In this unprecedented environment, innovation will be more important than ever. How can banks change their operating paradigm to find new efficiencies and allow the business to focus on strategy?
Mutualise back office processing
Financial services’ operational teams spend vast amounts of time and resources in a constant battle to adapt back office processes as financial markets and regulatory frameworks respond to changing needs and new information. Whether it’s local responses to the Royal Commission, adapting to the CHESS replacement or constant amendments to Consultation papers, it’s a full-time and challenging job staying up to date with regulatory and market changes.
To take a transaction reporting example, operational teams at many institutions are still smarting from the debacle of having to respond to new MIFID II reporting over Christmas to meet a 3 January 2018 go live. Building solutions to meet these new reporting requirements not only disrupted holiday plans, Risk and Compliance Officers may have also been asking “why isn’t there a better way of doing this?”
With few off-the-shelf solutions available in the market, many institutions decided to build their own solution – further stretching already stressed IT resources. It was a costly exercise that, for many banks, increased IT churn, as burnt-out talent left.
The point is, none of this was necessary. Transaction reporting, like many other back office processes, is a commodity capability. Its effective execution can deliver value to the business, but the capability itself doesn’t hit the bottom line. In the current environment, building your own transaction reporting solutions makes as much sense as building your own power station.
To deal with transaction reporting and other utility functions, the financial services community could and should have its own back office processing platforms that perform the same functions for all parties – at scale. It would be low stress, low risk and low cost.
There is no strategic differentiation or competitive advantage from owning back office processing. So why do institutions do it?
Remove legacy pain
The answer lies in one of the other major pain points for incumbents: their legacy systems.
While many institutions have invested in front office platforms to deliver a better customer experience or higher volumes of trades, middle and back office technology and operational processing have received less attention. As a result, most banks still rely on legacy systems that are not scalable, expensive to adapt and prone to manual intervention.
Yes, change budgets are focused on meeting waves of new regulatory requirements. But, this is mainly being achieved by adding processes, controls and reporting on top of already offshored inefficient processes that sit on legacy infrastructure. In other words, change effort is limited to small-scale efficiency and run-the-bank fixes to meet the deadlines set by the regulators.
However, most institutions have now reached the point where the cost of upgrading aging proprietary technology is excessive and an increasingly sub-optimal use of capital. Attrition is making it close to impossible to support outdated systems with in-house experts. For many institutions, it’s easy to spend tens of millions annually simply maintaining in-house technology to remain compliant.
The efficiency and cost changes that institutions made last year just to keep up have played out. Tactical change is only offering diminishing returns. As banks take on the challenge of shoring up the economy, many are now considering the use of mutualised technology and operation services to free up balance sheet and resources that can be repurposed to higher value activities.
Mutualisation is where many market participants share a common facility, pooling resources and technology into managed services, using shared standards, data and process to achieve economies of scale. Global institutions already on board with this model are significantly reducing their operating costs – and finding they can now change direction quickly without significant upfront investment.
Tap into network value
But this is not just a cost play. Participants derive network value from the large number of institutions leveraging the same platform. Individual institutions aren’t the only ones having to interpret the rules and the obligations. The community effect becomes a powerful benefit.
Mutualisation also helps institutions to move away from monolithic systems, enabling them to adapt to market or regulatory changes with substantially less pain as the provider makes the change at scale for all their clients. They offer:
- Speed and agility – As banks respond to the crisis, having a customisable, shared technology platform delivers important benefits in terms of scalability, reduced complexity and faster transaction cycle times.
- Easy transition to microservices – Microservices are key to getting the type of pure-play digital agility incumbents only dream of. These mutualised pieces of the process chain can be developed, easily distributed and rapidly scaled up and down. For example, Broadridge is building a system agnostic adapter for CHESS replacement that can be easily deployed on any system, whether that be an internal build or another vendor solution. The new adapter interfaces to the new CHESS replacement system and supports both ISO20022 messaging and real-time NODE connectivity.
- High-quality solutions – Mutualised platforms solve many of the challenges faced by those trying to build their own, offering complete flexibility around connectivity, seamless integration and world-class data security.
- Continual improvement – Platforms are kept up to date as vendors make continuous multi-million-dollar technology investments to improve functionality.
- Easy access to AI, blockchain, the Cloud and digital – Providers leverage their own market leading technology to drive scale and innovation. Their platforms are ready for the new distributed ledger and other fintech technologies as they emerge. At Broadridge we refer to it as The ABCDs of Innovation®. It’s how we help our clients understand and apply next-gen technologies — including AI, blockchain, the Cloud and digital — to transform their business and get ready for what’s next.
As regulators get their heads around the potential of new technologies to deliver ever more granular and frequent data, they will expect institutions to harness these capabilities. In the future, legacy infrastructure will simply not be able to deliver the mandatory capabilities regulators are demanding.
Take the Basel Committee on Banking Supervision’s recent revision to its global standard on disclosure for the Basel III leverage ratio. From January 2022, Australian banks will have to start disclosing their leverage ratios based on daily average values of securities financing transactions in addition to quarter-end values. Many institutions with legacy systems will find this an extremely challenging ask.
Meanwhile, significant change is looming on the horizon with the increased momentum of crypto-currency, technology innovation and revisions to traditional real-time gross settlement to enable wider access and cross-operability with emerging technology.
Mutualisation becomes easier as market participants begin to process in the same way. With a wave of ‘open standards’ emerging – UK Treasury’s Open Banking Standards and the European PSD2 for faster cross-border payments – the business case for mutualisation is becoming ever more attractive.
By taking advantage of mutualised services, financial institutions can save costs, improve business function quality, reduce distractions to focus on what matters and ultimately increase Return on Equity. There’s never been a better time to move on from legacy systems and buy commodity capabilities that deliver the benefits of a mutualised model.