Banks struggle to break up the value chain

Banks are under pressure from all sides. From regulators to shareholders. Margin are down and costs are up. The banks need to do something, but what? This week, a few thoughts on where improvement might be possible.

Industrialisation! This was the rallying cry at the largest Swiss bank, UBS, several years ago. In an attempt to radically reduce costs, the then CEO Ossie Gruebel, called in an expert from the telco branch to drive the grand industrialisation programme. Taking in expertise from outside the banking industry was, in my opinion, a smart move. Taking telco expertise was a very smart move. That industry has several complexities about it that would suggest a skill set applicable in banking.

Just a few short years later, the initiative has been abandoned with little to show for the efforts. Except of course the usual band of MD’s and senior folks who were very well paid in the meantime. As an outsider, it is impossible to know exactly what went wrong. UBS was and still is a large organisation and it is not difficult to imagine that the typical dynamics of such large places played a role and there was some pushback to change. It does occur to me though that the root cause might be a more simple one.

Recently, I caught up with the global head of operations for another one of the big 5 Swiss banks. We were discussing the challenges of the suddenly significantly higher valued Swiss franc. Clearly all the banks in Switzerland are challenged; they have a high cost base in Switzerland and revenues are based on the values of many non-Swiss assets, which translates to fewer Swiss francs. We agreed that the banks were likely to follow one of two strategies: yet another big savings effort, with cuts predominantly on the infrastructure side, or the realisation that proper investment was needed in order to deliver efficiencies. We also agreed that this would likely be an 80:20 game, with very few banks willing to make substantial investments. Easy to explain; the usual pressure of quarterly results. We then talked about offshoring. Many of his departments have perhaps 7 to 10 people; off shoring is not going to move and entire department. If part of the department is moved there will be overhead in liaising with parts foreign. No easy or quick wins for his bank on a stand-alone basis that there really.

For this bank, there would appear to be just a few possible routes to cost improvement: either incremental efficiencies that might change a department of 10 to a department of 9. Or, the efficiencies could be realised if there was a major industry initiative to create a utility of some kind. For example, around reference data, be that securities or instrument reference data or customer reference data. The latter is something that I think is easier than many would claim, because with the advent of the LEI there should be more central library-like information about institutional counterparts.

Lessons Learned: My opinion, is that one potential failing of the UBS initiative was that it was an answer in search of a question. I think the banks will do better when they have a question in search of an answer. And they will do that better when they act as an industry, rather than as one bank trying desperately to find efficiencies internally and on its own.

Given the current huge program of regulatory reform, it strikes me that they should be several areas of common interest: reference data is mentioned above. Liquidity management is another topic where cooperation could help.

The banks have done very well in the past when they have created community or industry solutions: Swift, CLS, even SwapClear, are all well-known success stories.

Further reading, at least for the German speakers, see this article from Inside Paradeplatz: Opinions vary about the source, but the general framework of the issue is worth reading.

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