Purpose-based Performance; innovation must drive purpose in banking and capital markets

HFS Research helps enterprises understand the business benefits of technology and innovation. All our research is focused on helping enterprises and their technology and services ecosystems solve specific problems and drive toward an array of defined value and benefit outcomes. Every company in every industry is marching toward fulfillment of their purpose. Their investments in technology and innovation must support this mission. However, the understanding of “purpose” in for-profit businesses easily gets lost in the quest for topline and bottom-line impact. Making money and driving profit is certainly a responsibility to shareholders, but it should never be a company’s sole purpose. For banking and capital markets (BCM), HFS has developed its Purpose-based Performance model, inspired by the Triple Aim of Care used in the healthcare domain, to help BCM firms ensure their innovation and tech investments are aligned with purpose.

What’s the purpose of a bank?

Nandita Bakhshi, board member and former CEO of Bank of the West, recently characterized the purpose of banking as enabling dreams. Lori Beer, Global CIO of JPMorganChase, remarked on the AWS re:Invent stage in early December that the stated purpose of her firm is to make dreams possible for everyone, everywhere, every day. These purpose statements are decidedly not revenue and profit-focused. They serve to remind us that the most fundamental purpose of banks and capital markets institutions is to help consumers, businesses, and governments protect and improve their financial outcomes—and this must be done with fair cost, efficiency, and excellent customer experience. These purpose-driven performance objectives can and must co-exist with revenue and profit objectives.

Introducing the HFS Purpose-based Performance model for BCM enterprises

HFS designed its Purpose-based Performance model to help the BCM sector align its myriad investments in technology and innovation to outcomes beyond topline and bottom-line impact (see Exhibit 1). BCM business and tech leaders and their array of ecosystem partners should leverage this model as a simple litmus test to assess the alignment of investments with purpose-based performance.

The three pillars of the model include:

1. Driving operational and cost efficiency—are your investments in tech and innovation supporting excellence in operations and fair fees for service? The cost efficiency point is intended to cover the cost-to-serve for the BCM enterprise as well as the cost-to-consume for the end customer. If you are only focused on optimizing your own costs, you are not fulfilling the pillar.
   1. Key innovation investments: AI and automation initiatives often lead in this pillar for operations and operating model transformation for IT.
   2. Key metrics: Net interest margin (the difference between the interest income generated from loans and the interest paid on deposits); cost-to-income ratio (operating expenses as a percentage of operating income); fee transparency and reduction; time to execution (time it takes to execute a trade after an order is placed)
2. Improving the customer experience—are your investments in tech and innovation driving better customer experience? This pillar focuses on driving superior digital hygiene to make consumption of BCM services easy, effective, and ideally differentiated.
   1. Key innovation investments: Data, analytics, and AI initiatives often lead in this pillar for operations, while cloud, core banking, lending, and payments modernization pop for IT initiatives—all in the name of improving the experience of consuming BCM services.
   2. Key metrics: Net promoter score (NPS); customer lifetime value; cross-sell and upsell rates; client effort score
3. Improving and protecting customers’ financial outcomes—are your investments in technology and innovation helping your clients safely and securely retain and grow their assets with trust and high levels of compliance? While BCM institutions cannot guarantee alpha or asset growth, they must ensure that secure and viable frameworks are in place to enable customer pursuits.
   1. Key innovation investments: AI, automation, cybersecurity, fraud and financial crime compliance, and digital trust all figure heavily in operations investments, while cloud, data, and application modernization drive IT enablement.
   2. Key metrics: Debt-to-income ratio; credit score trends; financial crimes compliance-related financial penalties and sanctions; net rate of return (returns after fees)

Exhibit 1: HFS’ Purpose-based Performance model for BCM enterprises

Source: HFS Research, 2024

While alignment with at least one pillar is recommended, BCM enterprises that strike a balance across two or more ensure an optimal focus on purpose and performance. Enterprises that lean too heavily on their own bottom-line impact risk causing an imbalance in an essential banking efficiency metric—the cost-to-income ratio. In many BCM segments such as mid-tier banks, cost-to-income ratios are actually going up (which is bad). Driving purpose-based performance is premised on balancing shareholder needs with customer needs. Profit and purpose must co-exist.

The Purpose-based Performance framework for BCM complements HFS’ Horizons value and innovation model

HFS uses a Horizons model to assess the innovation and value needs of enterprises and how well their tech and services ecosystem partners help them achieve these needs, as outlined in Exhibit 2:

Exhibit 2: HFS’ Horizons model aligns enterprise innovation and value needs

Source: HFS Research, 2024

By design, the Horizons model aligns with the Purpose-based Performance framework. Horizon 1 maps to the purpose pillar 1 of “driving operational and cost efficiency” with a shared focus on using innovation to drive improved operations. Horizon 2 maps to the purpose pillar 2 of “improving the customer experience” with a shared focus on leveraging enterprise modernization to break down front, middle, and back-office silos to enable superior customer experience. Horizon 3 maps to the purpose pillar 3 of “improving and protecting customers’ financial outcomes.” As the penultimate purpose of BCM enterprises, great financial outcomes are enabled by investments in Horizon 1 and 2 capabilities. While tech and services ecosystem partners have a significant role throughout all Horizons levels, optimized and modernized tech and business operations allow for new forms of value to be conceived and acted upon in Horizon 3.

The Bottom Line: BCM enterprises must ensure their investments in innovation support performance and purpose to best meet shareholder and customer needs.

If your firm’s investments in technology and innovation are solely designed to drive topline and bottom-line impact, you are missing the point and broader purpose of the role of financial institutions. A bank’s business strategy is inherently grounded in its ability to help its customers nurture and protect financial outcomes at a fair cost with efficiency and excellent customer experience. These purpose-driven performance objectives can and must co-exist with revenue and profit objectives.