Banks are starting to focus again on making securities services more profitable
Improving the profitability of securities services in banks’ back offices is becoming increasingly important. In view of the economic shock waves caused by the COVID-19 pandemic, which are increasingly reaching the European banking sector, many financial institutions are forced to address this hitherto rather neglected topic in the background of their organizations.
A recent study by the management consultancy zeb, which specializes in the European financial services industry, shows that front office activities (excluding advisory) in the European banking securities business generally account for about 20–30% of all costs in the securities value chain. By contrast, the cost share of the middle and back office is about 70–80%, with transaction processing accounting for about one-third of these costs and custody activities for two-thirds.
Kai Stefani, Partner at zeb, explains: “So far, most major European banks have tried to keep their post-trade operations stable and compliant with regulatory requirements. For the most part, they have failed to address and reduce costs because senior management did not consider securities services to be a core business. This will change fundamentally in light of COVID-19 and the considerable potential for optimization.”
Going into more detail, the zeb study revealed that European banks have hardly been able to reduce their middle and back-office costs in securities settlement over the past 12 years, especially as most consolidation initiatives have failed or been put off due to more pressing requirements. Four challenges are at the heart of this problem: the inadequate scale of the respective securities settlement units, low efficiency, an unsatisfactory contribution to the overall earnings of the respective institutions, and the very limited future readiness of the relevant IT (huge investment needs).
Against this background, the zeb study shows that banks can increase the efficiency of their securities operations by more than 25% by applying a number of targeted measures. In zeb’s view, they should in particular standardize their processes, promote centralization and automate processes in a targeted manner in order to achieve consistent data processing. Practical examples show that efficiency measures in securities services with automated processes and fewer variations enable savings of 20% on average.
Martin Rietzel, Senior Manager at zeb, explains: “Once the banks have done their homework in the back office, they will be able to handle more complex business situations in a cost-oriented manner by using artificial intelligence. Real-time indicators and benchmarks such as social media reactions will then enhance their products as asset managers and, from the customer’s point of view, create significant added value compared to the competition.”
In essence, banks that want to optimize and realign their securities services have to overcome four challenges: substantial scaling (through additional business or merging of units), leveraging efficiency and cost potential, increasing the value contribution within the group, and improving the future readiness of the respective IT, e.g. through investments and/or outsourcing and cloud technology.
Manuel Hobisch, Senior Manager at zeb, summarizes the situation as follows: “Currently there are few banks in Europe that organize their securities services in an exemplary manner. They point the way forward for institutions that still have a long way to go along this path. Which measures are most suitable depends on the individual bank’s current size, its business model and its ability to integrate new technologies and systems.”
Further information on the zeb study “Turning securities services profitable” is available here.
As a leading strategy and management consultancy, zeb has been offering transformation expertise along the entire value chain in the financial services sector in Europe since 1992. In Germany, we operate offices in Frankfurt, Berlin, Hamburg, Munich and Münster (HQ). Our international locations are in Amsterdam, Copenhagen, Kiev, London, Luxembourg, Milan, Moscow, Oslo, Stockholm, Vienna, Warsaw and Zurich. Our clients include European large-cap and private banks, regional banks, insurers as well as all kinds of financial intermediaries. Several times already, our company has been classed and acknowledged as “best consultancy” for the financial sector in industry rankings.
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