The banking industry operating model is broken and needs dramatic reinvention for banks to survive in the longer term.

The clear parallels

As we look at the banking industry operating model today, it looks similar to that of the airline industry in the late 1980s.  The entire business value chain proprietary owned and operated by the airlines themselves, including non-core functions, such as ticketing, luggage handling, ground services and catering etc. This model resulted in little to no recurring investment in the non-core functions that were considered low value, cost centres. In reality, these functions were instead subject to continuous cost challenge without investment. This approach did little for client experience, operational efficiency and risk management. Morale of the staff who had the thankless task of managing and maintaining service continuity in these functions was extremely low (sound familiar?). Further, this model distracted investment and management focus from delivering differentiation in the airline’s core proposition. The outcome – poor quality services, customer dissatisfaction and consistent failure to deliver on a strategic return on equity; and in some cases business failure.

Thankfully with the benefit of hindsight, we can also look to the airline industry for the solution – adoption of a supply chain model.  Integration into an eco-system of specialist providers/strategic business partners providing non-core services and functions. By developing standardised services on multi-tenanted platforms to multiple airlines, these specialist providers were able to achieve utility scale and the platform investment not possible for a single airline operator. In turn, this allowed the airlines to focus on differentiation of proposition. The outcome – improved cost income ratios, better quality support services and enhanced customer experiences, resulting in improved returns on equity.

However, despite these clear lessons, and banking industry executives agreement on the topic, industry body research and advice from leading strategic advisory firms over the years – the industry still remains lethargic and little action has been taken.

Are banks now running out of time?

The last pit stop? Time for bold late-cycle move. These were the headlines of McKinsey’s latest Global banking annual review 2019. The report provided bank executives with a very clear call to action as the global banking industry approaches the end of the cycle.

The need of the hour is to industrialize tasks that don’t convey a competitive advantage and transfer them to multi-tenant utilities.  Reinvention of the traditional operating model itself is the imperative.”

The likely recession to follow the Covid-19 pandemic, the increased potential for credit events, the growing cost of operational resilience will further weigh on banking industry profit and compound the problem.

Delta Capita recently secured a $150m capital investment to expedite delivery of its Capital Market Infrastructure Provider (CMIP) strategy – to become a leading specialist owner/operator of non-core bank services – packaged infrastructure, technology and operations capabilities delivered on multi-tenanted utility platforms.

This investment was secured following successful delivery of a number of specialist managed service solutions in the areas of KYC/AML, Structured Retail Products and Pricing & Risk. The investment will be used to extend our services in the areas of Trade Reporting, Post Trade Processing, Operations Risk Control, Asset Servicing, Reference Data and Sub-Ledger Accounting.

Delta Capita is actively looking to deploy this capital in partnership with early adopting clients under either a purely cost reduction play or a strategic joint venture with co-investment.

The capital investment completes the five success characteristics that must exist when selecting the right strategic business partner for achieving success in making a bold operating model transition:

  1. proven track record in delivering operational critical services;
  2. a credible, industry recognised leadership team;
  3. access to technology solutions;
  4. transformation leadership experience & scalable integration capacity and;
  5. investment capital.

To those bank executives that have been mandated to make a bold move to permanently reduce the cost and management burden associated with owning and operating non-core bank functions…please get in touch, we are here to help you succeed.