Reduce Operations Costs: What a Headache!
Updated: Dec 4, 2019
One major cost center for a bank is its back-office operations. And not controlling processing costs in the back-office is a sin today.
The objective of a good back-office is to reduce costs and streamline transactions’ processing in order to optimize profits for other ‘money-generating’ desks.
Banks cover their operations costs by charging fees to clients. But due to increasing competition from disruptive newcomers, banks need to reduce their fees while enhancing their services.
The big question is: How much can banks afford to reduce their fees without impacting the cost/revenue equilibrium?
Fees - Cost of Operations >> 0
Hence, in order to keep the profit margin acceptable while reducing their fees, banks need to optimize the cost of processing.
By optimizing, I mean reducing the cost of course 😃.
The traditional way banks approached cost reduction in back-office processing was by outsourcing the operations to countries where labor cost is low.
However, cost savings were not as expected as labor costs in these countries are steadily increasing. So, the return on investment was quickly diminishing.
Another trend today is moving the operations to the ‘cloud’ and mutualizing the infrastructure and labor costs. This is in theory very attractive, but in reality, very costly and still not yet optimal.
Why is that?
First, let us understand what major variables contribute to a transaction processing cost:
- Fees like brokerage, clearing, …
- Human resources
- Other departments services like accounting, marketing, …
- Office equipments
- Real estate
There are variables that the bank has control over and others not really. As mentioned before, outsourcing or cloud migration, both aim to reduce costs of labor and systems. However, if the bank’s transactions processes are not optimized, the bank is just moving the problems to remote locations hoping for the best ☹️.
Let me illustrate my thoughts with an example: a foreign exchange spot transaction should have a very low cost of transaction processing and its process should be fully automated (a simple straight through processing 'STP').
The bank will not really care for the operation’s cost, since the fees it asks for more than cover this cost. However, it is enough to have a wrong payment to break the STP process and hike the cost 10x.
It might take for an employee several hours to find -> correct the issue -> reverse the old payments -> generate new ones -> validate -> resend -> wait for confirmation... All these steps are costly, and each activity might incur its own delay.
The outcome might be that the asked fee is not covering the cost anymore and the client is unhappy from the delay.
This is just for one simple transaction. Imagine the uncalculated cost and delays for thousands of breaks for multiple types of operations.
No bank can afford to be in such a situation in this competitive environment. Unfortunately, banks do not really know how to identify this type of costs and interruptions. And moving such non-optimized processes to the ‘cloud’ will generate future problems and drive costs higher.
Before any outsourcing or moving to the cloud initiative, banks need to optimize their transactions costs first. To do that, I highlighted two words that play an important role in a transaction cost: break in an STP workflow and duration it takes to move a transaction from one status to another in the workflow. The bank needs to monitor these two variables very closely and identify the reasons for a break, adjust and optimize the processing time.
To be even more precise, the bank needs to always be able to have answers to questions like:
Is the cost of operating a desk eating up my desk's revenues?
How much time does it take to fix a break in an STP process?
What are the costs of fixing breaks in an STP process?
Which employee is having the largest bottleneck?
Which counterpart is generating the largest cost to my operations?
How much time does it take to generate a payment for a specific product?
How much time does it take for a loan to be approved?
Having timely and precise answers to this type of question will give the bank a definitive edge over competitions. Additionally, applying the right corrective measures, then the bank will dramatically reduce its cost and streamline operations.
KPI Minds™ cloud-based solution was built by the people that engineered major enterprise banking solutions used by more than 500 banks around the world and is designed specifically for banks’ processing workflows.
KPI Minds™ pinpoints exactly to the management what area(s) they should tackle first in order to optimize their operations and dramatically reduce their cost.
KPI Minds™ will help optimize any transaction process workflow, be it in treasury, capital market, corporate banking, loans, retail or trade finance.
KPI Minds™ gives you a 360° view on operations performance coming from different systems such as Murex, Calypso, Finastra, FIS, SAP, internal ...
Do not undertake expensive actions hoping to optimize your processing cost before trying KPI Minds™.
Contact us at firstname.lastname@example.org and let us help you achieve your cost optimization.