Open For Business
This week brought news that UBS and Credit Suisse are exploring sharing back-office costs.
A deal is yet to be struck due to ongoing conversations regarding client confidentiality, but these two industry powerhouses (and fiercely competitive rivals) appear to be negotiating cooperation across compliance, settlements and trade processing. This comes after UBS CEO Sergio Ermotti said that banks can no longer afford separate back-office functions because of tighter margins.
It’s been brewing for some time. Tidjane Thiam said back in 2016 that Credit Suisse was in talks with another bank about sharing databases and servers. The swiss banks have long harboured plans to sharing back-office functions on a larger scale with the stock exchange, which they own. And it’s highly probable that banks in other jurisdictions are looking at collaboration as a way to drive efficiencies and financial performance.
This trend is significant for a number of reasons, which I’d like to examine in greater depth. Speaking candidly, the replication of several back office operations across multiple financial institutions is a value destroyer. It’s a great example of a redundant cost that confers no benefit to anyone. Sharing costs makes a lot of sense, and we expect to see banks doing this more and more. We’re living in an era of rapid technological advancement, which is fundamentally altering the structure of the banks and the wider industry. Mr. Ermotti is already on record saying that his bank could employ about 30% fewer staff within a decade due to the impact of technology, so the recent cost-sharing negotiations should come as no surprise.
Make no mistake, technological progress and rising competition are compelling banks to adopt new approaches and forge new models. Regulation is another key driver. MiFID II has forced banks to divert resources into regulatory compliance, and they are adapting as a consequence. According to Accenture, 9 out of 10 global financial services executives foresee increasing compliance costs. Investment in technology to integrate the new regulatory framework is the order of the day for all banks, and they’re looking for creative ways to fund it.
Interestingly, when it comes to technology, many people in our industry are confused as to whether they should go down this new “shared utility” model, which commoditizes elements of financial services, or whether technology is a differentiator, something that drives competitive advantage and unique selling propositions. The short answer is that it is both.
Here at Origin, we believe that banks should not be building utility technology in-house. This is one of the key reasons why we started our company. Instead, they should be partnering with innovative external parties, like Origin (there are numerous others, too), who build and manage a holistic infrastructure that can grease the wheels of the market together. These offerings should be developed as utilities, so the cost is split amongst all users.
There is certainly a business case for investing in bespoke technology, but only if it truly adds value and yields a clear advantage over competitors. In areas such as pricing, trading and decision making, this often makes sense.
Cost-sharing is nothing new or scary. It’s something to be embraced, rather than viewed with suspicion. In fact, many smaller, less established companies and industries have been using it to their advantage for years. As a small business, we take advantage of “shared back office” services all the time. We use outsourced accountants, lawyers, and many more for our professional functions. We use Amazon for our servers. We work with a design agency for our graphic design. A content marketing agency helps with our online content. By stripping away these distractions with the help of experts, we can focus on our core competencies – building the Origin product and growing our community. For banks to really succeed with the customers and shareholders, they should be doing the same.
Every bank will have a different internal strategy when it comes to their infrastructure, technology, and a different answer to the question that asks what to build internally and what to buy from a vendor. Here at Origin, we recognise this. So, we’ve built Origin with an “open architecture”, driven by APIs. This means that different institutions can make use of different parts of our system and integrate that into their own infrastructure, depending on their set up. Some banks may use the full offering, as they don’t have the resources to build something internally. Others may have built something bespoke, but they can still integrate our external data on our issuers into those systems using our API.
Times are changing. To ensure our industry remains profitable and relevant, we need to be more open, more collaborative, and more focused on the unique value that each of us has to offer our customers. This “open architecture” is the future of capital markets technology.