What are the major strategic challenges in the market at the moment?
There are a number of big changes underway. The margins that banks are earning are very low at the moment, and they’re decreasing, so banks have to look for ways to improve their overall profitability in ways other than charging more.
They can either improve their operational efficiency or their organisational efficiency—that is, their technology and workflow. Many have already reduced headcount several times since 2008, so instead they have to look inside their businesses to their processes, to see whether they can be streamlined and automated, whether handovers can be reduced, or if fewer systems can be used.
Another issue is the increasing level of regulation, which hasn’t really stopped. We have know-your-client (KYC) and anti-money laundering (AML) rules, and capital regulations from Basel III coming in. These regulations increase the level of transparency within the banks, and the level of reporting that they need to be able to do. This puts additional pressure on the systems being used. Pulling all of the required information out of the various systems can be very difficult and time consuming.
Banks need to have much more agility to access data when they need it. In the past, particularly in corporate banking, banks would operate in siloes, with each of the different systems running as its own organisation, with its own CEO and its own procedures and reporting mechanisms. That’s not tenable anymore because the regulators want access to information right the way across the business. Banks need to have the ability to gather and analyse data across all the different areas of the business to get a holistic view of their operations to manage risk more effectively.
Banks have to know the details of their relationships with each customer, and their exposures to particular countries or industries. Those answers are currently extremely difficult to give because they all exist in separate systems. This is something that our systems can enable right now.
Have client expectations changed?
Another trend is around the expectations of our customers’ customers, and this ultimately comes down to digital services. There is a lot of technology that exists for retail banking customers. They can make transactions online and set up new payees immediately using smart phones. However, in the world of corporate banking it still takes hours, if not days, for a corporate to set up a new client relationship with their bank.
It’s partly because KYC and AML regulations are quite onerous, but it’s also because banks have never invested in a horizontal layer across all of their functions to allow customers to easily interact with the systems that meet their needs. In the retail space, banking products are quite simple and low-margin, so in order to make money banks have to have millions of retail clients—it was ripe for automation from very early on.
The corporate business is traditionally more relationship-driven. The banks are conservative and not inclined to try new things very quickly. However, now that these technologies have proven themselves in the retail space, some of the leading banks are looking to see if they can use them on the corporate side as well. There was an assumption that corporate treasurers would prefer a human touch, but, actually they see what they can do with their smartphones and personal accounts at home, and wonder why they don’t get that same service from their corporate banks.
Creating a digital corporate channel may not cut costs for the banks in the near term, although there is probably an efficiency gain to be had by automating the interface with customers. More importantly, it is about improving the business and providing the best service, thereby increasing the number of client transactions.
Further to this, we’re seeing more use of new technology and big data. The idea here is for a bank to gather as much information on its customers using all their transactions across each one of its services. That information could be harnessed to assess risk exposure for a particular customer, but also to get a better picture of who that customer is, and how they can be better served.
Improving connectivity across all points of a relationship with a single customer can be a win-win situation. Interestingly, the industry has been talking about it for a long time, and it is working in retail banking, but again, on the corporate side it’s not happening yet.
Banks are moving away from a siloed back office. What is the main driver for this?
It’s partly regulation and partly to gain efficiency. Throughout the crisis, whenever there was any geo-political event, for example, the sanctions issued against Russia, each event was a crisis for banks, because risk and compliance departments would have to find any transactions that touched banks on the blacklist in Russia and stop the relationship with them.
A compliance officer would have to go into each department individually to figure out how much exposure each one had. Even with teams working around the clock, it can take several days to get that information together. It is a relatively complicated process, but banks need to get better at it.
It would be difficult to rip out all the existing core systems and replace them with a shiny new back office, and that could actually create new problems that we don’t know about yet. We provide an elegant and low-cost solution in our Misys FusionBanking Payments Insulator, but we also offer a horizontal solution within Misys FusionRisk. That lets banks track their exposure across all of their systems and can give pre-trade authorisation of whether a trade will lead to exposure elsewhere.
The solution can identify exposure to a country or counterparty, or highlight undrawn commitments to a counterparty that could increase exposure in the future, while also flagging up products against them that could make capital markets exposures more complicated to calculate.
Misys is enabling its clients to address these issues without putting a whole new back-office in place. Our solutions create more connectivity in order to help banks get the transparency they need.
How important is it to get that information together quickly?
A lot can happen in two or three days. If a corporate entity banks with a big institution that sets the national standard for excellence, but it takes two days to know how much exposure that bank has to Russia, then that’s not acceptable.
But the reality is that in many cases people will be manually trawling through systems to see how many relationships are affected. This kind of real-time ‘what-if’ analysis across all data services can be crucial to running a quick assessment of risks and exposures. Banks have to have the ability to take action.
Breaking down siloes is a big culture change in the industry. Are banks making the changes required?
Often, when the market goes through a period of change there will be some early adopters and early signs of disruption. In the case of regulations, there will be early regulators to implement new rules; those that first wake up to the changes and push them through.
Next there will be the enlightened adopters who get somewhat pulled along with the crowd, and finally, those that are dragged kicking and screaming because they no longer have any choice than to embrace the change.
Where we are now, the first real benefits are coming to light, and the first tangible threats of not changing are becoming very evident. Banks aren’t earning enough return on capital, and if they want to stay relevant to investors they have to improve their platforms, their connectivity and their straight-through processing in a way that reduces costs. There is a way to do that now, and we are seeing the first proof-points that show this.
Changes also mean opportunities. We are seeing disruptors in the areas that are most ripe for disruption, such as foreign exchange (FX). There are new players, not banks, which are making the whole process of FX facilitation a lot simpler for corporates. They are applying their technologies directly, and taking customers away from the corporate banks. In order to challenge them, the banks need to disrupt from within. They need to adjust their processes and provide the services that customers have come to expect, or they risk being removed from the value chain altogether.
So there is regulation—knowing what your exposure is and being able to provide information on it; there is cost—providing services at a rate that a corporate is willing to pay, and there is the pull from the customer. That is what is causing the acceleration in innovation, and the status quo won’t be viable for much longer.
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