Full Circle: Banks Turn to BPM
By Deepak Pareek
April 22, 2005

Summary: This article explores how and why banks are embracing BPM. Deepak Pareek argues that BPM provides the ability to manage and automate tasks and decision-making in the financial sector.

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Business process management has come full circle. While business process reengineering was the mantra of the early 1990s, the economic boom later in that decade made it easy for financial services companies to ignore their costly, inefficient back-end processes in favor of sexier, revenue-generating e-business initiatives.

The technology solutions that were focused on impacting business processes (such as integration servers, document-centric workflow, business analytics, and rules engines) received less attention, and were deployed in an inconsistent, fragmented manner. That is no longer the case. Economic conditions and market dynamics have caused financial services organizations to look at business process management (BPM) as a cohesive enterprise strategy to enhance operational efficiencies by unifying back-office systems, orchestrating the interactions between man and machine, and providing visibility into metrics and key performance indicators.

Today's BPM solutions are frameworks that provide the ability to manage, coordinate and automate tasks and decision-making. This provides significant business benefits-especially for banks, which face strategic challenges due to the current interest rate environment, and diversified financial services companies, which must present a common face to their customers across multiple business lines. As interest rates hover at 45-year lows (although rates are slowly creeping higher), home buying and refinancing are occurring at record rates.

To keep up with the exponential rise in demand, mortgage originators have quickly responded by increasing capacity and dedicating every available resource, whether system or human, to the processing of mortgage applications. While lenders must clearly capitalize on current market demand, they also need to think ahead.
The housing bubble will eventually burst, and when it does, lenders will experience rapidly declining volumes, increased loan defaults, and a unit cost structure so high that only the fittest will survive.

For commercial banks, which are already battling corporate bankruptcies and bad debts, the low interest-rate level is causing a substantial decline in contributions from lending income, from the previous 80 percent of revenue to the current average, which is closer to 50 percent.

Banks are thus looking to fee-based income-which is unaffected by the volatility in the lending markets-to make up for the loss in interest-based revenue. This means offering new, enhanced services, including business process outsourcing, and improving efficiencies in existing, commoditized services, like item processing and loan servicing. The stakes are raised because banks must compete with nimble non-bank service providers that have tapped with greater ease the opportunity to service the growing need for electronic payments, transaction processing, and outsourcing of non-core business processes for corporate customers. Bank executives who are taking this situation seriously are desperately searching for technologies that can help them effectively streamline their processes, optimize utilization of personnel and systems, and increase efficiencies all around. That's the key to controlling operational costs and providing real-time visibility into operational and functional metrics.