Key findings of the recently launched whitepaper ‘End-to-End Efficiency: Highlighting crucial bottlenecks for private banks in Singapore and how they can be eased out' – written by Private Banker International and sponsored by DTCC – highlight how best to mitigate challenges arising from evolving regulatory demands, rising cost-income ratios and increasing complexities on numerous levels.
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The private banking landscape has gone through an unprecedented transformation globally. Singapore – a crucial wealth management hub and a magnet for the global wealthy – is also adjusting to the new realities of the industry, battling myriad challenges and trying to find ways to lasting success.
The purpose of this research was to gain a comprehensive understanding of how private banks in this crucial wealth hub are mitigating imminent challenges and roadblocks, achieving end-to-end efficiencies while ensuring client centricity, and establishing future best-practices. The objective was to obtain quantitative as well as qualitative industry insights. PBI carried out an exclusive survey with 20 senior executives from IT and operations units of private banks operating in Singapore, followed by six exclusive, in-depth, C-level interviews. The key findings, detailed below, are essential for private banks to survive and thrive:
Challenge of the three-Cs: Compliance, Cost and Customer satisfaction
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By GlobalDataFor the majority of private banks in Singapore, the most crucial concern continues to be regulatory compliance. This is followed by regulatory reporting. Squeezed profit margins and high cost-income ratios and digital disruption are also among the top five concerns.
Unsurprisingly, compliance is the top-most priority – in line with the banks’ primary concern area. This is followed by customer satisfaction and risk management.
Additionally, 58% of respondents revealed that their IT budgets have increased in the last two years by 0-10%, and 80% of respondents cited regulatory demands as the primary reason behind the rise. Approximately 21% of respondents said their IT budgets had increased in the previous 24 months by 11%-20%. The smallest minority of respondents (3%) said their IT budgets had actually decreased during this time period.
Other risk management demands were also cited as a factor behind the IT budget increase. Some banks attributed the budget rise to capability upgrade, business growth requirements, digital disruption and digitisation.
The many layers of fragmentation hindering cost-income ratios and efficiency
Fragmentation is an enemy of operational or business success and PBI’s research found that private banks in Singapore are victims to it. However, the nature of fragmentation is not limited to the technology front but also the data, process, and operational fronts.
IT vendors and systems fragmentation heightening risks: Well over half the respondents (57%) said that using different software vendors and systems leads to a complex overall technology infrastructure. Only 5% of respondents said they are completely happy with their current IT infrastructure, while 38% of respondents said they are happy with different vendors but open to streamlining the systems.
Approximately 82% of respondents cited IT systems fragmentation as the top data management issue for their banks, followed by traditional business silos (56%) and data duplication (43%).
Singapore’s IT vendor space is crowded with many players offering pieces of technology, adding to the existing fragmentation. Additionally, many private banks still have legacy back-end systems, making the all-round infrastructure ever more complicated and rigid. Keeping the overall infrastructure agile and cost-effective requires increased standardisation.
It will also be rewarding for private banks to choose umbrella-partners – one-stop-vendors that empower the bank with a suite of solutions. Streamlining the systems as well as providers is an essential next step.
Tackling the multijurisdictional ‘Cost and Complexity’ fragmentation: Overwhelmingly, 81% of respondents divulged that operating in different jurisdictions within Asia Pacific (APAC) made their IT strategy more complicated while 75% of respondents said it made their IT spend more costly.
The cost and complexities of being multijurisdictional have been primary reasons behind certain global institutions retrenching or downsizing their booking centres in APAC. Being multijurisdictional also impacts the banks’ ability to leverage IT resources, models, architecture and potentially consolidate them for economies of scale.
Private banks in Singapore, undoubtedly, need a more coordinated approach, and this is where automation can help. State-of-the-art back-office architectures go a long way in mitigating challenges and costs of being multijurisdictional too.
Manual intervention in the middle-and back-office amplifying risks and process fragmentation: Another key pain-point is how manual intervention in the back-and middle-office is making private banks risks prone, with 99% of respondents agreeing with this statement.
These manual interventions are ultimately hindering profits and customer experience. One reason behind the existing manual intervention levels is the fast pace of regulatory changes. However, relying on manual systems is not sustainable and more automation’s required across the entire value chain at private banks. There has also been a cultural inclination towards hiring more staff members to manage tasks. This is not sustainable either.
There are some areas, however, where manual intervention becomes unavoidable such as client-and account-onboarding, KYC and rhythmic review of clients. Another manually intensive area is the way in which banks manage corporate actions.
There needs to be a fundamental understanding among the management at private banks around where true value can originate when processes are IT enabled. Private banks can seek real value from more automation and standardisation.
When asked if they are happy with their existing middle-and back-office technology infrastructure and processes, approximately 64% of respondents said they are ‘happy but more work needs to be done’ Only 19% of respondents said they are ‘fairly happy’ while an even smaller segment said they are ‘very happy’ (5%). This is a straightforward indication that many private banks’ technology infrastructures need upgrades.
Data fragmentation: The importance of achieving smooth data-flows (especially for big banks): Private banks in Singapore, currently, not only have client sensitive data to worry about but also counterparty data. The post-trade ecosystem is critical, but it’s often an overlooked part of their data management prerogatives despite requiring highest levels of execution, risk mitigation, integrity and resiliency.
While some banks have gone the distance to bring in increased automation, there is a long way to go for most private banks to adopt and implement a centralised approach to collateral data management.
Overwhelmingly, 100% of respondents to the PBI survey revealed that private banks need to centralise and automate their reporting activities to respond to high regulatory demands as well as ensure data quality.
The bigger the bank is in size, the more important it is for the institution to have an organised and efficient data management framework in place. As data volumes and variety increase, counterparty data fragmentation and discrepancies pose significant threats. Approximately 83% of respondents agreed with this statement.
It will only be beneficial for these private banks to partner with specialist third party firms that can allow for more centralisation and assist in bringing in automation across the gamut of data management requirements.
Rise of RegTech to ensure a coordinated and compliant approach
Singapore has garnered global spotlight when it comes to positioning itself as a FinTech hub. But private banks have only recently started taking note of RegTech’s far-reaching potential.
Automation is at the core of RegTech. It brings clarity to the way private banks interpret and manage compliance and regulatory reporting, enabling freedom from the cumbersome, largely spreadsheet-based approaches.
There is no doubt that RegTech can help Singapore’s private banks increase efficiency, reduce operational risks, automate mundane compliance tasks and provide a clear view of the volume and variety of data coming in.
Simpler, safer, stronger: The importance of STP in managing the ‘new middle-office’ and back-office functions
There is an obvious need for private banks to increase straight through processing (STP) rates to reduce manual intervention and manpower costs. The research findings indicate that current workflows in the middle-and back-office of private banks are sub-optimal, and in some cases, there have not been adequate investments.
In the years past, many banks have attempted to combine some of the middle-and back-office functions. The middle-office of the bank typically includes functions that are both client specific and non-client sensitive, such as reporting of securities and trades (this can differ from institution to institution).
With the increasing regulatory requirements private banks are starting to ‘grow’ their middle-office again. This gives more of a reason to turn to automation in a bid to become more efficient and manage surging headcount costs.
KYC and AML due diligence, client-onboarding and regulatory reporting were cited as the top areas where more automation in the middle-and back-office can help, in the PBI Survey.
IT solutions are key to developing and managing this ‘new middle-office’ successfully. The important next step, also, is finding ways in which banks can work – not only internally but with counterparts – to derive more STP as clients look to trade complex structured products.
Need for non-captive outsourcing alongside automation rife in lower margin environment
More than half of the respondents said they have already outsourced select middle- and back-office functions to third party firms and more private banks need to do it.
Though many private banks do outsource select middle-and back-office functions, a majority of this activity has been limited to captive outsourcing – working with a subsidiary company.
However, PBI’s research reveals that both the regulator and banks are getting increasingly open to non-captive outsourcing and are on the lookout for trusted partners. But outsourcing in and of itself is not the final solution. Private banks need to find the right third party organisations to streamline complex processes to better focus on areas of core competence.
When it comes to factors that influence a private bank in choosing their non-captive outsourcing partners cost effectiveness seems to be most important. Operational efficiency and robustness of offerings are other key aspects. Past Experience, stability, reputation and risk management are equally crucial.
The key to achieving success in non-captive outsourcing and in partnerships with other third party firms is for private banks to be thoroughly prepared. To do so, private banks need to be able to build a Vendor Management capability within their organisations.
Understanding the value of STP and identifying where automation can be beneficial can also be looked upon as non-flashy ‘innovation engines’ for private banks.
