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Five themes for transforming wholesale banking operations and technology

Banks have made progress with O&T transformations, but there is still tremendous value to be gained.
Jared Moon

Leads our corporate- and investment-banking work in EMEA, helping clients across sell-side, buy-side, and market infrastructure to transform and improve performance through the use of technology, analytics, data, and innovation

At a time when banks are looking to significantly improve returns, it can sometimes seem that everything that can be done, has been done, particularly on the operations and technology side. It certainly is true that the easy gains have been made. But there is a lot more banks can do. The opportunities may be more complex, but they could drive the next step-change in productivity and efficiency.

Wholesale banks have made huge progress in transforming operations and technology over the last few years. There has been a general move to agile, and technology teams have been upskilled, and platforms rationalized. Operations teams have improved their partnership with the business, exception drivers are much clearer and the use of new technologies, such as robotic process automation and natural language processing, has been scaled up. The results have been significant. For example, in capital markets, trade volumes rose by an average of ten percent a year from 2014 to 2017, while industry-wide cost levels declined. Overall, banks have now broadly settled on a global operating model across trading hubs, and on their nearshore and offshore locations.

However, most operations and technology functions are still looking for opportunities to achieve greater delivery speed and outcomes, increase efficiency, and ensure regulatory and compliance deadlines are met. This is a particularly acute need for firms which lack critical scale in the wholesale business, and are struggling to make the investments required to continue to increase automation levels, consolidate platforms, and transform to a more modern environment. Some firms spend more than 25 percent of revenues on operations and technology, making profitability a challenge.

The same set of pain points constantly surface in our discussions with banks: lack of a “golden source” of data, an absence of holistic financial resources, limited access to real-time pre-trade insights (such as compliance checks). Platform fragmentation across asset classes and geographies. Lengthy, inefficient and cumbersome client onboarding/updating processes (for example, 90 percent of time spent collecting documents and only 10 percent analyzing data).

What are firms doing to get the most out of their spending and improve efficiency? From our work with wholesale banks across the globe, five themes keep coming up. The first is the importance of focussing investment. This means making at-scale investments in the next generation of re-platforming, and automation in one or two product processes. Some firms have invested at-scale in multi-year trade-finance re-platforming. Some have targeted investing in cross-asset trading risk management. The most successful initiatives are always the ones linked closest to the strategy of the business.

Secondly there are opportunities to be seized from taking a “greenfield” approach. This is particularly important for businesses where the bar for client experience has risen dramatically. This means investing in new technology often in partnership with a fintech firm. Areas where this can be important are lending for small business clients, foreign exchange execution, and trade processing. New tech firms have built end-to-end stacks, in less than eighteen months, with small, high-caliber product and development teams.

Other productivity gains can be made by carving out and “mutualizing” processes. If a bank decides it does not have a differentiating business area, or one that it is not able to invest in, success can come from working with private equity, information technology, and business process firms to carve out operations and technology. This can even mean transforming operations and technology into a new business to provide services to multiple wholesale banks. This works particularly well in areas like post-trade processing in capital markets, reference data management, and lending operations.

Banks are also experimenting and scaling the use of a multi-lever approach to improve end-to-end client journeys, and processes. Firms have been able to improve throughput and productivity by more than 40 percent in product control and operations by combining client channel migration to electronic portals, automated workflows, optical character recognition, and natural language processing process improvements.

The final theme is the importance of setting bold aspirations. For a few critical topics, firms are striving for a dramatic improvement. For example, in the proportion of technology staff who are engineers delivering code, the proportion of workloads (applications and data) in modern infrastructure, and reductions in exception rates.

There are different implications for the different actors in this ecosystem. For wholesale banks, bolder actions are required to drive costs down. For business processing outsourcing and information technology outsourcing firms, platform partnerships will be critical to drive “mutualization.” For private equity firms, a deep understanding of transformation in this space (for example the ability to automate smaller, more specialist teams) will be crucial to making carve outs successful.

But what can be said with confidence is that overall, there is still huge value potential for the trading banks, and it is to be found where they may least suspect—in their operations and technology teams. These must be treated as businesses in themselves, and their professionals as “business people.” To get an idea how big the opportunity is, just consider that in sell-side capital markets alone, banks spends some $17 billion on middle- and back-office operations and technology.