Disclaimer: the views expressed are purely mine and does not endorse my firm’s views or any individual at my firm.
Let me start by asking you a question: What is common between General Motors, Daimler Chrysler and BMW, apart from the fact that they make top class cars?
The answer lies in the following link:
The fact that some of the biggest auto makers in the world got together to form a hybrid variety is really something that we could learn from. These companies have top class engineers, top class production facilities and top class cars, and they tried to
bring their best together to “synergize”.
It is high time that banks thought about synergy as well. This has a lot of benefits apart from the usual, let us not reinvent the wheel.
The benefits are obvious and will benefit the country and the industry as a whole. Banks are able to watch their expenses and ensure that their lending rates are competitive.
When we go to a restaurant, there are a few things that really matter like the quality of food, the professionalism of service and of course the price.
Likewise, every business has their core competency and we wouldn’t want the business to get hijacked away from their core competency.
Therefore it is high time banks focus on their core competency which is banking!!
There are a lot of services that appear to be shared across banks, but realistically these are just parasitic relationships that do not really have a long term strategy, namely:
a.) ATM’s that are compatible and accept cards from other banks
b.) Inter-bank fund transfers – Real time gross settlement
These are reactive approaches like prophet prophesying about the past and not something that have been thought of from the point of view of shared infrastructure.
Further to my article, around the fact that new banks are in the process of obtaining licenses to start new banks, hopefully every bank doesn’t look to reinvent the banking wheel of misfortune!
There are some areas that banks could look to share infrastructure and reuse:
1.) Lockers – what is so special in a safe deposit locker from one bank vs. another bank. Size?, Price? Location? Value added services? We may have to look at a shared service model, like LAAS – Locker as a Service. This locker as a service,
can be a subscribed service for all other banks. An organization like visa or mastercard that formed payment services and gateways for credit card transactions, could be setup to be the LockerKeeper of the nation that other banks can leverage from. We can
have a cool service like a camera across a transparent shelf of lockers for customers to be able to remotely digitally view their locker contents.
2.) Infrastructure – Infrastructure should be a service that a lot of banks should be able to leverage. This could be the existence of a call centre for support, ATM maintenance, clearing personnel for the back office, reporting or even
IT infrastructure. The bank obviously need to worry about security measures involved in sharing common facilities.
3.) Shared KYC – Know your client is really a very important step in the process of opening an account and cannot be compromised. Just like NASSCOM or the OFAC maintain a list of defaulters, we will need to have a common repository and
mechanism across banks to ensure that we are able to validate our clients before they are introduced into the bank. A chain is as strong as its weakest link they say, and likewise the banking industry is as strong as its weakest bank, and we should strive
to ensure that all banks are well equipped to do KYC and customer due diligence and how better than to offer this centrally and allow all the banks to subscribe to this?
4.) Shared Clearing hubs – link office concept – the major banks have a link office which is a shared clearing hub before it reaches the central bank. Also to come to think of it, the process of clearing is not rocket science, and doesn’t
really have to be a big value differentiator across different banks.
Hedge Funds and the creation of Prime Brokerage departments in investment banks are a classic example of shared service infrastructure. The hedge funds focus on their strategy of making money and leverage the prime broking services at banks. Therefore a
hedge fund is a “lean” organization.
By sharing common infrastructure and service, hopefully new banks will think of themselves as a Lean organization, hopefully not mean organizations
There are thought processes already in place for global Banks looking to share back-office costs as per the below article:
However, it becomes difficult once a lot of fat piles up, to reduce fat. Therefore it is important for us to catch them young at their incubation phase and hence the need for the newly emerging banks to think of shared services:
Mr. Andrew Haldane, BOE’s executive director has written about this and he is quite visionary in urging banks to share infrastructure and highlighting banks to consider the too big to fail scenario.
an empty vessel makes much noise,
a heavy vessel falling hard damages itself and its surroundings,
hopefully if the institutions cut the fat, and distribute their load amongst themselves then hopefully we will have agile, responsive and proactive banks.
Happy new lean year!