Banks’ internal culture and inhibitions are the main things holding them back from shared operations centres that could dramatically reduce their cost bases, a new survey has found.
The research, by consultancy Capco, polled 69 financial institutions on their approach to developing “utilities” to handle vast swaths of their operations including IT, regulatory reporting and trade processes.
Almost two-thirds of respondents said they expected “significant” or “very significant” cost reductions from using utilities, and bankers privately told the Financial Times savings above 20 per cent were achievable in several areas.
The savings would come from the massive operational expenses of banks, which cost Europe’s top 10 lenders by market value almost €200bn in 2015 alone. Savings are needed more than ever in a banking industry whose earnings are being crushed by poor revenue growth, mounting regulatory demands and low interest rates.
“This is a point in time where you’ve got institutions where they’re going to have to make some significant choices and this would be one of the better ones,” says a senior executive at a large European bank.
Despite the many arguments in favour of utilities — which could be owned by third parties or by a consortium of banks — the survey found relatively low levels of activity so far.
In regulatory and compliance reporting — an area banks identified as ripe for savings — just 27 per cent of respondents had used utilities. Only 30 per cent used utilities in “know your customer” and anti-money laundering data management, another key area for potential savings.
The biggest thing preventing wider usage of utilities was “internal culture and territorial ownership” of IT and other processes, according to the survey. Almost nine in 10 respondents cited this “not invented here” attitude as an issue.
“I honestly think the market is changing that,” says Farzine Fazel, a partner and head of shared services at Capco, adding that it was harder for banks to resist change when the pressure to improve earnings was so great. He says “tier-two” banks were more naturally inclined to utilities, but that bigger banks are now looking at the area more closely.
A senior banker at a large US bank says his institution “completely concurs” with the cost arguments for utilities. “Warehouses for reporting, collateral management, know your customer processing, tax processing, you name it, there’s a structural cost dynamic where we can create economies of scale on processes that are not proprietary,” he says. “This view that somehow these processes are proprietary is starting to change dramatically.”
He cautions, however, that there were dangers in doing too much too quickly. “A lot of these utilities take time, they require considered investment, we need to make the right technology choices, those have to be funded, they have to be managed, operating companies and staff have to be brought together, and these things typically take time,” he says.
A senior executive at a large European bank says utilities “absolutely make sense on paper” but could be more complex in practice. “Having been involved in consortium, it never quite works out the way you’d hoped for,” he says. “Nobody wants to put in their best ideas because they’re working with competitors . . . Nobody wants to pay for anything . . . Sometimes you have a resource problem, a partner asking for a customised thing (that takes too many resources).”
Winding down a utility that didn’t deliver on its initial promise is complex, he adds: “You’re basically married with these partners.”
Mike Mayo, a New York-based analyst at CLSA, says the industry should keep an “open mind about improving cost control given the worst revenue growth in 80 years”.
“This includes options such as a utility model,“ he adds. “Yet, there could be upfront costs due to standardisation, systems, and securities that would need to get weighted versus the long-term benefits. Banks would also need to determine their sources of competitive advantage, and the extent that some of this might be given away.”
Notable utility deals so far include Barclays’ 2015 deal to hand over some post-trade and regulatory reporting to a utility being built by software group FIS.
FIS’s derivatives post-trade utility platform allows global banks to share their IT services for cross-asset derivatives.
Mr Mayo says utilities had been around for a long time, in areas such as credit derivatives markets and warehouses doing central clearing. “I don’t think we’ve seen a situation where we’ve built these things and unwound them, the difficultly typically is when we’ve built it, getting adoption and data utilisation right, that takes time . . . people need to be educated on the opportunity.”
This article has been amended since original publication to reflect the fact that SunGard was acquired by FIS
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