The world of Private Banking has seen many changes over the last 10+ years. Although most of the issues remembered by the general public were initially linked to investment banking and then commercial/retail banking, Private Banking has only been relatively lightly impacted, mainly as an indirect consequence of the pressure on the Banking industry in general. How to respond to change in the most efficient way is a key topic for banks and financial institutions, since the answer may well be essential to their survival. IT is in the front-line.
Consider how much has changed already
To start with, despite being able to claim that the segment emerged relatively (but by no means completely) unscathed from the political turmoil that hit the overall Banking sector – Private Banking has nevertheless had to adapt to a series of new regulations.
Topics such as the EU Savings Directive, FATCA and EMIR, among others, sound familiar to those who have been involved in the segment. So do the Asian crisis, the American economic crisis, the European crisis, etc.
Regulatory changes have come against a background of many other changes, albeit at a slightly more measured pace, in the customer-facing side of the Private Banking segment. Organisations have also seen changes geographically with the rising importance of Asia, Russia and the Middle East.
Let’s not forget the mutation of the type of customer and their profile. From being mainly orientated towards multi-generational wealth-preservation, the segment now has to manage the growing importance not just of entrepreneurs, but entrepreneurs from a variety of different cultures who are themselves frequently very knowledgeable, not just about their own sector but also about financial markets and products generally.
So in reality, there has already been an enormous amount of change for Private Banking institutions to understand, absorb and manage.
Consider the costs of change
Adapting to all these changes, on so many fronts, has required a very significant mind-shift on the part of those running today’s financial institutions, as well as high and on-going investment in everything from new products to new skills and new mind-sets. And we all know what the requirements for new skills can do to the average staff costs of an organisation.
It is therefore no surprise that you often hear the wish that the pace of change could just slow down a bit, or even perhaps pause for a while. But that is unlikely to happen. The problem is perhaps more in getting used to not only the constant change and the multiplicity of the types of change, but also the level of incurred investment.
The increase in costs which has not been off-set with a parallel rise in income has resulted in significantly lower margins. It is always surprising to see the number of institutions whose Cost/Income ratio is 70% or higher. As for those whose Cost/Income ratio is over 90% it is no wonder that many of their owners are asking whether they should remain in the business.
With competitive pressure still intense in many geographies and the change in customer profile meaning that customers tend to be more cost-conscious or at least cost-aware, the room for improvement in revenues for a given customer base is relatively slim.
So we have a continuing demand for investment due to regulatory pressures, changes in customer profiles etc., set-off against declining margins due to competitive pressures. To stay alive, the line needs to move somewhere in the equation!
How do play to stay in the game?
With revenues subject to so many external factors, the only thing which a financial institution can really consider to preserve margins is cost. Reducing cost in Private Banking means looking at its two major components: people and IT.
In terms of the first, Private Banking is all about providing a high level of skilled service to customers. Though some improvements are without doubt possible, it would be difficult to cut too much in terms of customer-facing staff without risking a backlash in terms of customer retention and profitability. It is also difficult to imagine (yet more) cuts in the support areas, unless these can be adequately replaced by technology to prevent customer service from suffering.
In terms of IT, the exponential growth of recent investment seems to have been essentially linked to meeting the new requirements of the customer-facing parts, often to the detriment of the rest of the organisation.
Keep investing in the front-office
Investment in the customer-facing aspects of IT must continue – this derives directly from the changing nature of customers and their expectations. Clients have become much more tech-savvy; even the silver-haired generation is increasingly using the latest apps and widgets; Offerings from financial institutions have to meet and, hopefully, even exceed customers’ expectations. Investments in this area have to be on-going and regarded as almost automatic or unavoidable to stay relevant.
IT spending is just a start
I underlined earlier the necessity of investing in the front-office to ensure that the customer-facing tools stay up-to-date and relevant, especially when compared to the competition. But while being conscious of peer pressure, it is also important to look at how such tools are being implemented, and how they are interacting with the rest of the processes within the organisation.
Too frequently the diagram of an IT architecture resembles either a game of snakes and ladders or an advertisement for spaghetti. And this is not only true of those applications designed to serve the middle and back-offices. As pressure grows to introduce new applications for the end-customers, it often seems to just prove too tempting to buy yet another application and then somehow make it work with the rest of the IT architecture.
On the back-office side, many systems and processes still have to be used and reconciled, etc… And despite that, how many processes remain manual, especially when it comes to the newer products and services?
Make it simple, keep it simple!
This should be the standard motto for any organisation which looks at its processes and the way its IT system manages and supports those processes. Not only should an organisation turn to maximising the automation of processes, it should also be paying a lot of attention as to how that can be streamlined.
A multitude of systems (the so-called “best-of-breed” approach) can be stimulating but can create multiple projects. If this can keep the IT team justifying even further expansion – and many of the systems are no doubt wonderful in their own right – then what does such complexity do to the bank’s P&L? The answer probably lays in switching, whenever possible, to a single integrated system ruthlessly using the 80/20 rule to eliminate arguments in favour of complexity when simplicity provides the solution to most requirements most of the time.
Beyond changing systems
With wide-ranging pressures on margins unlikely to relent in the near future, and the need for wide-ranging investments and management for these relentless changes, organisations need to take a long hard look at all their processes and the associated operating costs.
Some will claim to have already done all that is possible. They will claim they have brought in consultants to conduct reviews – held brainstorming sessions with the troops etc. But can they all really say that they have done everything possible?
Due consideration must be given not only to changing systems, but changing the key principle by which any review is done. Look at how to take cost out of the organisation, not just by automating, but by simplifying. How can an organisation do more, in at least or preferably an even a more automated way, but with fewer systems? How can those processes be combined into just a few systems, with minimal interfacing and reconciliation to worry about?
The simplification of systems, accompanied with maximum automation to reduce costs, seems to be one of the few areas left to an organisation to protect its margins. And that of course requires further change and a mind-set which welcomes and embraces yet more change.