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.ukWe 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 BankingManaging 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 3Contents
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 BankingSection 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 5ROE 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 BankingBut 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 7The 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 BankingManaging 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 9Figure 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 BankingAt 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 11Winning 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 BankingFigure 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 13Moreover, 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 BankingMaximising 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 15Figure 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 BankingDealing 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 17Figure 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 BankingSection 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 19Performance 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 BankingFigure 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 21You can also read
