2012-08-01 – London
The Financial Service industry is facing historically low returns in the aftermath of the financial crisis. This is causing many headaches to management teams and open polemics with shareholders and other capital providers. In general terms, these low returns are due to the increased cost of capital, very low interest rates, significant overcapacity in the industry and increasing regulatory and reporting requirements.
More importantly, the traditional solution for these problems – industry consolidation through large scale mergers – is not an option, as regulators specifically favour the opposite. In addition, numerous non-traditional financial players are breaking into several business areas. For example, telecommunications companies are now providing payment and savings services to their clients, while internet-based companies are providing peer-to-peer funding for start-up companies and projects.
Management teams have focused on two main areas in order to resolve this situation: decreasing their cost of capital and reducing their cost base. One solution that could enhance cost cutting strategies includes business process automation.
Reducing staff numbers is the main cost cutting strategy currently being used, although this is being constrained by increased reporting and regulatory requirements. On their own, reducing a firm’s headcount will also limit top-line growth, which in turn limits profit growth. As a result, managers have the difficult task of reducing headcount while still maintaining their existing capacity, which can only be done through business process automation and increases in productivity.
Business processes automation and productivity increases are highly correlated. During the last few decades, the introduction of IT-based technologies has boosted productivity in different waves, starting with personal computers, databases and software, and latterly internet and social networks. Financial services companies have always been on the forefront of new IT developments; but as a consequence their IT systems have been overlaid by different legacy systems.
Ironically, this is preventing financial services companies from taking full advantage of the newest developments in technology, as rebuilding their systems is too expensive and too risky. For many, the great inter-connectivity between players within the financial industry even makes rebuilding impossible.
In summary, companies within the financial services sector need to invest heavily in software solutions, in order to centralise their operational models and to automate their business processes and thereby underpin their efficiency and profitability. However, these software solutions should be flexible enough to adapt to their legacy systems and to handle the challenges derived from regulatory pressure. In addition, they have to be secure and transparent in order to minimize operational risk.
