Bankers aren’t ready to start sharing yet

Three years ago Tidjane Thiam stirred hopes that the banking industry was looking at new ways to tackle its bloated cost base. The chief executive officer of Credit Suisse Group AG said his company was working on a common platform with another lender to share expenses.
The project has made little visible progress since then, and it’s not because the pressure on banks to become more efficient has eased; there’s a deeper resistance at play here to the notion of combining or outsourcing certain functions.
Trying to share costs with your rivals does present difficulties, but they shouldn’t be insurmountable. For a sector whose revenue outlook and profitability is deteriorating, the possible gains from outsourcing aren’t trivial, as was highlighted in a recent report from the management consultancy McKinsey & Co.
Almost half of banks’ costs come from doing stuff that doesn’t set them apart from their competitors, McKinsey finds. Much like the car industry in the 1990s, the consultants argue that banks could outsource much of their “production” to third parties. Trade processing, collateral management and “know-your-customer” functions are just some of the things that could be farmed out.
In Europe especially, where bank valuations are much lower than during the 1990s, every penny counts. So why have bankers not pushed harder on sharing costs?
There are some practical reasons. Because financial services are exempt largely from value-added tax, they wouldn’t be able to recover the VAT they’d pay on outsourced services. That could offset some efficiency gains and potentially make some shared services less appealing.
Then there are the regulatory concerns and demands. As much as 12% of a bank’s costs are soaked up by anti-money laundering processes and the monitoring of customers, making it a possibly fruitful area for cost savings. But sharing these processes with other banks wouldn’t shelter a lender from its legal duties. If anything went wrong, the responsibility would still lie with the individual bank. As such, it would still feel beholden to check this information even if it’s held on a common platform.
That said, a raft of money-laundering scandals in Europe — and the hefty fines that will almost certainly follow — have added a sense of urgency. Six Nordic banks are creating a joint company to handle “know-your-customer” data.
Generally, the biggest obstacle to shared services is getting buy-in from banks, with the efficiency gains often not deemed enough to offset the loss of control and flexibility.
The industry outlook — especially in Europe — has become sufficiently grim to warrant a rethink. More than one-third of the world’s banks are sub-scale, according to McKinsey, while their business models are broken and they may have no option but to sell themselves in an economic downturn. With such a background, any chance to cut expenses shouldn’t be ignored.
—Bloomberg

Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News