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Cut the capital noose, breathe and start mobilising for industrialisation

For financial institutions, capital allocation challenges are an ever tightening noose threatening their very existence. Previously profitable business models are increasingly pressured, and the problem can no longer be resolved in year on year cost reductions on existing operations.

Capital is expensive to raise, scarce in supply and needs to be allocated judiciously against buffers, investments and provisions. These pressures are stifling the amount of spend available to differentiate against competitors.

Banks continue to suffocate themselves

Banks are absorbed by doing what needs to get done to stay in business – Compliance and IT maintenance - leaving little room for innovation. Yet, high expectations to be the most innovative, customer savvy, preferred bank in the market remain.
Banks’ regulatory spend is averaging in excess of 70% of total change budgets with the remainder allocated to ‘change the bank’ costs. Rather than succumbing to their competitors, banks are suffocating themselves as their reserves are eroded and they reduce their market footprint further to meet the new capital requirements.

Creating breathing space through industrialisation

This situation has sent banks looking for alternatives and there is a growing focus on industrialisation;

• Move from the traditional ‘command and control’ with ‘in-house’ development to a more dynamic ‘consumption-based’ model, based on the use of commodities available in the market.

• Build utilities that are ‘future-proofed’ for regulatory change and use partners to help shoulder the cost of maintaining future compliance

These approaches both free up capital and significantly reduce waste in ‘run the bank’ costs, creating breathing space to support innovation and growth.

According to the CSC/Finextra report called ‘Redress the Balance’*, 49% of respondents thought that there were opportunities for new or expanded network-centric services for the industry. 32% felt that opportunities existed for new third party utilities to support business process required by the regulation.

Evolve relationships with partners to generate utilities

Banks should consider the following:

1. Have a clear strategy. Review existing capabilities, decide which business areas the bank wants to operate in and assess where the vital-ground is (the market differentiators that must stay in-house).

2. Assess which capabilities can be provided ‘As a Service’. Align and standardise these across the organisation. Look to augment these with commoditised capabilities from the market.

3. Evaluate the current partnerships in play and look for opportunities to move to a consumption based model and to develop capabilities together.

4. Move the procurement focus away from the ‘race to the bottom’ on price, and towards creating value through collaborative partnerships that harness the best technologies and create revenue generating utilities.

5. Create independent functions that provide assurance to both the partners and bank, keeping all parties honest on performance and incentives from design to BAU.

Through industrialisation, the ‘command and control’ culture in financial services yields to a more collaborative model where control is through effective governance rather than ownership of capabilities, with a greater emphasis on simplicity and standards that enable interoperability, reducing departmental silos.

The move to variable cost models allows banks to pay for what they use, substantially reducing ‘run the bank’ costs and their capital requirement, allowing greater expenditure on innovation to stay ahead of the competition.

The opportunities for sharing the regulatory burden and creating revenue generating utilities are clear. The question is - who will be the first to loosen their shackles and lead where others will follow?

*A Finextra survey sponsored by CSC, ‘Redress the Balance: How can IT leaders stop spending too much on ‘running the bank’ and start spending more on ‘changing the bank’?’ (March 2015).

 

 

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