Cost-cutting has been a high priority in the financial services industry for many years, so it is strange, then, that some of the biggest cost centres are often overlooked. Fees and expenses—costs incurred by dealing with brokers or exchanges—are accepted as a part of doing business, but with the right systems and accountability they can drive significant savings. Bharat Malesha of SmartStream tells us how.
Every year, financial institutions incur a multibillion spend on variable expenses, and the impact on profitability is significant. Whether it is brokerage fees, settlement costs, or many other non-transactional fees, there is often a lack of transparency and accountability that means banks do not realise the potential efficiencies that they could uncover.
Capturing the right data on fees and expenses could have a huge impact on the costs of doing business. It would enable banks to create clear paths of ownership for fees and, using this information, they could negotiate relationships with exchanges, brokers and clearing houses. Banks only need the right systems and processes to take control of these expenses, and get a clear picture of a major cost centre.
“Banks and financial services institutions operate in a complex environment across different geographies and legal entities, and they incur a lot of cost,” says Bharat Malesha, executive vice-president of fees and expense management at SmartStream. “Fees and expenses, particularly brokerage, clearing and exchange fees, represent the second-largest cost for these organisations, second only to compensation, and these fees vary according to transaction volumes.
“This is glaringly clear, but although banks have invested heavily in many areas, they often overlook fees and expenses, usually because they are not on anyone’s critical path. But banks need more transparency as costs become more important after a decade of seeing their margins squeezed. Someone needs to take control of this cost across the organisation. At the moment, there is no team or individual that looks after it, so there is a lack of internal leadership,” he concludes.
Investing in a smart solution
The process of creating efficiency begins with capturing the right data. SmartStream helps banks to create a single data repository that replicates what their agreements with counter-parties are and the rates that have been agreed bi-laterally. Exchanges and other elements of market infrastructure that publish rate cards can be easily managed on a global basis. Moreover, SmartStream can interpret those rates across many banks, which saves its clients from duplicating those processes.
A financial institution’s ability to recognise and achieve potential savings is determined by how it can support effective processes with complete and accurate information. SmartStream’s TLM Fees and Expense Management solution has been specifically developed to drive savings to the bottom line and to enhance profitability by using state-of-the-art technology to help banks strategically manage their variable expenses. It does so by putting in place an end-to-end automated process that can accurately substantiate variable expenses accurately across high volumes of transactions and can ensure that fees are apportioned exactly.
The solution not only drives a reduction in variable expenses, but can improve client profitability, enable the dynamic pricing of bank services, support automated accounting and drive operational efficiency.
“Banks need to tackle the fragmented ownership of these costs,” remarks Malesha. “They need to consolidate processing, reporting and analysis, and look across global volumes to identify where their spending is not effective. Transparency leads to control and oversight, so they need to understand what is driving these costs.
“Banks have a data-driven approach from the front office to the back, and automation brings standardisation, so we can see the details around those costs. Our approach is all about increasing transparency and efficiency, consolidating fees and expenses into a single process, and having global analysis and reporting. We increase automation to improve operational efficiency and financial control,” he says.
The level of detail that the solution provides is unprecedented. It brings together vast amounts of data from each client in such a way that a bank can create a quick view of what drives cost with each customer. In short, banks have the ability to respond quickly to changes in variable costs and can put themselves in a better bargaining position in regard to fees.
“We can pinpoint why any change happens,” explains Malesha. “We can see why costs go up in relation to changes in volume. The technology we offer covers all asset classes – equities, listed derivatives, OTC derivatives and much more – in a single platform across all categories of fees and expenses. With a single platform and a single data store, a bank can allocate cost to the right part of the business, and develop cost-sharing processes.
“It also allows banks to negotiate with their counterparts. They can go to brokers, exchanges and clearing-houses and have a dialogue over fees dependent on their flows of business. They can also analyse how efficient they are across different markets, which means they can make better choices about where to trade,” he concludes.
A standardised solution
Every bank will have different areas in which it can drive efficiencies. The gains are different for each institution and while there is no standardised implementation that drives savings in the same way for every client, there is a technology platform that standardises information flows to reveal the unique value proposition for each organisation. The central premise is always the same – knowledge is power.
“Banks can optimise the relationships they have with brokers, for example, and decide who they should use for their transactions based on an analysis of costs. They can identify the biggest pain points, where spending can be impacted and where action can be taken. Not only that, they can measure client profitability and the impact that fees have on customers,” Malesha explains.
“We worked with a tier 1 global bank and built comprehensive front-to-back processes, including a catalogue of its fees structure, and brought its volumes into the platform. Overall, it gained savings of up to 7% on the impactable areas, which is very significant and drives the project towards being self-funding. It is all optimising the costs of execution, which drives efficiency. The level of savings depends on how well a bank manages fees and expenses to begin with, but in any bank the process must be automated – it cannot be done manually.”
Malesha knows this as SmartStream’s team initially came out of a bank, where the operational team gained much of its experience. The company is now a global service provider with clients in the thousands, including many well-established and respected banks.
“We don’t just sell the platform, we provide entire managed services,” Malesha adds. “We derive best practices from all of our clients’ relationships with brokers and exchanges in order to benefit all of the organisations that use our system. We have coded and predefined all of those relationships within our system, so they are already there for the benefit of any new client. That drives more value for everyone.
“That said, all of our customer data either remains within their own infrastructure, or, when hosted by SmartStream, it is kept segregated. The data on our clients’ operational activities does not co-mingle. Data security is essential,” he explains.
In the current regulatory environment, it has been hard for banks to look beyond investment in systems that target anything other than compliance, but in an increasingly competitive marketplace, in which new players are disrupting the traditional model of banking services, it is vital to target cost control and efficiency. In order to stay ahead of the curve, banks must begin to think about new technology investment, and sooner rather than later.
“A lot of investment has been blocked out to cover regulatory compliance – for instance with MiFID II – but budgets are now opening up again and cost control could be a key focus,” Malesha notes. “The industry increasingly understands the value of what we do in the fees and expenses area, so our business is growing.”
Using the technology and services from SmartStream, banks can get real value from their transaction data. All that it needs to add is the necessary internal oversight.