TOP 10 CHALLENGES FOR INVESTMENT BANKS
Getting Fit: Aggressive Cost Reduction
Investment banks have been pursuing cost reduction for years. What will it take to achieve sustainable cost efficiency?
Investment banks have faced a challenging landscape over the past eight years, characterized by declining revenues, high costs, developments in digital and regulatory pressure—and the changes could continue. Through it all, the drive to reduce costs has been constant. And it might not go away: the focus on cost reduction remains razor sharp as companies continue to seek sustainable cost efficiency.
Governance, leadership and culture matter
Leadership matters. After an examination of the cultural and institutional personas of successful and unsuccessful cost reduction initiatives, we believe that the pre-requisites for success should include:
- A top-down mandate that crosses business and operating silos and enforces a “bank first” view rather than a desk or product orientation
- A truly front-to-back process to help verify that costs are truly understood, solutions address root causes and downstream effects are minimized
- A deep understanding of costs and their drivers
- A re-examination of what’s important to own and what customers will pay for
- A plan for the savings generated—whether that’s offsetting costs or investing them to generate new revenue
Building blocks for change
Many banks still may need to rethink their business models in parts or as a whole through:
- Further simplifying operations
- Establishing alliances with fintechs, other banks or players from other industries
- Redefining the role of the bank and tapping into the wider ecosystem
- Embracing utilities
But before transitioning to an ongoing spend-and-performance management technique, they must first undergo a cost-resizing exercise.
New digital technologies are not only disrupting traditional sources of competitiveness, but also raising the bar on what’s possible and setting new benchmarks for cost reduction. Cloud-based services and the “everything-as-a-service” model could be redefining how investment banks approach their operating models and IT systems.
The average large investment bank could save up to 11 percent in run-rate costs by moving from a private model to a public cloud-based model.
How masters of client experience play to win
The new digital ecosystem requires strategic investing
The new digital ecosystem offers many opportunities to reduce costs and generate new revenues, but this requires a strategic approach to technology investments for banks that could include the following:
- Fintech partnerships that supplement their offerings and increase efficiency
- Big data and predictive analytics that provide key customer insights and improve responsiveness
- Artificial intelligence that automates complex tasks that involve non-structured data and require learning algorithms
- Distributed ledger technology to deliver efficiency in areas such as cross-border payments, liquidity management, collateral management, syndicated loans, trade finance and securities settlements
Conclusion
Over the next decade, investment bank leaders who are seeking sustainable cost reduction should try to strike a balance between optimizing the existing core and investing in what’s new.
In the short term, that means finding opportunities to simplify, rationalize and automate, while at the same time clarifying—and changing if needed—the business model, moving toward a client-led approach and building a strong network of alliances. In the long run that could mean eliminating legacy systems, adopting blockchain and shared digital infrastructure, and refocusing human resources.
By moving beyond tactical cost reductions towards more strategic initiatives, investment banks might not only reduce costs and improve efficiency, but also set themselves up for sustainable growth in the future.
Get in touch
Bob Gach
New York
