Businesses have to make a profit. This is, if you will forgive the pun, the bottom line. It is the reason why businesses exist, and it is the most important, if not the only reason, why any business does anything. Profitability really is king.
Transforming the banking sector
Hold that thought, then, as we move rapidly to the question of the digital transformation of the banking sector. Digital transformation to most is about the customer journey, about delighting customers and making sure they stay or return. I would argue, however, that there is a deeper purpose to transformation, and indeed to focusing on the customer journey, and that is profitability. The reason you want to keep customers coming back is because it is cheaper (and therefore more profitable) to keep an existing customer than to find a new one. But it is also no good delighting unprofitable customers. Those are the ones that you don’t want to keep.
Instead, you need to know which customers, and which products, are profitable for the business. In other words, you need profitability analysis. Once you understand what is most profitable, you can use analytics to find out more about the characteristics of your profitable products and customers. You can then design more products that customers will be happy to pay for, and use digital to lower the costs of providing them. Win–win.
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This sounds simple, but in practice it can be anything but. The range of stakeholders for profitability analysis is growing. The glib answer to the question ‘who are the stakeholders?’ is ‘everyone’. The c-suite should certainly be interested, if not extremely focused. It is also true that those most likely to know how to make cost savings are those doing the work — and they are also likely to be those most affected by change. Finding suitable incentives to persuade them to engage with profitability analysis could therefore be quite challenging. Some companies have resorted to offering retraining for those who suggest how artificial intelligence could be used to do their job. Transparency may be key to achieving success, as it will help to reduce organisational barriers to change.
The stakeholder pool is also expanding outside the business itself. Product managers and those doing the work may have a strong interest. However, customers also have a vested interest in knowing that their banks understand where the money is coming from. A sustainable business model is important for ongoing stability, and most customers understand that since the 2008 financial crisis.You need to know which customers, and which products, are profitable for the business. In other words, you need profitability analysis. #Fintech #DigitalTransformation Click To Tweet
Improving profitability analysis
Like any other analysis, profitability analysis is only as good as the data going in. The volume of data available has therefore helped to improve it over the last few years, making it much more reliable. Sadly, however, departmental silos may still be an issue, with some hiding behind regulations as reasons not to share data more widely. There is also still a lot of use of proxies, rather than actual measures. There is, shall we say, room for improvement.
What’s more, internal data may not be enough. Credible third party data must also be integrated to get a more rounded and nuanced picture. This, in turn, will mean that new products can be better targeted and therefore more profitable.
Real-time analysis in particular has had a strong impact. It has improved response times, and enabled banks to react swiftly to customer activity and behaviour. The ability to provide ‘next best offers’ has been hugely helpful in driving profitability, and ensuring that customer offers are targeted and timely. This may in fact be the biggest difference between some of the fintech start-ups and the more traditional players in the banking sector.
Insight may not be enough…
Introducing profitability analysis, even in real-time, and drawing on all data available, may not be enough in itself. Even sharing the results around the organisation might not be sufficient. Insights are important, but stakeholders also need to understand what to do with them. You need analysis without paralysis, which is partly why ‘next best offer’ has been such as revelation.
Taking action, and therefore responsibility, may be everyone’s job, but it must surely start at the top. Where the c-suite leads, the business will eventually follow, provided that there is sufficient communication. It may be old fashioned when talking about digital transformation, but good communication remains vital. We are, after all, talking about people, not machines. We have a genuine need to communicate. Just because we are talking about technical subjects like analytics does not take that need away.