In retail banking, strong cost pressures remain. These stem from increasing regulation, operational costs, historic remediation issues and legacy infrastructure. Combined with income challenges in a low interest rate environment they provide a “perfect storm” and as a result, the reduction of cost/income ratios has been a consistent issue across all retail banks over the last few years. This is further compounded by an environment where customer centricity is the primary focus.

The emergence of disruptors in the retail banking industry is therefore no surprise, as they can offer a unique customer experience at a much lower cost than any of the incumbents. Thus banks face a real challenge: simultaneously defending market share, lowering cost/income ratios, whilst providing better customer service and dealing with Open API banking and PSD2.

Over the last 10-15 years, a popular strategy to address at least part of this challenge has been to optimise and standardise processes and then to offshore to lower cost locations. However, there is increased regulatory scrutiny on offshoring, increased wage pressure from the traditional offshore locations as well as the risk of potentially diminishing customer experience.

Faced with this dilemma, retail banks have turned to technology, often through automation initiatives that are largely focused on relatively simple transactional activities in back and middle-office. Practically all banks are either considering, planning or executing automation and in approximately three-quarters of cases these projects originated as part of wider, technology-enabled improvement programme*. Transactional, rules-based automation (also referred to as Robotics Process Automation, or RPA) has been adopted to a mixed degree in financial services, with some companies employing hundreds, if not thousands, of bots, whilst others are still in the exploratory stage. Many (but not all) of these initiatives are delivering significant benefits, reflecting the rapid maturing of the market in the last 2-3 years, the fact that RPA technologies are not inherently complex (although the automated process might be) and the lessons companies have learned from initial implementations and BAU issues.

The use of RPA has gone some way to addressing the cost/income challenges. However, there is a limit to what RPA can achieve, once activities with a clear rationale for automation (scale, repeatability, rules-base) are exhausted. For example, RPA tools are typically less able to address the enablement of enhanced customer experience. To deliver additional value, leaders are now focusing on the adoption of Intelligent Process Automation (IPA) and Artificial Intelligence (AI). IPA/AI are terms that include capabilities such as Natural Language Processing, unstructured data processing, pattern recognition and others. It is estimated that about 10% of banks are using IPA/AI tools in a productive environment*. These tools ‘co-learn’ with the human through feedback loops and enable solutions such as chatbots that have the potential to transform banks’ customer service. In the Irish retail banking market, the expectation is that a quarter of customer transactions will be conducted by a chatbot in the near future, according to a PwC survey**.

Digital leaders in the Irish banking market are expecting the widespread adoption of IPA/AI powered tools to be imminent. This next wave of automation has the potential to address both parts of the cost/income equation: lowering operating cost and enhancing revenue streams. Even more so than the implementation of RPA, IPA/AI solutions are raising profound questions regarding data protection, governance and changes to the workforce. To address the cost/income challenge, consideration needs to be given to how automation is embedded into initiatives that address customer-centricity, operating models and tooling. The adoption of RPA in the past few years showed that strategic planning, through preparation and precision on the expected benefits are the cornerstones to a successful automation programme. Irish banks that are mindful of these lessons have the opportunity to move quickly into this space and create competitive advantage.