Over the last five years, investment banks have repositioned themselves in response to market and regulatory conditions, through significant cost-cutting measures. And in many respects, the industry is much leaner and fitter now than it was at the onset of the financial crisis. But investment banks have found that revenues in certain business lines are still falling faster than costs, and despite headcount reductions, other expenses such as infrastructure and technology costs have remained stubbornly high.
Utilities level the playing field for smaller banks
In many cases, investment banks spend significant sums of money performing largely identical processes on individually owned technology platforms. In the past, when they were making returns on equity of 25 percent or more, the expense of these technology infrastructures was not a priority. But in today’s cost-focused environment, the level of investment required to maintain these systems can barely be justified, even by market leaders, with their huge volumes of business.
Smaller banks, with higher unit clearing and settlement costs and often a lack of scale and technological edge, find it harder to compete with the bigger players in some business lines. To survive, they have to make a choice—exit particular lines of business altogether or join forces with other banks, using industry utilities to level the playing field and gain the benefits of scale.
A model for the future
Industry utilities can therefore help smaller banks remain competitive by bundling activities across different players. A model for the future, the utility concept offers banks the potential of significant savings in the face of growing pressure from stakeholders to reduce costs further. The model can be extended to many parts of the business where processes are standardized, including payments, know your customer, market data and mortgage processing. The beauty is that it helps let banks concentrate on the unique skills that differentiate them from their competitors, such as structuring products and helping clients manage risk.
To learn more, visit Accenture Post-Trade Processing