Managing for performance Transaction banking - Reshaping your business to take advantage of the shift in global commerce, clearing and customer ...
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Reshaping your business to take advantage of the shift in global commerce, clearing and customer needs. Managing for performance Transaction banking www.pwc.co.uk
We are well aware of the erosion of public trust, constrained investor interest and evermore intrusive government intervention facing banks today. We believe that by embracing a customer-centric business model and forensically managing performance through customer-informed value drivers, banks can win back investment and rebuild faith in their economic potential. 2 PwC Managing for performance Transaction Banking
Managing for performance The key question is no longer whether or even how transaction banking has been transformed, but how to re-engage with customers, how to respond to their changing needs and how to generate sufficient returns in this new business environment. In ‘Managing for performance’, we look at what different customers most value and how banks can make the most of the resulting opportunities and value potential. In our 2011 transaction banking Our work with a range of global overview (‘Reshaping the vision: transaction banks highlights a further Emerging stronger from market consideration that cuts across all those transformation’), we looked at how above – how to manage the business to the competitive landscape is being optimise performance. The ways banks transformed by shifts in global trade, are going to have to do this are being Julian Wakeham customer expectations, technology transformed as quickly and decisively Partner, PwC and regulation. We identified three as the competitive and regulatory key considerations for competing landscape in which they operate. in this new landscape: ‘Managing for performance’ is therefore 1. How do you get closer to your the main focus of our 2012 overview. sure the business can quickly chosen customers – who will be respond to these evolving your key customers in 2020 and The starting point for managing for expectations. how can you develop a more performance is the fundamental profitable relationship? importance of a truly customer-centric In the final section we explore the culture and business model in ensuring unfolding opportunities for innovation 2. How will you manage risk and survival and success in this new and growth, with a key focus on how capital more effectively – what is landscape. Strategies should be based to make sure good ideas fulfil their the impact of regulation on your on a deep and insightful understanding potential by delivering real returns. business model and how can you of customer needs. The challenge develop a more favourable and is how to keep pace with changing We are well aware of the erosion sustainable balance between customer demands and make sure the of public trust, constrained investor risk and reward in this new organisation is focusing on the drivers interest and evermore intrusive environment? that are going to make the most government intervention facing 3. How will you keep pace with difference to performance and returns. banks today. However, we believe market developments – what that by embracing a customer-centric competitive advantages can you Our opening section looks at fresh business model and forensically bring to bear and what resources approaches to enduring challenges managing performance through and technology will be required including determining the right way customer-informed value drivers, to support this? forward for the business and dealing banks can win back investment with the strategic implications of and rebuild faith in their economic regulation, along with the return on potential. equity expectations that underpin this. I hope that you find ‘Managing for In the second section we examine the performance’ insightful and informa- changing needs of three core customer tive. Please do not hesitate to contact segments, namely small and medium either me or any of the contributing size enterprises, large corporates authors if you would like to discuss and financial institutions, and how any of the issues in more detail. to gear performance management We welcome your comments and organisational design to making and queries. PwC Managing for performance Transaction Banking 3
Contents Section 1: A different approach to familiar challenges 5 ROE: the new equilibrium – finding a true measure of success Managing infrastructure for performance Maximising return on regulatory investment Section 2: A model for performance management 19 Performance management: getting straight to what matters Understanding customer needs Section 3: Innovation and growth opportunities 36 Turning innovation into a real engine for growth Taking the working capital opportunity to the next level Emerging partnerships in regional banking Entering new markets – new opportunities for servicing existing clients 4 PwC Managing for performance Transaction Banking
Section 1: A different approach to typical challengess Article Brief synopsis ROE: the new equilibrium – finding As many banks scale back non-core a true measure of success operations and seek out new sources of growth, what role does transaction banking play within this new banking ‘equilibrium’ and how should the value and returns of banks be judged? The remainder of this section challenges the way investment decisions are typically evaluated and considered. Managing infrastructure High profile IT failures have shaken for performance confidence in payments. How can banks rebuild market faith in their IT resilience and what part would more effective contractor management play in this? And how can these and other upgrades to infrastructure provide ways to capture key client data and bring customer profiling up to the standards being set in other industries? Maximising return on regulatory A wave of new regulation is creating investment huge implementation demands on banks. But these regulations could also accelerate market developments in areas ranging from electronic transfer to more competition in the settlements and clearing market. Smart banks are going to be looking at how to turn investment in compliance to their competitive advantage by using it to help serve customers more effectively. PwC Managing for performance Transaction Banking 5
ROE the new equilibrium – finding a true measure of success As many banks scale back non-core operations and seek out new sources of growth, what role does transaction banking play within this new banking ‘equilibrium’ and how should the value and returns for the bank be judged? The banking market is being reshaped boost return on equity (RoE) – 12%- Transaction banking’s strategic by the shifts in the economic landscape 15% is the typical target. The assets importance is being reinforced by and customer needs. Further pressure being relinquished in the drive to cut the shift in the focus of investment for change is coming from governments RWA may actually be the businesses and growth towards the fast growth and regulators’ insistence that banks that offer the greatest long-term markets of South America, Asia, Africa curtail their risks, scale back their potential if retained. In turn, these RoE and the Middle East (together these balance sheets and provide more support targets may be unrealistic given the markets form what PwC terms as for the ‘real’ economy. Many banks’ state of many developed economies ‘SAAAME’). It is not just the growth response includes a closer focus on and the absence of the leverage that in these economies but the increasing transaction banking opportunities. But did so much to boost RoE before the trade flows between them that are as we explore in this article, the verdict crisis. Nonetheless, many banks believe going to be so crucial to business is still out on how successful they can that a mid-teen RoE is needed to attract development by both banks and their be and a change of tack may be needed. and retain the levels of equity that corporate customers (see Figure 1.1). regulators are demanding. Banks that can develop the If we begin by examining how groups geographical reach and service as a whole are responding to this new So where does transaction banking fit capabilities needed to follow their economic and regulatory landscape into this shake-up? In many ways, the clients into new markets and tap into we can see a mixed bag of sound, need to re-balance risk and reward these trade flows would be in the disciplined business adjustments and re-engage with the real economy strongest position to attract and retain and messy reactions to short-term plays to transaction banking’s customers and develop new sources of regulatory imperatives. Worse still are strengths. Transaction banking has revenue. While some banks are looking the potentially damaging decisions always offered a strong and stable to exit from markets that do not meet stemming from misguided efforts to source of relatively low risk and their immediate RoE targets on a reduce risk-weighted assets (RWA) and capital light revenues. standalone basis, others are seeking to extend their international coverage in recognition of its importance in Figure 1.1 Transformation in global trade flows sustaining client relationships and enhancing performance. World trade flows, US$ trillions, 2010 Trade value: $6.92tr CAGR 2002-10: 8.0% Non-SAAAME Trade value: $2.16tr Trade value: $2.67tr CAGR 2002-10: 12.9% CAGR 2002-10: 13.6% SAAAME Trade value: $2.82tr CAGR 2002-10: 19.4% Source: PwC 6 PwC Managing for performance Transaction Banking
But transaction banking is not a magic with SAAAME markets likely to be a Banks are therefore going to need bullet. First, using transaction banking key target. Too many banks chasing too new ways to price and mitigate their to improve group RoE does not neces- little business is likely to drive down exposures in these markets. Prices will sarily address wider problems in the prices and margins and offset any be affected by higher risk, capital and group and does not consider whether advantage from the lower capital costs funding costs. But this will be partially the existing client franchise supports of this business. As outlined earlier, offset by product rationalisation and the business that the bank is trying to senior management may also lack the lower operational costs. Areas where develop. From a group perspective, necessary experience to steer such a the high capital costs are matched by it is important not to lose sight of the rapid expansion in transaction bank- high levels of customer demand are portfolio perspective and understand ing. Favouring transaction banking likely to be the greatest focus of where transaction banking fits within simply because it makes sense from an innovation and re-engineering. the broader product portfolio. The RWA optimisation perspective is thus a related question explored in this article clear case of the regulatory tail Banks may also need to look beyond is whether ROE is necessarily the most wagging the strategic dog. RoE targets at more relevant measures appropriate criterion upon which to of performance and success for these make business decisions as it may not Realistic expectations longer term and relatively high risk and reflect the underlying business perfor- So how can banks shape their transac- reward strategic plays. Risk-adjusted mance and real economic value of the tion banking and wider business measures such as economic profit business. The second challenge for support services to make the most would provide a better indication of transaction banking development is of its potential within the new risk, the true value being created across that there may be insufficient scale in capital and market equilibrium? the different operations. the new target markets to provide adequate volumes and margins for all While in the past, transaction man- The underlying challenge is how to the institutions that want to enter. dates tended to be offered as the prize convey the rationale of these strategies Finally, transaction banking is a very for finance, helping clients to move into to investors and whether they would different business from traditional unfamiliar and often under-developed accept the implications for RoE. Some wholesale banking and the manage- markets is likely to require a more may withdraw their investment if their ment skills, capabilities and expertise symbiotic relationship between lending RoE expectations are not met. But on of the existing management team may and transaction services. This might other measures the long-term potential not be appropriate to support this move include finance to help clients set up of banks that can tap into fast growing into new markets. manufacturing facilities in a frontier economies and trade flows will be SAAAME market and then support for strong. RoE measures may also be less These issues have been brought to the infrastructure and other develop- universally comparable as a result of the fore because some banks may be ments needed to build up demand in variations in gearing and local capital stepping up their focus on transaction local markets. requirements, leading to greater focus banking for what might be described as on economic spreads and profitability. the ‘wrong’ reasons. In particular, they While the reward potential would may be favouring transaction banking mirror the strong GDP growth in the simply because it is less capital inten- SAAAME economies, contending with sive than their potentially more volatile varied and possibly limited risk data, lending and trading counterparts legal systems and regulatory frame- rather than judging business develop- works could radically change the risk ment on the relative commercial oppor- profile of your business. Loans may be tunities and their ability to capitalise riskier. The need to operate with an on them. Many areas of the transaction ever growing array of local partners banking marketplace may become on the ground would also heighten more crowded as banks rush to expand, counterparty risks. PwC Managing for performance Transaction Banking 7
The new equilibrium make sure that they have the capabili- Far from being a cyclical downturn, the ties and differentiated strategies to market and regulatory forces shaping make sure that transaction banking the banking sector are here to stay. realises its return potential. The good news is that the fundamental customer need for banking products As with any change, there will be and services has not disappeared, relative winners and losers. The and the opportunity in the long run to winners will be those that manage service that need profitably has not through this transition most effectively gone away either. A new equilibrium is and emerge in the new equilibrium thus set to emerge over the next three with their franchises and balance to five years as de-leveraging runs its sheets in best shape. In a nutshell, course and banking moves closer to there is everything to play for. the real economy in both its service offering and return expectations. If transaction banking may be one of the beneficiaries of the new funding Transaction banking is at the forefront and strategic considerations facing of the renewed focus on the real economy. banking groups, it is also facing But it could also take banks into riskier significant new regulation of its own. and more volatile markets that are out At the heart of these changes is the of step with the current mantra of RWA pressure to strengthen and update optimisation and demand to boost payments and custody systems. RoE in the short-term. Such moves may As we explore in the remaining articles also be beyond the scope of existing in this section, smart banks are looking management expertise. We therefore at how they can use these regulatory think it is crucial that banks recalibrate demands and the necessary investment their economic models, performance this entails as an opportunity to targets and pricing formulas to the new develop new markets and improve economic realities. They also need to customer experience. Banks need to consider looking beyond RoE targets at more relevant measures of performance and success, such as risk-adjusted measures such as economic profit which would provide a better indication of true value being created across the different operations. 8 PwC Managing for performance Transaction Banking
Managing infrastructure for performance High profile IT failures have shaken confidence in payments. How can banks rebuild market faith in their IT resilience and what part would more effective contractor management play in this? At the same time, banks are missing out on a commercial opportunity as they are finding it difficult to draw any insight from all the transactions in the system. So if infrastructure invest- ments have to be made, how can they be turned into a source of competitive differentiation by providing ways to capture key client data and bring customer profiling up to the standards being set in other industries? IT resilience within the banking sector completely under-stood by a small These weaknesses have led to an was once taken for granted, with number of key staff. These problems increasing number of high profile customers and regulators seeing this are compounded by the fact that many incidents that affect customers and are as a well-funded, well-managed and banks have shifted their investment embarrassing for the banks concerned. highly robust area. But confidence is focus away from maintaining IT The risk of breakdown is a growing now sagging. CIOs face two pressing resilience to other programmes of work concern for financial regulators around priorities, namely how to understand as they have expanded, merged and the world and has put resilience squarely and manage the risks of their existing sought to offer new services. back on the agenda. As a result, some IT infrastructure (including the banks are actively reviewing their IT outsourced components) and how Complexity is compounded by limited services and the controls around them to make sure the required investment understanding of the complete IT in anticipation of increased focus from delivers maximum value (for landscape, which makes it harder to customers, regulators and investors. the customer franchise and for gain a clear view of the impact of IT shareholders). This article explores changes. This lack of visibility prevents The risks surrounding payments dependency risks, including vendor the development of effective IT highlight the broader IT issues. and contractor management, system resilience solutions, allows single Complexity is of course, unavoidable complexity and the relationship points of failure to creep into services in any global payment system as these between reducing complexity and and contributes to IT service outage as typically support multiple mechanisms, managing risk and extracting value the impact of changes cannot be fully products and customers. from the IT infrastructure to benefit assessed. Further tensions are coming the end customer and organisation. from the ever increasing pressure to deliver more IT changes faster. So why is payments infrastructure now in the spotlight? This is a vital part The pressure of demand is also of the economic fabric. Yet in many growing. This includes increases countries, this delicate ecosystem is in real-time (or near real-time) in a fragile state as it seeks to contend data transfers between IT systems, with the strains of age, under- combined with a reduction in buffer investment and increasing demands capacity (from data growth). This (e.g. faster payments, SEPA etc.). pressure can create data concurrency Piecemeal upgrades, connecting with risks, which are highly sensitive to other systems following mergers changes in business rules, IT interfaces and use of third party suppliers have and IT failure events. Assessing these created complex ‘spaghetti-like’ changes requires both business and mechanisms that are expensive to IT analysts to appraise and approve manage and maintain and only modifications and upgrades. PwC Managing for performance Transaction Banking 9
Figure 1.2 Dependency risks Customers High Impact Outage Processes Core Banking Payments Incorrect payments to customers Applications App1 App2 Impact to App15 Misaligned data between systems Incident , Problem , Impact Alerting, Availabilty, performance Change , (eg. IT Management Impact Impact Impact Resource Layers Configuration , Control risks Processes) Testing , Lifecycle, Impact Impact Data Integration, Recovery, Capacity Buffers , Disaster Recovery, Security Data centre infrastructure IT teams Vendors Single point sensitive risks Framework, KPI risks Source: PwC Managing IT Before considering what is needed to monitoring systems and clear remedia- dependency risks limit contractor/vendor dependency tion plans that would allow appropriately The immediate challenge is how to risks, it is important to map the bank’s skilled bank staff to regain control identify and tackle weaknesses. At core payment infrastructure (engine, quickly if necessary. present, risk management frameworks gateway and sanctions checker) to their end-to-end payment flow. Banks will also need to focus on how do not always provide management with accurate or telling information. to anticipate and review potential risks, The bank can then gain a clearer how strong are their levers of control This makes it harder to identify and picture of the critical nature of their and how they are being operated as tackle IT risks. peripheral systems and processes part of overall IT resilience manage- (e.g. channels, bulk splitters, payment One of the most difficult challenges ment. We have carried out a study of warehouses, XML converters). Only is how to take account of the impact then can the appropriate type and practices adopted by major organisations of multiple dependencies. Figure 1.2 level of contractor/vendor management across a range of sectors and identified highlights common dependency risks. be applied. Ways of strengthening three key categories of practices, These risks can coalesce to cause high resilience might include bringing with nine organising principles for impact failures in business critical vendor staff and operations within the managing vendors and contractors processes. A minor change or problem organisation rather than outsourcing (see Figure 1.3). These translate into in one infrastructure component can critical processes. Another option seven key drivers for managing have a severe knock on impact if it would be implementing end-to-end successful vendor relationships. impinges on additional weaknesses in IT controls and IT risk management Figure 1.3 Organising principles used in understanding the vendor/contractor management relationship further down the line. While third party specialists can provide innova- Establishing and 1 Common 2 Nature of 3 Mutually sustainable maintaining targets relationship outcomes tive and insightful solutions, their relationships presence can add to complexities and Implementing 4 Relationship 5 Risk & 6 Responsibility & interdependencies within the IT levers of controls management control accountability infrastructure, making the manage- and influence ment of vendors and contractors a Making it 7 Planning & 8 Resources: 9 Performance key area for risk management focus. work responsiveness capability, capacity management to unplanned events & flexibility Source: PwC 10 PwC Managing for performance Transaction Banking
At the heart of this framework is the Figure 1.4 Key drivers for managing successful vendor relationships in a composite model of excellence need for more co-ordinated purchasing and consistency in the management Number of contractors 12 or less per business Difficult to maintain deep Bank needs to manage and review of third-party services. Less than 4 per high working relationships contractor development impact category with too many contractors programme consistently Streamlining vendor services is also and will spread staff over time Relationship crucial as an excess of suppliers is too thinly needs high level exe- difficult to manage. Underpinning this cutive sponsorship, clear targets, retained multi- is the need for high level sponsorship to functional team and time make sure the resilience of third-party to drive the relationship systems is a sufficient priority within Relationship length 10 years + Takes time to translate Contractor needs to hear the bank and recognised as critical (not contract length) corporate intent into the same message from the to the relationship and resulting ways of working bank regardless of where revenues by the supplier. across different levels relationship sari held Reducing complexity Impact on supplier Within top 5 To ensure appropriate Prevent maverick or business (actual or level of influence to non-compliant purchases The critical nature of payment systems intended) get the right resources through consistent mean that banks often replace elements and investment can internal messaging of their IT infrastructure with vendor be applied solutions in a piecemeal way. They may Sourcing type Sole but not Retain alternatives to Contractor aware of wider even decide part way through imple- single source reduce risk, but provide commitment as a result mentation to keep particular parts of contractor with sufficient of sole sourcing, but commercial certainty aware of consequences the legacy system to deal with bespoke to forecast likely demand for underperformance processes. This approach exacerbates the fragmented understanding of the Invasiveness of Highly invasive and To enable informed Bank needs to view the complete landscape. Layers of complex- inspection / audit / rigorous benchmarking and audits as a business assessments ensure commitments asset – dependent on ity are added when legacy systems are complied with. leadership commitment are excluded from improvement To establish message and ability to execute programmes to help speed up delivery that verification will follow trust and reduce cost. Training, systems, Mandated by bank with Consistent way of Banks need to demonstrate Unfortunately this complexity means standards and some shared IT platforms. working to reduce compliance with their own reporting Reporting and data uncertainty and standards – demonstrating that as banks look at how to strengthen integrity built into promote efficiencies to vendors that they will confidence in payments and gear systems contractual requirements over time follow their own rules to increasing demands, the point at which and operational ways and standards and non- of working compliance will not it is easy to address these problems has be allowed passed. On-going upgrades and mainten- ance to the infrastructure are expensive Common industry Banking typically benefits Helps level the playing standards from a high level of field in terms of cost and only achieve a preservation of regulation and standard of compliance the status quo. The effort of meeting setting – however new regulatory requirements, which implementation and execution of the standards continue to emerge, needs to be may vary across banks. increasingly manual as systems Not all vendors may be struggle to keep up, further inflating subject to the same level of regulation costs. Investment is therefore vital. The alternatives to a multi-year Source: PwC improvement programme – e.g. hosted service provision, joint venture to deliver payments infrastructure, full transaction outsourcing – are used by some of the smaller banks. But these are not seen as a viable solution for their larger counterparts. A shift from tactical to strategic investment is therefore required to put payments infrastructure onto a sustainable footing. PwC Managing for performance Transaction Banking 11
Winning CIOs enable the Figure 1.5 Technology investments are needed to move organisations to a lower target cost curve and enable greater customer-centric capabilities at a competitive cost business capabilities needed to achieve customer centricity High Unsustainable cost curve at a lower cost – by investing in a scalable and robust 3 Total cost of ownership technology environment Just being customer-centric is not a sustainable competitive advantage, Target cost curve because any organisation can become 1 2 customer-centric. The real differentiator is enabling customer-centric capabilities faster and more cost-effectively than your competitors. Low Customer-centric capability High Growing the business without increas- 1 In order to move to the target cost curve, leading organisations make strategic investments ing costs faster than revenue may be a in a flexible architecture and robust technology foundation. These investments pay dividends in the longer-term, even though tactical investments may present quicker and cheaper challenge if the institution’s technology options in the short term. foundation is not flexible. Establishing foundational capabilities – such as a 2 An inflection point occurs where investments in foundational capabilities begin to pay dividends. Additional customer-centric capabilities may be delivered while flexible architecture and single view of maintaining margins. the customer – allows for the extension of IT capabilities to enable new, customer-centric business capabilities 3 Without the early investment, an inflexible architecture and “waxy build-up” within the technology stack put organisations on an unsustainable cost curve, eventually making while still maintaining profits. it cost-prohibitive to deliver additional customer-centric capabilities. Source: PwC March 22, 2012, FSViewpoints: If They’re Happy, Do You Know It? - The CIO’s Agenda in Improving Customer Centricity at Financial Institutions Whether banks want to overhaul their payment infrastructure. This approach Where a feature remains critical payment infrastructure or need to take is equally beneficial whether the it should obviously be preserved. a more pragmatic incremental approach, existing systems are being gradually Where there are multiple features they need to approach the challenge upgraded or completely replaced. The doing broadly the same thing in slightly with the same objectives: Simplification advantages include increased flexibility different ways, the simplest should be and transparency to address the and sustainability as the environment preserved and the others standardised. complexity challenge. becomes easier to understand and If the original reasons for a feature cheaper to change and manage. It is are no longer valid, it should be Leading banks are seeking to simplify time to consider the presence of all discarded as soon as possible. their systems in a systematic and bolt-on functionality layered on over consistent way across the whole of the the years and ask: ‘Is it still needed?’ Simplification and transparency are key objectives to addressing the complexity of IT change. Central to any change is the ability to develop more customer centric IT infrastructure. 12 PwC Managing for performance Transaction Banking
Figure 1.6 Focusing technology on customer needs A proper technology foundation and basic, customer-service-enabling capabilities have become table stakes in the financial services industry. Getting ahead of the curve means going beyond traditional IT capabilities. How well is your technology enabling a customer-centric business? e rv cu • Can you track customer sentiment online by being engaged in social media and mining data with text analytics? information Business e • Do you have advanced analytics and predictive modeling capabilities to predict and test customer behavior? th • Do customer-facing employees have access to all customer interactions and preferences in all channels? of • Are customers segmented beyond demographics? d ea Ah • Does your technology landscape support multi-channel integration? Technology • Is there a true single view of the customer across all business units? solutions • Can customers customise their Web Portal experience and have access to online help with rich functionality, and click to-chat? es • Is mobile access for customers and employees enabling a better service experience? tak • Are your management decision cycles bogged down in bureaucracy? s e bl IT operating • Do legacy IT systems create an overly complex IT environment that prevents capability model delivery in a timely manner or at a reasonable cost? Ta • Are all employees offered incentives to drive customer satisfaction results? Source: PwC March 22, 2012, FSViewpoints: If They’re Happy, Do You Know It? - The CIO’s Agenda in Improving Customer Centricity at Financial Institutions Smart use of data is critical to managing to enhance insight and generate Extracting value for the end for performance – getting closer to cross-selling opportunities in areas customer and organisation customers and enhancing revenues – such as hedging and working capital From a competitive perspective, bank while reducing the burden of complying management. payments are at risk of becoming with regulations. Legacy payment a commodity service that smarter ecosystems often capture the bare When investing in payment infrast- companies use to their advantage minimum amount of information ructure, planning to enrich the data (see Figure 1.6). Retailers are offering required to execute a payment and capture and processing capabilities to an ever wider range of banking are not structured in a way to support allow for greater transparency should products to consumers, using their greater transparency of underlying be a key strategic aim. This will be expertise in customer insight and data. It is then difficult to develop an extremely difficult for some legacy analytics to plan market entry, target aggregate view across all payments to platforms, and will need to be customers and maximise the chances spot trends and develop a comprehensive, delivered incrementally. Delivered of success7. Figure 1.7 highlights how customer centric view of payments strategically, the investment will banks can address the key IT issues transactions. This is a lost opportunity yield broad reaching benefits. from a customer-centric perspective. 7. http://www.guardian.co.uk/money/2012/jul/18/marks-spencer-bank-current-account PwC Managing for performance Transaction Banking 13
Moreover, technology companies are Figure 1.7 Addressing the key issues from a customer-centric perspective using their IT skills and brands to Issues to address Technology implications position themselves between the banks and consumers to gain control of that Legacy systems Application rationalisation and a move towards a service-oriented architecture crucial, and lucrative, relationship8. (waxy buildup) are 1) required to keep pace with the technological change that is necessary Although currently mainly a threat to to respond to customer needs. 2) reduce time-to-market for new products, and 3) reduce operating costs in order to divert funds to discretionary spend consumer banking services, emerging that can be used to please the customer. payment hubs and supply chain collaboration through multinational Single view of Achieving a single view of the customer requires a single source of truth for each the customer piece of customer data, which can then be integrated and utilised, preferably company portals offer opportunities to as a service, by all applications that use and update customer information. augment corporate client services and Proper data architecture and governance are necessary to maintain the integrity relationships. These would provide of all customer integration. A comprehensive information strategy may pave the way. the insights banks need to regain the competitive initiative from the Integrated All channels should be able to access the information contained in the single new entrants. multi-channel view of the customer in a way that ultimately presents customer data to end users in a consistent format. Updates across channels should automatically update the master customer record and be architected so that inconsistencies A platform for innovation cannot be created in the record by utilising master data management. So if sustaining payments infrastructure is a challenge for many banks, it is also Customer Analytical capabilities to segment customers beyond traditional techniques segmentation should be in a place. Understanding individual customers’ decision processess, a competitive opportunity for those behavioral characteristics, and likelihood to buy are all paramount to effectively that put simplicity, transparency and managing the consumer base and providing tailored customer experience. customer insight at the top of their investment agenda. The result will Data Recent data security breaches at several institutions have had severe be a more flexible and controllable security consequences in terms of customer satisfaction. Sensitive information is exposed, existing customer confidence is shaken, while potential customers platform, which will be better able who question a company’s ability to keep their information private are to meet changing regulatory require- likely to look elsewhere for products and services. ments and ensure that banks can respond to evolving customer Source: PwC expectations with confidence. 8. http://www.finextra.com/News/Fullstory.aspx?newsitemid=24062 14 PwC Managing for performance Transaction Banking
Maximising return on regulatory investment A wave of new payments and securities regulation is creating huge Holistic approach implementation demands on banks. But these regulations could also For many banks, simply getting over accelerate market developments in areas ranging from electronic transfer the regulatory implementation line to more competition in the settlements market and new business models in is the main priority. But a reactive the custody market. Smart banks are going to be looking at how to turn approach that addresses each new investment in compliance to their competitive advantage by using it regulation in isolation can be need- to help serve customers more effectively. lessly costly and disruptive. It could also be operationally unsustainable given the cumulative scale of the Governments and regulators have set As we outline in this article, we believe changes. So we believe that it is their sights on banks as they seek to there are two key principles to consider important to look at the developments take a stronger grip on potential when addressing regulatory change: in the round to avoid duplication systemic risk and make it easier, 1. Approach regulatory change and unnecessary costs. cheaper and quicker for businesses holistically to avoid duplication and consumers to transfer money and unnecessary costs, and Using this holistic approach to the domestically and internationally. 2. Keep customer needs and improved evaluation and implementation of A further priority is how to make customer service at the heart of all new regulations as the starting point, economically vital payments change efforts to deliver value Figure 1.8 outlines some of the key infrastructure safer and more secure. beyond pure compliance. considerations for budgets, business Similarly, new regulation is putting model evaluation and regulatory pressure on existing infrastructure, lobbying in the payments field. operations and business models Banks are going to have to make a within the custody market. considerable amount of investment to meet the new compliance demands, so making sure the new systems and capabilities can be channelled into meeting customer demands and developing new markets is going to be the most effective use of resources. Figure 1.8 Deal with regulation holistically Budget Influencing regulators • The biggest use of budget for the next 3-5 years • Understanding the impacts in sufficient detail to lobby • Efficiency – “Do it once” in the right areas, in the right way, and at the right time • Timings • Ensuring group and individual business line impacts • Align with other ongoing projects and lobbying views are appropriately aligned globally Identifying Ensure on-time future business compliance model • With large scale reforms re-shaping the market, • Pricing is affected e.g. pricing models for Euro Banking firms are looking to ensure they are well placed both Association (EBA) versus Target 2 in the Eurozone or operationally and commercially as regulations faster payments versus CHAPS in the UK come into force • Parts of the business are front-running others with • Ensuring the firm’s business model is sustainable and respect to regulatory response tailored to take account of the changing market • Senior management discomfort over extent of change and internal responses Source: PwC PwC Managing for performance Transaction Banking 15
Figure 1.9 Identifying and capitalising on the opportunities Assess Budget Design Construct Budget Implement Operate and Review Assess current approaches Determine governance Design your approach Execute projects Maintain focus on to regulation and impacts approach to the changes and make strategic reforms in BAU of regulation on decisions the business • Meetings with the business • Gaining a view of: • Based on the outcomes of • Creation of project initiation • Delivery of governance and and support functions to - committee structures, the heat-maps, designing a documents to provide a projects in a business as understand how regulation - working groups, thematic approach to the basis for delivery usual environment is currently approached - current projects, regulations • Execution of projects • Ensuring the approach to • Creation of a ‘regulatory - key stakeholders • This approach allows similar • Project reporting into the regulatory change remains inventory’ covering the • Determining the appropriate changes to be made steering committee allows proportionate over time, reforms impacting the firm’s governance model to ‘fit’ together options to be considered scaling projects up/down businesses within the firm’s current • By approaching regulation and strategic decisions based on regulatory • Assessment of the impact structure on a theme basis, there is to be made timelines and priorities of these regulations on the • Formalising a sustainable reduced risk of duplication • Providing the business with business and support decision making framework of effort, and ensures the capability to review functions • Identifying resources to changes are made upcoming regulation and deliver the structure efficiently integrate them into BAU Source: PwC As we explored in the previous article, evaluation of new regulation and most payment systems have been built subsequent response is therefore up over time, creating a highly complex mapping the end-to-end payment and poorly understood business and flows, segmented by payment product technological infrastructure. While and customer type (retail, corporate investment is needed to meet new and investment bank). This will requirements such as SEPA and address provide the foundation for an regulatory concerns over IT resilience, opportunity assessment and aligning it can also be channelled into investment in new systems and improving customer insight and capabilities with the performance experience. As Figure 1.9 highlights, drivers within managing for a key foundation for the impact performance. 16 PwC Managing for performance Transaction Banking
Dealing with market Figure 1.10 Key regulatory changes in the payments space and implications for banks transformation and divergent customer needs New regulations will have competitive as well as operational implications and will need to form a key part of strategic evaluation and planning. This includes identifying the opportunities. In some cases, the sheer volume of new regulation is fundamentally changing Regulatory aim Force / Regulation Implications for banks the market and it may not be enough to Speed up payments Payment Services Next day and same day transfer simply address regulation holistically. Directive (PSD)/ (Faster Payment Service in UK) Payments and custody (as illustrated Single European by Figures 1.10 and 1.11 respectively) Payments Area (SEPA) are good examples of areas experiencing Make cross-border PSD/SEPA Pressure on costs of transfer/ significant and market-changing payments easier and Greater cross-border regulation. Designing change to cheaper standardisation address regulatory compliance Open up market E-Money Directive Advance mobile payments/ requirements based on the commercial by allowing e-money digital wallets imperatives of the old market runs providers to offer payment services the risk of building a business that is completely unsuited to the competitive Promote greater SEPA More non-bank entrants/ requirements of the new landscape. competition Account Switching Pressure on costs of transfer Solution in UK In such cases, banks will need to look at which customers they want to serve Simpler account switching Account Switching Switch within seven days/ and how, taking into consideration Solution in UK Guaranteed re-direction of scale, customer needs and likely returns. payments/£650–£850 million investment 9 For many, the results of this evaluation are likely to lead to a fundamental Ring-fence payments Recovery and Operational separation between shift in the business model for custody resolution plans retail and investment arms/ Higher operational costs (‘living wills’)/Board G-SIFIs/ business (the impact of new regulation Financial Stability Independent Commission on in the FI market is further explored Banking (ICB) in UK in the ‘Understanding customer Control systemic risk Basel Committee on Identify, manage and control needs’ section). Payment and the risks of high value tiered Settlement Systems payments systems (examples include CHAPS in the UK)/ Strengthening Encourage large indirect customer service participants to become In addition to considering change direct participants holistically, it is also important to Bolster tax revenues EU Financial Greater scrutiny leading keep customer needs and improved possible interruption and US Financial Account to possible customer service at the heart of all alteration of payments inflight Tax Compliance Act changes. This will allow banks to (FATCA) gain the competitive payback from their investment in compliance. Source: PwC 9. Payments Council media release, 15.09.11 PwC Managing for performance Transaction Banking 17
Figure 1.11 Key regulatory changes in the custody and clearing space and implications for banks Force / Regulation Description of impact Likely Scenarios Implications for banks T2S • T2S is a settlement platform being • T2S will happen but not be mandatory • A number of institutions are actively involved built and owned by the ECB • It may be late due to technical and in moving the project forward (European Central Bank) non-technical reasons • Some European competition looking at • Due to go live in Sept 2014 • It will unify settlement, but corporate providing T2S solutions to clients • Unifies settlement across countries actions, dividends and tax will be less • Others just beginning to consider the issue at all harmonised due to contracts/legal • Not all are convinced of the value T2S will add differences in differences in issuing countries Exchange • LSE / TX Merger February 2011 • NYSE/DB merger will proceed and • Not currently seen as a major issue. consolidation • DB / NYSE proposed merger include Clearstream (50:50 chance) This may change once greater clarity emerges announced March 2011 CSD competition • Increasing downward pressure • ICSD agency outsourcing for notary • Leading players see the benefit in and consolidation on revenue which may be function on issuer services is likely becoming a CSD accelerated by T2S to stop • Acquisitions not being widely considered • Additional expenses to be • Continued migration of international incurred, connecting to T2S issues from ICSDs to CSDs • Positioning further up the value chain Increased need • Increased regulatory requirement • Independent central bank liquidity • All included in the sample have identified this for collateral for Collateral as transactions move arrangements will cease area as an opportunity and client need on exchange (i.e. the end of cheap money) • Broker dealer community most advanced and • High quality collateral likely to • Banks are looking to collateral have the most to gain be in short supply leading to: services to compensate for a decline • Wider recognition that for most institutions, - Transformation in OTC derivative revenue existing technology and silo organisational - Immobilisation • Potential for business to migrate to structures not fit for purpose - Globalisation Europe post July 2011 and prior • A few institutions are looking at establishing to the implementation of EMIR direct custody presence in selected markets. Most, however, will continue to rely on an agent network Source: PwC A clear case in point is the shift to a industry of mobile payments and single cross-border payment network10, advertising11. Businesses are now which will provide companies with following the retail market in looking an opportunity to consolidate their to take advantage of the ease of mobile invoicing and collections onto a single payment. Again, banks can use this as platform. For banks, this is an opportunity an opportunity to collect and analyse to provide clients with more integrated data, both for their own needs and to and real-time information. Banks that provide insights for their customers. are geared up to supporting their clients in centralising collections and channelling the funds will also benefit Coming through stronger from a significant upturn in transaction Regulation is spurring a lot of market flows. Further opportunities include change and development quite aside the promotion of contactless and from the direct compliance requirements. mobile payments as part of the A properly co-ordinated and strategically- E-Money Directive, which has helped aligned approach to the new regulations to accelerate the development of what would help banks to take advantage of Eric Schmidt, Chairman of Google, the commercial opportunities opened believes will be a ‘trillion dollar’ up by these developments. 10. Single European Payments Area (SEPA) direct debit requirements are being introduced. By February 2014, domestic transactions within the Eurozone will need to move over to an International Bank Account Number (IBAN) based system. The UK is due to follow by 2017. 11. Financial Times, 22.06.11. 18 PwC Managing for performance Transaction Banking
Section 2: A model for performance management Article Brief synopsis Performance management: Many transaction banks are suffering getting straight to what matters from too much information and too little focus. We believe focusing on the right balance of important performance drivers and recognising the critical role behaviour plays are the key to managing performance. Core drivers in the areas of operational efficiency, value and control are explored in more detail. We also consider the impact of different organisational structures on performance management and behaviours and opportunities for increasing revenues. Understanding customer needs Sources of value differ significantly by segment. We explore the emerging needs of key segments: changing SME expectations and the impact of the digital tipping point; the multiple buying points emerging from credit disintermediation in the corporate segment and the evolving business models and pricing structures emerging in the financial institutions segment. PwC Managing for performance Transaction Banking 19
Performance management: getting straight to what matters At a time when banks are facing a raft of new regulations and changes in customer demand, transaction banking activities could make a significant difference to returns. One of the keys to fulfilling this potential is a more streamlined and coordinated approach to identifying and pulling the key performance levers of the business. Transaction banks are constantly Framework for performance under pressure to cut costs and boost management revenues. But performance often Leading banks are developing sharper suffers from a lack of clarity and ways to define value and improve precision in what actually creates value performance. This approach is built and how these drivers can be managed around the clearer identification of the to meet cost and revenue targets. What key performance drivers and alignment banks are missing out on could have of these with the strategic processes a significant impact on group returns. and critical behaviours needed to By way of illustration, for one client, deliver value. effective performance management of the transaction bank has the potential to generate up to a 16% increase What are the key in group revenues and an 8–10% performance drivers? reduction in group operating costs.1 We define an effective performance driver as something that: So why are banks finding it difficult to • has a meaningful influence manage for performance? It is not that over a situation banks lack information. The problem • is measurable is stripping this down to what really matters – the small but decisive set of • management has a degree of drivers that deliver value and the levers control over, i.e. that management that influence the value. This includes can do something about. what customers value, the processes needed to meet their needs and the behaviour and incentives within These performance drivers or levers the organisation, which that optimise can be influenced by management to performance. It is our view that better enhance performance and profitability, alignment with customer value will be this reduced cost or increased revenue. also result in improved commercial/ This could range from insights into shareholder returns. client needs and how effectively these have been met, to the efficient use of staff time or the level of standardisation and automation in a particular process. 1. PwC Analysis of company accounts 20 PwC Managing for performance Transaction Banking
Figure 2.1 Performance drivers can be identified through various lenses – there are pros and cons of each Performance drivers Metrics Examples of performance drivers Product revenue and cost drivers Unlocks an understanding of the Contributed key revenue and cost • Cost by type and process underlying drivers of value or metrics and highlighted metrics • Time to market Highlights the key synergies product performance, i.e. the related to underlying drivers • Level of value-added pricing between products in terms of underlying drivers of cost and (e.g. efficiency metrics, service • Standardisation revenue and cost components revenue, e.g. SLAs, process quality, etc.) and the importance • Innovation score efficiency, service, etc. of synergies across products • STP • Product penetration Customer (including sector and Highlights the importance of Informs key metrics – particularly • Customer share of wallet segment) drivers taking a client-centric perspective those focused on product • Engagement score to understanding value, i.e. development and service and • Customer retention levels Illuminates the key drivers of client need understanding client, market, operations to ensure a client- and customer drift across different sectors and segments competitors – the external centric measurement of • Trusted adviser status to inform solution development environment performance • Customer profitability Strategic processes across Identifies detailed performance Consists of a range of operational • Revenue , profit, operating JAWS business dimensions drivers across business dimensions efficiency, control and quality • Cross-sell ratio Provides a detailed view of performance – these were grouped across (including customer) metrics across • Market share drivers across different dimensions of the the strategic processes business processes central to • Operational losses business – highlighting the importance and refined delivering value to clients • % of key processes automated of cross-functional cooperation • % variance to agreed SLA • Staff and infrastructure utilisation • % of value adding activities within major core processes Source: PwC Although performance drivers are Cross-sale opportunities The customer drivers may differ likely to be similar across banks and However, simply focusing on products significantly according to the particular across product areas, the specific will not allow the bank to identify and segment and can result in very different business, organisational and operating capitalise on the all-important cross- cost to serve models. This is explored model and the selected customer selling opportunities. It may also in more detail in a subsequent article segments being served can have a on understanding customer needs encourage teams to operate in narrow significant impact on which drivers on pages 27 to 35. Figure 2.1 sets out silos. Therefore, it is important to take have the most influence on business account of the drivers of revenue and examples of typical categories of performance. cost at a customer level. At times this customer drivers. Performance drivers can be identified requires considering indirect revenue drivers. Examples might include Although customer drivers can help by understanding what drives revenues and costs at a product level. To illustrate identifying what creates closer identify what is important in driving this, Figure 2.1 sets out examples of engagement, which has been shown revenue, it does not always translate typical product cost and revenue drivers. to increase revenue and profitability. neatly into key management areas of focus as it is difficult to see the end-to-end impact on the business and how to manage in existing functional structures. PwC Managing for performance Transaction Banking 21
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