Resilience, reorientation, and renewal: Cost cutting for banks
After years of reviews, reorganizations, and refocusing, during which banks have revamped business models and taken a scythe to their costs and headcount, still more needs to be done.
McKinsey’s latest Global Banking Annual Review says the “formidable forces” of a weak global economy, ongoing regulatory reform, and disruption from digitization threaten to cut bank profits in Europe and the UK from $110 billion today to about $50 billion by 2020. ROEs, which have already slumped to around 3% to 4%, could potentially fall to 1% or 2% over the same period.
The McKinsey report follows similar warnings from PwC and EY; banks have high and rising cost-income ratios, and must embrace greater cost reduction targets and more radical restructurings.
To counter the challenges, McKinsey recommends that banks undertake the “Triple R” approach - a three-pronged, fundamental transformation that focuses on:
- Resilience – ensure short-term business viability by protecting revenues, downsizing and cost cutting, strengthening balance sheets, and safeguarding core assets.
- Reorientation – redefine the customer experience by reconceiving the bank as a platform for digital and data processes and analytics, respond to regulation more strategically, and rethink the operating model with smarter sourcing and outsourcing approaches.
- Renewal – embrace new technology and data capabilities and organizational structures to become more agile and able to support the frenetic pace of innovation.
Focus on core activities, outsource the rest
For most banks’ treasury divisions, the obvious answer to McKinsey’s “Triple-R” agenda is to outsource as many parts of their middle- and back-office operations as possible.
In truth, post-trade processing is hardly a core competency for treasury departments, or a value-added, revenue-generating activity. In addition, as processing times shorten and regulatory and IT investments demands increase, these tasks are getting more complex.
By leveraging the expertise, scalability, and IT sophistication of a dedicated third-party partner, treasury divisions can instead turn heavy fixed costs into a lighter variable cost. A third-party partnership minimizes operational and regulatory risks and burdens, keeps banks current on the latest technology developments, enhances responsiveness and business agility, and frees precious internal resources to focus on those activities where they can add the greatest value.
For more information on how outsourcing can improve the performance and efficiency of your middle- and back-office operations, visit SS&C Advent.