is primarily a dramatic increase in compliance-and-control spend with either limited or unproved impact on the residual risk profile of a bank.

An emerging best-practice model for compliance in banking needs to rely on three core principles to address these challenges.

1. An expanded role of compliance and active ownership of the risk-and-control framework

In most cases banks need to transform the role of their compliance departments from that of an adviser to one that puts more emphasis on active risk management and monitoring. In practice it means expanding beyond offering advice on statutory rules, regulations, and laws and becoming an active co-owner of risks to provide an independent oversight of the control framework.

Given this evolution, responsibilities of the compliance function are expanding rapidly to include the following:

• Generating practical perspectives on the applicability of laws, rules, and regulations across businesses and processes and how they translate into operational requirements (Exhibit 2)
• Creating standards for risk materiality (for example, definition of material risk, tolerance levels, and tie to risk appetite)
• Developing and managing a robust risk identification and assessment process/tool kit (for example, comprehensive inventory of risks, objective risk-assessment scorecards, and risk-measurement methodology)
• Developing and enforcing standards for an effective risk-mediation process (for example, root-cause analysis and performance tracking) to ensure it addresses root causes of compliance issues rather than just “treating the symptoms”
• Establishing standards for training programs and incentives tailored to the realities of each type of job or work environment
• Ensuring that the front line effectively applies processes and tools that have been developed by compliance
• Approving clients, transactions, and products based on predefined risk-based rules
• Performing a regular assessment of the state of the overall compliance program
• Understanding the bank’s risk culture and its strengths as well as potential shortcomings

Risk culture has a special place in the compliance playbook. Indeed, most serious failures across financial institutions in recent times have a cultural root cause leading to heightened regulatory expectations. Elements of “strong” risk culture are relatively clear (albeit not always explicitly articulated) and include timely information sharing, rapid elevation of emerging risks, and willingness to challenge practices; however, they are difficult to measure objectively. Use of tools such as structured risk-culture surveys can allow for a deeper understanding of nuances of risk culture across the organization, and their results can be benchmarked against peer institutions to reveal critical gaps. Consequently risk culture can be actively shaped, monitored, and sustained by committed leaders and organizations.

Effective execution of these expanded responsibilities requires a much deeper understanding of the business processes by compliance. There are a few practical ways to achieve this:

• Incorporating process walk-throughs into the regular enterprise compliance-risk assessments (for example, facilitated workshops with first line and second line to assess inherent risk exposures and how they affect business processes)
• Implementing a formal business-change-management process that flags any significant operational changes (for example, volumes, products, workflows, footprint, and systems) to the second line
• Developing a robust tool kit for objectively measuring risk (for example, quantitative measurement for measurable risks, risk markers for risks harder to quantify, common inventory of risky outcomes, and scenario analysis and forward-looking assessments)

Finally, the design of the compliance function’s operating model is becoming increasingly important. Thus, it demands a shift from a siloed, business-unit-based coverage to a model where business-unit coverage is combined with horizontal expertise around key compliance areas, such as BSA/AML; unfair, deceptive, or abusive acts or practices (UDAAP); mortgage (across all mortgage businesses); third-party and others.

2. Transparency into residual risk exposure and control effectiveness

One of the traditional industry practices for the second line’s engagement with the business has been to identify “high-risk processes” and then to identify “all the risks” and “all the controls” that pertain to each of them. This approach, however, falls short of creating a real and comprehensive transparency into material risk exposures and often becomes a merely mechanical exercise.

First, the lack of an objective and clear definition of a “high-risk process” frequently leaves this decision to the discretion of business lines, which can lead to the omission of risks that are critical from a compliance-risk standpoint but deemed less significant from a business standpoint (for example, a low-volume collections process can seem an insignificant part of the overall business portfolio but can be a critical area for regulatory compliance). This approach also suffers from inconsistencies. As an example, an account-opening process may be deemed high risk in some retail units but not in others.

Second, the pursuit of documenting virtually “all risks” and “all controls” implies a significant amount of work and actually limits the first line’s ability to go deep on issues that truly matter, producing lengthy qualitative inventories of risks and controls instead of identifying material risk exposures and analyzing the corresponding process and control breakpoints and root causes.

The new approach focused on residual risk exposures and critical process breakpoints ensures that no material risk is left unattended and provides the basis for truly risk-based, efficient oversight and remediation activities. It addresses these challenges by directly tying regulatory requirements to processes and controls (that is, through the mapping of risks to products and processes), by cascading material risks down to the front line in a systematic and truly risk-based way, and by defining objective (and whenever possible quantitative) key risk indicators (KRIs) in the areas where the process “breaks” and creates exposure to a particular risk.

Thus, as Exhibit 3 illustrates, there are typically numerous controls associated with every regulatory requirement throughout a given business process. Testing all of these controls consumes tremendous organizational time and resources. Each control is documented and its level of effectiveness qualitatively assessed (although the definition of “effectiveness” is often ambiguous and varies from person to person). Unfortunately, the overall control-effectiveness score resulting from this exercise is only loosely correlated with the outcome—it’s not unusual to see critical audit findings in areas where the majority of controls have been deemed effective.

In contrast, the new approach starts by defining which risks apply to a given business process and identifying where exactly in the process they occur (known as “breakpoint analysis”). Informed by the identified process breakpoints, one can then design KRIs that directly measure the residual risk exposure. This approach leads to far fewer items to test (in our example, two KRIs versus seven controls) and much more robust insights into what the key issues are. Moreover, it provides the essential fact base to guide and accelerate the remediation process and resource allocation.

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3. integration with the overall risk-management governance, regulatory affairs, and issue-management process.

Compliance risks are driven by the same underlying factors that drive other banking risks, but their stakes are higher in the case of adverse outcomes (for example, regulatory actions that can result in restriction of business activities and large fines). Therefore, it’s only fitting that a modern compliance framework needs to be fully integrated with the bank’s operational-risk view of the world.

Integrating the management of these risks offers tangible benefits. First, it ensures the enterprise has a truly comprehensive view of its portfolio of risks and visibility into any systemic issues (for example, cross-product, cross-process), and that no material risk is left unattended.

Second, it lessens the burden on the business (for example, no duplicative risk assessments and remediation activities) as well as on the control functions (for example, no separate or duplicative reporting, training, and communication activities). Third, it facilitates a risk-based allocation of enterprise resources and management actions on risk remediation and investment in cross-cutting controls.

The following practical actions can help the bank firmly integrate compliance into the overall risk-management governance, regulatory affairs, and issue-management process:

• Develop a single integrated inventory of operational and compliance risks
• Develop and centrally maintain standardized risk, process, product, and control taxonomies
• Coordinate risk assessment, remediation, and reporting methodologies and calendars (for example, ensure one set of assessments in cross-cutting topical areas like third-party risk management; ensure consistency of compliance monitoring and testing activities with quality-assurance/quality-control activities in operational risk)
• Define clear roles and responsibilities between risk and control functions at the individual risk level to ensure there are no gaps or overlaps, particularly in “gray areas” where disciplines converge (for example, third-party risk management, privacy risk, AML, and fraud)
• Develop and jointly manage integrated training and communication programs
• Establish clear governance processes (for example, escalation) and structures (for example, risk committees) with mandates that span across risk and support functions (for example, technology), and that ensure sufficient accountability, ownership, and involvement from all stakeholders, even if issues cut across multiple functions
• Consistently involve and timely align senior compliance stakeholders in determining action plans, target end dates, and prioritization of issues and matters requiring attention
• Establish a formal link and coordination processes with government affairs

To address this integration effectively, financial institutions are also considering changes to the organizational structure and placement of the compliance function. Exhibit 4 lays out the three archetypes of compliance organizations in banks. Migration of compliance to risk organization (that is, archetype B) is a recent trend among global banks, which previously had compliance reporting to legal (that is, archetype A). This new structure reinforces the view of compliance as a risk similar to operational risk and as a control rather than advisory function, and is meant to facilitate an integrated view across all risk types. A few banking institutions have elevated compliance to a stand-alone function (that is, archetype C), positioning it similar to internal audit, with clear separation from business, thus significantly raising its profile but also creating the need for stronger coordination with the operational-risk function.

Measuring progress—outcomes that matter

The three principles outlined above imply a multifaceted transformation of the compliance function. The scope and complexity of this transformation create a real risk of “missing the forest for the trees.” We have found it helpful to apply the following ten-point scorecard to measure progress on this journey:

• Demonstrated focus on the role of compliance and its stature within the organization
• Integrated view of market risks with operational risk
• Clear tone from the top and strong risk culture, including evidence of senior-management involvement and active board oversight
• Risk ownership and independent challenge by compliance (versus “advice and counsel”)
• Compliance operating model with shared horizontal coverage of key issues and a clear definition of roles versus the first line of defense
• Comprehensive inventory of all laws, rules, and regulations in place to drive a risk-based compliance-risk-assessment program
• Use of quantitative metrics and specific qualitative risk markers to measure compliance risk
• Compliance management-information systems providing an integrated view of risks and reflecting a common risk taxonomy
• Evidence of the first line of defense taking action and owning compliance and control issues
• Adequate talent and capabilities to tackle key risk areas (for example, BSA/AML, fiduciary risk) and a working knowledge of core-business processes (for example, mortgage servicing).

Assuming one point for each of these requirements, a bank with a low score (for example, four to five points) may require a significant transformation. Banks can maximize the impact of the transformation by rigorously measuring progress against desired outcomes. Audit should play an important role in this process, providing an independent view of program status and effectiveness with respect to commonly agreed-upon transformation objectives.

Regulatory compliance has undoubtedly affected banks in a variety of challenging ways, increasing the cost of service and sometimes making the delivery of great customer experiences more difficult. However, as the regulatory environment evolves, we see a major opportunity for the compliance function to get ahead of the curve by implementing targeted changes to its operating model and processes, and thus delivering a better quality of oversight while at the same time increasing its efficiency. Banks that successfully make this shift will enjoy a distinctive source of competitive advantage in the foreseeable future, being able to deliver better service, reduce structural cost, and significantly de-risk their operations.

Piotr Kaminski is a director in McKinsey’s New York office, and Kate Robu is a principal in the Chicago office.

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Case Study: The YES Bank Crisis

Harkirat Singh, Ashok Kapur, and Rana Kapoor instituted a bank called YES bank in 2004, which became the 4th largest private sector bank in India. The team at YES bank established a customer-centric and service-driven Indian bank for the future corporates of the country. It released its IPO (Initial public offering) and kept progressing until the global financial crisis of 2008. Harkirat Singh left the bank in a very initial period whereas Ashok Kapur, unfortunately, died in the 2008 terrorist attack in Mumbai. However, to achieve success the bank started aggressively focusing on its operations.

The rise of YES bank:

A lot of companies rely on private banks for their funds. And YES bank turned out to be the go-to bank for them. They acquired many clients for all operations and for some of them, it was the only banking partner for UPI transactions such as Swiggy, Phonepe, Flipkart, Redbus, etc. Looking at the growth of the bank, people started depositing more and more, essentially, this value grew to 2 lakh crores for the bank. YES bank attained its peak and the highest confidence among depositors and rating agencies.

The Collapse:

However, as they say, it is only when everything is looking alright is when things go wrong. As soon as the bank reached its peak of success, the bank (owing to the overwhelming response they received) started lending billions to companies. However, some of their clients were already under financial stress – these included Dewan Housing Finance Corp. Ltd (DHFL), Infrastructure Leasing and Financial Services ( IL&FS ), Anil Ambani’s Reliance group, the Zee group, and Subhash Chandra’s Essel group and the likes.

Now, this led to a huge problem because these companies really had no way to pay their debts back to the bank and were in no way the safe investments. A lot of questions were raised as to why the financial assistance was given to these companies, were the correct contingencies in place?

All of these issues led to the following in the coming years:

• Outstanding loans of YES bank grew from INR 55,000 crore in FY14 to INR 2.41 trillion in FY19
• UBS, a global financial services company raised concerns about the asset quality of the YES bank. They released a report mentioning the rising Non-performing assets (NPAs) of the bank.  Despite knowing the financial inability of existing borrowers, the bank lent more money to them which eventually proved to be the NPAs for the bank
• On 5th March 2020 RBI put YES bank under moratorium. With this regulation, the people having accounts with the bank could withdraw only INR 50,000 and this continued till 3rd April 2020

Negative ratings of rating agencies, the UBS report, RBI’s correcting measures on the bank for under-reporting NPAs, and finally the moratorium imposed led to panic among the depositors and the shareholders which triggered them to withdraw their investments and sell the stocks respectively. The confidence of people went down and so the share price. From INR 1400 per share, it came down to mere INR 5 per share in early 2020s. Furthermore, the Enforcement Directorate (ED) arrested Rana Kapoor under the case of money laundering of about INR 4,300 crore.

Current Rescue plan:

• The government took over the bank and came with a draft plan which said State bank of India (SBI) will buy 49% stake and bring in the needed capital
• The investing bank will not reduce its holding in the new bank below 26% before completion of 3 years
• All the employees will continue to work at the same pay for at least for one year
• AT1 bonds of worth around INR 10,800 crore to be wiped out which will bring back capital in the bank but leave the customers with a huge loss
• RBI opened INR 60,000 crore as an emergency credit line for the bank
• ICICI bank took 7.97% stake in YES bank

Needless to say, the current economic situation owing to CoVID-19 is going to be difficult for the bank to recover in the coming months. After PMC bank’s fall, this was the second banking crisis reported in the country. First-ever case in India which cancelled AT1 bonds issued to investors of worth INR 8,415Cr.

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Money Report

UBS CEO says integrating Credit Suisse will become a ‘case study' for future big bank mergers

By jenni reid,cnbc • published april 5, 2024 • updated on april 5, 2024 at 1:48 pm.

• Credit Suisse collapsed in March 2023 following years of underperformance, scandals and risk management crises. UBS in June completed its takeover of the 167-year-old bank in a deal controversially brokered by Swiss authorities.

The Swiss National Bank has said the size of the new entity flags potential competition issues that will need to be monitored.

The mammoth integration of failed bank Credit Suisse into its former rival UBS will act as a "case study," UBS CEO Sergio Ermotti said Friday, one that will show that big bank mergers should be allowed.

"It's going to be a case study to be evaluated globally, but also particularly in Europe, where eventually the necessity of creating stronger banks, and stronger and more competitive banks from a global standpoint of view, is in my point of view a necessity," Ermotti told CNBC's Steve Sedgwick at an event at the Ambrosetti Spring Forum in Italy.

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"Of course, we can't just rely on a crisis to create or facilitate the merger of banks," Ermotti said.

"It's good to have strong players that can be part of the solution, like UBS was in the Credit Suisse case. ... But it cannot be just that part. So in that sense, I think that the real issue is, there has to be a political desire to facilitate something like that. So it's not the reality of today," he added.

Credit Suisse collapsed in March 2023 after years of underperformance, scandals and risk management crises. UBS in June completed its takeover of the 167-year-old bank in a deal controversially brokered by Swiss authorities.

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Ermotti said Friday, "The good news is that, in my view, in many countries, there is a recognition that they want to protect their banks or financial institutions as national champions, which is an implied or explicit recognition of their value for their economies."

"But the bad news is that they don't realize that in order to really be meaningful, and go to the next level of their contribution in their economies, they will need to be also more competitive globally. But without a banking union, without a capital markets union, it's going to be very, very difficult for Europe to compete with U.S. large banks."

Unlike in the U.S., European economies continue to rely on the banking sector for business financing; and Europe has a "completely different playing field and a lack of critical mass," Ermotti said.

"So I hope, I'm not so convinced it's going to happen soon, but I hope eventually one day those kinds of mergers between big banks will be allowed and we can contribute to that by showing that it's possible. In the meantime, I think that in many countries, critical mass and synergies can be created by further rounds of local mergers," he said.

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