joint financial services infrastructures key … · 2018. 4. 26. · • business process ... joint...

© Oliver Wyman

JOINT FINANCIAL SERVICES INFRASTRUCTURESKEY CONCLUSIONS & EXECUTIVE SUMMARYJUNE 2015

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Copyright © Oliver Wyman

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JOINT FINANCIAL SERVICES INFRASTRUCTURESKey conclusions of the review

• Oliver Wyman has carried out a report for the Icelandic Financial Services Association during the spring of 2015

• Our key observation is that there are significant opportunities for the Icelandic FS sector to increase use of common shared platforms

• The future of banking will require participants to dramatically improve manufacturing costs while increasing the quality of the customer experience

• Globally the trend is towards increased appetite for outsourcing in the FS sector driven by cost pressure, regulation, globalization and digitalization

• Iceland is currently poorly positioned for the future:– 3 large banks have high operating cost when compared to international peers– The level of capital reserves will need to remain high relative to international peers to protect

against system risk– The Competition Authority has traditionally taken a conservative stance on cooperation– International banks will continue to compete to serve Iceland’s most valuable corporations

• Oliver Wyman recommends a cross governmental and industry committee is formed to develop a broad blueprint of cooperation across the manufacturing of financial products and services

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JOINT FINANCIAL SERVICES INFRASTRUCTURES Executive summary

• We see the need for both bank and policy driven initiatives to address Icelandic banks’ high cost base:A. Pull forces: Global trend towards even increased appetite for outsourcing in the FS sector driven by

cost pressure, regulation, globalization and digitalizationB. Push forces: Relatively high cost of financial services will force Iceland's largest companies to seek

financial services from international institutions • Our research indicates that there are significant opportunities for the Icelandic FS sector to increase

use of common shared platforms both through drawing on other countries experiences but also taking advantage of global trend towards increased outsourcing/sharing

• Smaller banks in e.g. Sweden and Denmark use a mutual model to reduce operating costs and compete with larger banks - given the size of the Icelandic banks this should be a clear gain

• There are multiple ways for FS institutions to outsource non-differentiating tasks and in our view the solution space shouldn’t be limited to Icelandic domestic solutions

• Furthermore, to maximize benefits of increased sharing the whole IT strategy needs to be assessed holistically rather than just taking one step at a time without seeing the big picture

• In Iceland the Competition Authority has traditionally taken a conservative stance on cooperation, while neighboring countries emphasis has been on consumer mobility, non-discriminative access terms to joint infrastructures (e.g. payment systems) and increased transparency

• While we agree that it is important to safeguard competition in small economies like Iceland, it is our view that enabling joint infrastructures and sharing of cost of non-differentiating value chain parts is key to promote competitiveness of the Icelandic financial sector

• Oliver Wyman recommends a cross governmental and industry committee is formed to develop a broad blueprint of cooperation across the manufacturing of financial products and services

© Oliver Wyman

JOINT FINANCIAL SERVICES INFRASTRUCTURESFINAL REPORT – EXTENDED VERSIONJUNE 2015

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We see room for both bank and policy driven initiatives to address banks’ high cost base

Today we will focus in on opportunities to shared infrastructures between the banks

Recap from SFF day presentation (27 November 2014)

Initiative Assumed impact on costs Total impact on pricing

Estimated impact of initiatives (illustrative)

Operating costs1

Cost of funding2

IRB migration

Review capital requirements

Other costs3 Review bank levy

Shared infrastructure between banks

Cost reduction programmes

Assume 50% of reduction from current levels to regional peer

level is achievable

Assume 60% of potential risk weight reductions (relative to Nordic peers) is achievable

Assume average CT1-ratio could be reduced from 24% to 19%

resulting in additional reduction of €0.5BN in CT1 capital

Assume current levy rate reduced by 50%

Potential reduction in operational and interest expenses would make a

25% reduction in interest income possible (keeping

ROE constant)

Focus of today’s discussion

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Today’s we will be answering three key questions; why consider joint infrastructures, what is typically outsourced and how have others done

1 WHY consider joint infrastructures?

2 WHAT activities do other industries outsource?

3 HOW have other FS players done this?

Today’s agenda

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A - Because we can

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Globally the trend is towards increased appetite for outsourcing in the FS sector driven by cost pressure, regulation, globalization and digitalization

A

B

C

D

Regulation• “As regulation has made balance sheet and risk

capital more expensive and harder to deploy, banks have strived to become more ‘client centric’”

Digitalization• “Digitalization in banking isn’t only about meeting the

customer online, but also take advantage of optimization opportunities that didn’t exist before”

Globalization• “Digitalization can be a double-edged sword, it will

allow small economies to tap into a larger global market place – but the benefits come at a risk”

Cost pressure• “Optimizing and adapt historical business models to

the new economic reality is driven by increased cost of compliance, transparency and owner’s demands”

Increased ability and appetite for outsource

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Smart sourcing in the FS industry can bring significant cost savings, as well as other benefits that are harder to quantify but key to preserve competitiveness

Smart sourcing cost savings sizingGlobal opportunities assessment

Perspectives

• The majority of IT, processing and support behind banking services is delivered in-house with platforms that are highly duplicative across players

• We estimate up to $10 billion of industry costs could be pushed out into an external supply chain (net savings of $4-6bn in scale economies)

• However, cost savings are only part of the potential benefits of outsourcing, other factors that are vital to meet customer demand and remain competitive are:– Flexibility and control– Innovation– Business contingency– Quality/Sophistication of offering

Area represents relative size of cost savings opportunity

Low Medium High

Source: Oliver Wyman analysis

Illustrative example(not Iceland specific)

Card payments

Core banking systems & administration

Com

petit

ive

diffe

rent

iatio

n

Ease of implementation

Settlement& Custody

Collateralmanagement

Clearing

Tradeprocessing

Trade executionEMS / OMS

Data &Analytics

On-boarding

HighMediumLow

Hig

hM

ediu

mLo

w

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B - Because we have to

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Operating cost and Income compared to total assets4

2013, %

Source: Bankscope, Annual Reports, Oliver Wyman analysis1. Peer set includes Nordea, SEB, Swedbank, Handelsbanken, DNB, Danske Bank2. Regional peers consist of: Aktia (FI), SBAB (SE), LF Bank (SE), Skandiabanken (SE), Fars&Frosta Sparbank (SE), Jyske Bank (DK), Spar Nord Bank (DK), SB 1 SR-Bank / SMN (NO)

Operating expenses / (NII + Net fees & commissions) 2010 – 2013,%

2011 2012 2013

75

70

65

60

0

Peer set average (regional banks)2

Peer set average (large banks)1

Islandsbanki

Arion Banki

Landsbankinn

4% 3% 2% 1% 0% 1% 2% 3% 4% 5%

0.9 2.0

Regional peers2 1.3 2.2

Landsbankinn 2.4 3.4

Arion 2.7 3.7

Islandsbanki 3.1 4.5

0.8 1.2

Nordea 0.8 1.6

SEB 0.9 1.7

DNB 0.9 2.0

Swedbank

Cost / Assets Income / Assets

Handelsbanken 0.7 1.5

Danske Bank

While benchmarking should be used with care, there is a marked cost difference between Icelandic banks and Nordic peers

Recap from SFF day presentation (27 November 2014)

If the Icelandic FS companies fail to optimize they risk losing largest domestic customers to foreign providers as they become unable to compete on price & service

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Low value-adding and non-differentiating parts of the value chain


As markets mature, companies are increasingly willing to outsource parts of their cost base - the FS sector is currently lagging behind other industries

Banking

Automotive

Telco

Level of maturityLeve

l of c

ost o

utso

urci

ng (%

of c

ost b

ase)

Industry maturity curve and level of outsourcing / joint infrastructures

Banking is a service sector which historically made outsourcing difficult but

digitalization is changing this

Industries with physical grids and product

components started outsourcing long time

ago


Across all industries, the tasks that typically get outsourced are the low value-adding and non-differentiating parts of the value chain

Area of differentiation and value creation

Willingness to outsource and standardize

• Client relationship management

• Service philosophy

• Marketing

• Service• Distribution• Marketing

• Design• Distribution• Marketing

• Customer service• Data

management• Clearing and

custody

• Application• Business process

• Assembly of components

• Assembly of cars

• Basic IT infrastructure

• IT support• Software

licenses

• Infrastructure, e.g. 3G network

• Manufacturing of components

Examples of tasks outsourced tasks across industries

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There are some shared FS infrastructures in Iceland at present, but there are a number of other opportunities to build scale though further sharing

There are significant opportunities for the Icelandic FS sector to increase use of common shared platforms by drawing on other countries experiences

State of shared FS infrastructure in Iceland

Outsourced / shared infrastructures In-house, opportunities for further outsourcing

Banking sector

RB• Online Authorization, Clearing and settlement• Deposits and loans solutions (innlána- og útlánakerfi)• Core part of the ATM and teller system functionality• Hosting of data centers, collaterals systems, large part of the

general ledgers

Advania: The customer interface and mid tier of the ATM and Teller system

Libra: Libra Loan & Libra Securities

Valitor, Borgun, Greidsluveitan: Card acquiring & issuing services

• Internet banks• Majority of core banking services e.g.

loans, collaterals, guarantees etc.• IBA for foreign payments• Mobile payments• Back office operations• The operations of both the ATM’s and

the Teller system

Insurance sector

CABAS: Joint damage evaluation system • Data sharing (e.g. fraud prevention)• Joint processers (e.g. claim mgmt.)• Damage assessments• Core insurance systems• Shared data and pricing models• Joint carriers


Standardization is key so that ancillary service providers can build scale by serving multiple clients – again focus on core competitive advantage is key

The iPhone is all about the design and customer experience…

…by standardizing each component Apple has managed to outsource almost all production and assembly work

Standardization will mean there is less room for special Icelandic solutions in terms of IT & back-end solutions

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Share Icelandic banks’ IT cost…

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Source: BEC, Cerdo

Smaller banks in e.g. Sweden and Denmark have use a mutual model to reduce their operating costs to be able to compete with the larger banks

• Danish provider of full service IT solutions for financial institutions

• Turnover (2013): EUR 150 M

• Ownership: jointly owned by a subset of its customers

• Examples of customers (50 in total):– Smaller banks, e.g. Spar Nord, Arbejdernes

Landsbank, Fynske Bank, Lollands Bank– Also larger, e.g. Nykredit, Swedbank, SEB, Citi, RBS

• Examples of services:– Administration of accounts, loans and customers – National and international payments including SWIFT– Online and mobile banking– Securities trading– Capital markets platform– Risk and credit management– Statutory reporting and compliance

Case study A: BEC (Denmark)

• Swedish provider of IT and process solutions for financial institutions

• Turnover (2013): EUR 32 M

• Ownership: Sparbanken Öresund and Sparbanken Syd

• Examples of customers (13 in total):– Smaller banks, e.g. Sparbanken Syd, Sparbanken

Öresund, ICA Banken, IKANO Bank, Marginalen Bank– Consumer finance: Nordax Finans, Bluestep, Collector

• Examples of services:– Full service banking platform (savings and lending)– Card platform– Trading platform– Customer services– Back office– Payroll services

Case study B: Cerdo (Sweden)

Given the size of the Icelandic banks it is clear that if dropped in another economy they would be forced to outsource to remain competitive

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…but there are many more options out there and perhaps we should look further abroad


In fact, the solution space is broader than just establishing a joint infrastructure domestically – we should challenge ourselves to think bigger!

Today

Expanded role of domestic joint

infrastructure providers

Multiple external providers

One external provider

AbroadDomestic

Separately

Jointly

The current trend in banking is towards joint

systems, e.g. RB

• Competitive advantage among Icelandic banks kept

• Different systems decrease system efficiencies

• Mitigates dependency on single players

• System efficiencies accessible for multiple Icelandic players

• Concentration risks in financial markets

• Increased bargaining power against external providers

• Economies of scale limited to the Icelandic market

• Governance and control kept inside Iceland

• Icelandic players will be small fishes in a big pond

• Innovations and efficiencies from foreign markets accessible

Perspectives

Perspectives


There are multiple ways for FS institutions to outsource non-differentiating tasks, with different ownership structures and governance models

Ownership Governance model Description

Mutually owned

Out-of-house domestic• Entity set-up and run separately from owners – in some cases the

service is at later stages also sold to non-owner institutions• Mainly domestic/regional focus to serve members’ operations

Regional / cross-border• Entity with several members in different geographies/jurisdictions• Global or regional set-up as a separate entity • Operations typically not tailored to and applicable for all members

In-house sourced• Legally separate entity but operated using in-house personnel and

platforms of multiple institutions• Useful when man-hours are low, but diverse expertise is needed

Third party owned

3rd party service providers

• Entity capitalizing on providing services for third parties• Typically, products are supplemental to outsourcer’s core business,

but have been developed as key tools inside their operations

Market infrastructure providers

• Separate entity integrating down/up the trading value chain• High regulatory pressure on MI providers and trading give increased

importance of MI related services

Publicly owned• Usually used for development of systems which are fundamental for

market’s functioning and safety • Applicable for systems with all market participant accessibility

A

B

C

D

E

F

There is no single best solution as there are trade-offs between cost savings, control and competition, which needs to be further assessed on a case-by-case basis


All structures are in use by different products, and the following examples clearly show the usefulness of the set-ups

Ownership Governance model Selected case studies

Mutually owned

Out-of-house domestic

Regional / cross-border

In-house sourced

Third party owned

3rd party service providers

Market infrastructure providers

Publicly owned

A

B

C

D

E

F

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Set up• Operated by Finans Norge• Permission from Data

Protection Authority, as competitive and sensitive customer data is collected

• Purpose– Reduce fraud– Mitigate double

reimbursement of claims– Spot suspicious customer

behavior

Across the Nordics• Similar system in Sweden,

GSR• System rejected in Denmark

due to the law of personal antecedents

Joint systems have been established in Sweden and Norway to prevent insurance frauds, but there are issues with the law of personal antecedents

Case study – Norwegian insurance claims database

“Through FOSS we are able to detect all attempts of getting reimbursed twice for a claim”

- Stein Hakkonsen, CIO Norges Forsikringsforbund

Source: Finans Norge, klikk.no and DinSide

Estimated savings on ~3–5% of gross premiums in Denmark

• Increased fraud detection and prevention

• Less fraud allows more accurate policy pricing, increasing customer fairness

• Lowered claims handling costs as fraud investigations are more efficient

• Might require exceptions from customer data protection since could enables misuse of system for sales purposes (prohibited in both Norway and Sweden)

Benefits & key learnings

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Case study – Euroclear settlement and custody

Source: Nasdaq, Euroclear

Settlement and custody services have been consolidated in several steps in the Finish and Swedish markets, giving large cost savings for Euroclear clients

2004 2008

1971

The Swedish Central security depository (VPC) was founded

Merger

APK and VPC merged to form Nordic Central Securities Depository (NCSD)

Acquisition

NCSD was acquired by the Euroclear, specialized in settlement and custody services

1997The Finish Central security depository (APK) was founded

“The Euroclear group is eliminating artificial boundaries and avoidable costs for clients conducting securities deals across national borders, often involving a multitude of intermediaries and different processing methods. Clients can together expect to reap back-office savings of more than EUR 300 million per year”

– Kjell Arvidsson, Chairman of the Board Euroclear Finland and Sweden, 2009

Estimated Swedish and Finish industry wide savings of ~€300 MM p.a.

Benefits

• Increased concentration risk as a larger part of the financial markets are dependent on a single operator

Risks

• Consolidation increases cost efficiency as– Maintenance is centralized– Product innovation and

development is paid jointly

• Alleviates trading across borders

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Mutually owned Swish uses an organizational model in which tasks and responsibilities are distributed and executed internally by the owning banks

Case study – Swish, real time money transfer application Benefits & key learnings

Organizational structure

Decisive mandate

Market communication

group

Swish council

One representative from each owning bank

Daily operations

Security team

Market team

Teams coordinated across banks, tasks split among banks

On demand

Legal/Trademark

Media

Experts within banks used as required

Owners

• Enhanced customer service by offering seamless digital solution

• Increased competitiveness of participant banks against market disrupters (e.g. Facebook)

• Low cost solution by not adding staff to a now mutually owned entity but building on existing resources

• Clear ground rules are key to minimize negative impacts from lowered competition, e.g.– Pricing discussions across

banks inside the operational teams are strictly prohibited

– Open infrastructure at fair pricing enables smaller Swedish banks (~10 to date) to tap into the network at low cost

• This type of solution requires the competition authority to grant significant trust to involved parties


Users

2.4 m~5 m potential users

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Nasdaq has started to integrate forward in the post-trade space by offering outsourcing of the entire back office functionality, leveraging its size for scale

Case study – Nasdaq back office solution

Outsourcing back office functionality gives cost efficiency savings on 25–50%

• Market infrastructure players are building increasing capabilities to service larger share of the value chain

• This is typically done by relatively small players and hence can be costly; however might be attractive to larger FS institutions at right price

• Can lead to increased power of market infrastructure providers, players which are subject to low competition already

Back office operations

(People)

Back office infrastructure

(Platform)

Market place

Middle office and client

facing activities

Post

-trad

e ac

tiviti

es o

f tra

ders

• Nasdaq’s traditional offering has been limited to market infrastructure products

• Market data storage and input• IT system communicating with the pan-Nordic market• Facilitates cross border transactions

• Direct interaction with the market, no intermediaries• Reporting to client and authorities

• Insights and information from back office system available for middle office operations

Nasdaq – Back office for hire


Source: Interviews with Nasdaq


We have provided perspectives on the three questions that we asked at the beginning… but there is a set of equally important additional questions




4 WHERE is the Icelandic FS industry heading?

5 HOW MUCH should we aim to outsource/mutualize?

6 WHO should drive this forward?


We have provided perspectives on the three questions that we asked at the beginning… but there is a set of additional bonus questions








Currently there are strict constraints on what systems the banking system is allowed to run as a joint infrastructure…

Deposit & payments

system

…thus the focus is on optimizing the pieces of the puzzle one-by-one…


…however, before we pick a favorite mix of solutions to join up infrastructures we need to take a big step back and look at the broader picture

Deposit & payments

system

…while in fact the whole IT strategy needs to be assessed holistically


Many banks are facing complexity and are thus embarking on big transformation project to simplify operations and “get the house in order”

# Area Components

1 Business model

• Products• Product features• Pricing • Distribution channels

2 Process architecture

• Functions performed by staff• Systems or external service

providers

3 IT architecture

• Applications, data and infrastructure supporting the business model and operations

4 Organisationaldesign

• Decision making processes, controls

• Roles and responsibilities, • Targets and metrics for the

organization Organisation Governance

Strategy

Process architecture

IT architecture

Business Model: Clients, Products, Channels

Origi-nation

Rating/Pricing

Account Servicing

CreditApproval

Collec-tions

End/Remark.

Applic.Mgmt.

Products & Pricing

Distribution channelsClient segments

People

Metrics

1

2

3

4

Target Operating Model framework Front-to-back architecture

Clear target operating model and “house-in-order” are prerequisite of a successful outsourcing/ infrastructure sharing program

3636© Oliver Wyman

There are also a range of external factors which require consideration and evaluation

Mitigation Trade-offs

Competition

Other macro economic factors

Job creation

Rigid customer data regulations and supervisory systems

• Allows customer movement

• Ensures product transparency

• Market share restrictions

• Minimum number of companies

Limiting Enabling

Financial stability

Cyber security

Customer choice

Barriers to entry

Price to customers

Ensure regulationlimits market abuse but still favourscompetition

Risk appetite evaluation for system set-up

Competition regulation

Concentration

Isolation Large scale• Enables

common use• Regional

integration

• System abuse is difficult

• Independency of foreign markets

System considerations

Concentration of risk can be negative for financial system stability. However, impacts on competition could be positive


High concentration of infrastructures brings cyber risks that need to be sufficiently anticipated and effectively mitigated

Sources: DI, IDG, the Guardian, BBC


Although competition law is fairly standardized between markets; interpretations and focus of competition authorities varies

• In Iceland there have been several competition law rulings in recent years where significant focus has been put on discussing low number of competitors and high market shares in the FS sector

• In the neighboring countries more emphasize has been put on:1. Barriers to consumer mobility within the banking market 2. Non-discriminative access terms to joint infrastructures (e.g. payment systems)3. Increased transparency in pricing

• Cooperation between the banks on specific topics has not been viewed as a major threat to competition as long as all involved parties follow the law and do not discuss pricing with each other

• The main difference in approach appears to be general distrust between competition authority and financial institutions – in the case of Iceland strict measures have been taken to avoid representation of competitors in joint boards, e.g. at RB

While we agree that it is important to safeguard competition in small economies like Iceland, it is our view that enabling joint infrastructures and sharing of cost of non-differentiating value chain parts would have net-positive impact and should be viewed on a case by case basis


Shared networks can decrease barriers of entry for new competition as the enable new market players to build a lean banking business model

• Established in Norway in 20002

• Norway’s first pure online bank• 378,000 active customers• ~250 FTEs

• Established in Sweden in 2007• Focus on online consumer lending1

• 50,000 active customers• ~25 employees

Source: Skandiabanken.no, sevenday.se1. SevenDay also has deposit accounts, 2. Established as a branch from the Swedish operations

Case studies of banks that have built their business models on joint infrastructure and large share of outsourced costs

Joint infrastructure thus do not have to have negative impact on competition as long as they are open to all market players at a reasonable price


There are many stakeholders and perspectives that need to be balanced and no single party can lead the transformation required single-handedly

Cooperation is the key - e.g. through cross-industry/government working committee

FMEOwners of FS institutions

Icelandic households

Financial ministry

Central bank

Icelandic corporates

Competition authority

Bank employees








We have provided some food for thought, but not all the questions have been answered yet...

…our intent is to start a dialog – which we hope will be a constructive one!

Case studiesAppendix

4545© Oliver Wyman

Small Danish and Swedish banks have expanded shared infrastructures to increase economies of scale

Case study – Small bank shared infrastructures

Estimated cost reduction on ~5–10% for a Danish bank with the BEC system

Description Danish full service IT provider Swedish IT and process solutions provider

Ownership Jointly owned by several clients Sparbanken Öresund and Bluestep

Clients +50 +10

Services • Administration of accounts, loans and customers

• Payments • Online and mobile banking • Securities trading • Capital markets platform • Risk/credit management • Reporting and compliance

• Full service banking platform • Card platform • Trading platform • Customer services • Back office • Payroll services

• Cost sharing potential– Many bank products are not

differentiated by the underlying IT platforms

– Development and maintenance is cost intensive for small players

• Allows competition with large players

Benefits

• Concentration risks, more customers would be affected by a system wipe out

Risks

Source: BEC, Cerdo, Bloomberg

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The joint ATM partnership in Sweden has reduced the number of large bank ATMs significantly, whilst keeping the local presence

• A joint Icelandic ATM system could give large cost savings through– Joint system development and

maintenance– Less and shorter money handling

processes, increasing transportation safety

– Reduced number of ATMs with the same service to customers

• Opportunity for small players to reach distant customers

• Possibility to increase ATM reach through shared costs

BenefitsCase study – Changes in the Swedish ATM market

Source: Bankomat, SvD

The number of large bank ATMs has decreased with ~25% since Bankomat AB was founded in 2010

Ownership • Bank separate ownership of ATMs

• Joint ownership of the founding banks’ ATMs

Coverage • ~2,700 ATMs in 2010 • ~2,000 ATMs today• 500+ locations• Cooperation with third parties to set

up new ATMs possible

Users • Cross bank ATM usage possible

• Different fee structures

• 10+ banks in system• Same transaction cost for all banks

• Concentration risks– Entire system wipe out– Decreased competition and market

abuse by dominant player

Risks

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Joint systems have been established in Sweden and Norway to prevent insurance frauds, but there are issues with the law of personal antecedents

Case study – Norwegian insurance claims database

“Through FOSS we are able to detect all attempts of getting reimbursed twice for a claim”

- Stein Hakkonsen, CIO Norges Forsikringsforbund

Source: Finans Norge, klikk.no and DinSide

Estimated savings on ~3–5% of gross premiums in Denmark

Set up• Operated by Finans Norge• Permission from Data

Protection Authority, as competitive and sensitive customer data is collected

• Purpose– Reduce fraud– Mitigate double

reimbursement of claims– Spot suspicious customer

behavior

Across the Nordics• Similar system in Sweden,

GSR• System rejected in Denmark

due to the law of personal antecedents

• Increased fraud detection and prevention

• Less fraud allows more accurate policy pricing, increasing customer fairness

• Lowered claims handling costs as fraud investigations are more efficient

• Might require exceptions from customer data protection since could enables misuse of system for sales purposes (prohibited in both Norway and Sweden)


4848© Oliver Wyman

Case study – Euroclear settlement and custody

Source: Nasdaq, Euroclear

Settlement and custody services have been consolidated in several steps in the Finish and Swedish markets, giving large cost savings for Euroclear clients

2004 2008

1971

The Swedish Central security depository (VPC) was founded

Merger

APK and VPC merged to form Nordic Central Securities Depository (NCSD)

Acquisition

NCSD was acquired by the Euroclear, specialized in settlement and custody services

1997The Finish Central security depository (APK) was founded

“The Euroclear group is eliminating artificial boundaries and avoidable costs for clients conducting securities deals across national borders, often involving a multitude of intermediaries and different processing methods. Clients can together expect to reap back-office savings of more than EUR 300 million per year”

– Kjell Arvidsson, Chairman of the Board Euroclear Finland and Sweden, 2009

Estimated Swedish and Finish industry wide savings of ~€300 MM p.a.

Benefits

• Increased concentration risk as a larger part of the financial markets are dependent on a single operator

Risks

• Consolidation increases cost efficiency as– Maintenance is centralized– Product innovation and


• Alleviates trading across borders

4949© Oliver Wyman

Mutually owned Swish uses an organizational model in which tasks and responsibilities are distributed and executed internally by the owning banks

Case study – Swish, real time money transfer application Benefits & key learnings

Organizational structure

Decisive mandate

Market communication

group

Swish council

One representative from each owning bank

Daily operations

Security team

Market team

Teams coordinated across banks, tasks split among banks

On demand

Legal/Trademark

Media

Experts within banks used as required

Owners

• Enhanced customer service by offering seamless digital solution

• Increased competitiveness of participant banks against market disrupters (e.g. Facebook)

• Low cost solution by not adding staff to a now mutually owned entity but building on existing resources

• Clear ground rules are key to minimize negative impacts from lowered competition, e.g.– Pricing discussions across

banks inside the operational teams are strictly prohibited

– Open infrastructure at fair pricing enables smaller Swedish banks (~10 to date) to tap into the network at low cost

• This type of solution requires the competition authority to grant significant trust to involved parties


Users

2.4 m~5 m potential users

5050© Oliver Wyman

It is becoming more common to use white-labeled system solutions, an cost efficient alternative to in-house platforms which still allows for customization

Case study – Saxo Bank online trading platform

Saxo Bank’s revenue sharing model allows technology upgrade with no upfront costs

Awards Trading platform

• Saxo Bank offers a complete set of tools for trading and investment strategies

• The online trading platforms enable trade in: FX, CFDs, ETFs, Stocks, Futures, Options and other derivatives

Worldwide white labeling of platform

• +100 major financial institutions

• White labeling partners include; Citibank, Banco Best, Banco Carregosa and Standard Bank

• White-labeled platforms are cost efficient as maintenance is centralized

• Product innovation and sophistication can increase as investment in development is shared by a larger group of users

• Some customization is possible to differentiate the customer experience between financial institutions

• Barriers to entry lowered, in this case as there is no upfront cost

• Banks become dependent on another bank’s infrastructure and won’t keep in-house IT development know-how



5151© Oliver Wyman

Outsourcing in fragmented Asia Pacific markets has proven to be cost efficient, establishing an example for increasing outsourcing opportunities

Case study – Citibank and UBS cooperation

E.g. brokers can save up to 50% of post-trade expenses through outsourcing

“Some elements of post-trade functions are very commoditized, where you can no longer claim any competitive advantage against your peers even if you perform them well, with only downside for doing them badly”

– Andrew Murfin, UBS, Asia Pacific Head of Group Operations

Asia Pacific Region

• Many exchanges serve small areas• Regulations are fragmented• Post-trade cost above Europe and US levels

Cooperation • In 2012, UBS moved its Singapore-based clearing and settlement activities to Citibank

• UBS’s middle office platform and Citi’s clearing expertise together constitute a comprehensive outsourcing offering

Asia Pacific Benefits

• Loss of control– Prioritization of clients are

inevitable in times of turbulence– Operations can be performed

on distant venues with low direct connection with client

Risks

• Post-trade back office outsourcing is a way to tackle increased regulatory burden

• Outsourcing back office operations can reap large cost savings– Shared development and

maintenance costs– Economies of scale

Source: Citibank

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Large back office cost savings can also be achieved through outsourcing, but comes with an increased cost of lost control

Case study – Post trade system outsourcing

Outsourcing of a wholesale bank’s all securities processing activities achieved +30% cost reduction

Global

Selection of post-trade activities

Clearing processing Settlement Collateral

managementAccount set-up & management

Outsourcing partner

+3 banks/clients needed to reach sufficient scale

Off-shoringis the long-term ambition

• Outsourcing back office operations can reap large cost savings– Shared development and

maintenance costs– Same people can handle the same

tasks for different banks

• The more standardized the tasks are, the more cost savings there will be (e.g. easier if all same systems)

• Such outsourcing only becomes economical if a sufficient number of participants is reach

• Off-shoring (longer term) can also increase the level of cost savings, but needs careful consideration as– High execution risk– Implications for job market


Source: OW expert interview, Accenture

?

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Inefficient and costly on-boarding systems and increased regulatory pressure have pushed financial information companies to develop KYC standards

Case study – Markit Genpact KYC on-boarding system

Source: Celent, Markit Genpact

+80 banks

+900 buy-side

+5000 corp.

Partner banks

Onboarding system

Estimated global industry redundant costs of ~$10 MM p.a.

• Centralized standards– Increase customer transparency– Mitigate fraudulent behavior– Enhance AML compliance– Increase financial sector reliability– Streamline onboarding processes

• Cost saving effects– Removes duplicate work– Gathers maintenance and

development processes

Benefits

• Misuse of system for sales/internal purposes

• Increased risk of theft as sensitive data is collected in one spot

Risks

Standardization,collection, enrichment and central administration of legal entity data

Inefficientonboarding and KYC processes

Stringent regulationfor KYC and AML processes

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Complete brokerage tools free up time and resources which can be spent on customer relationship building and increased understanding of customer needs

Case study – Söderberg & Partners financial technology

Source: Interview with Söderberg and Partners

Benefits

• Loss of control– Prioritization of clients are

inevitable in times of turbulence– Operations can be performed

on distant venues with low direct connection with client

Risks

• Cost saving potential – Maintain and develop in-house

systems is cost intensive – Product innovation and


• Increased customer knowledge and service– More time and resources can

be allocated on customer relationships

– For insurance brokers, it is easier to match customer needs with available products

Söderberg and Partners’ financial technology platforms

• A complete tool for insurance brokers and financial advisors

• Provides customer reports and analysis tools

• Enables customers to log on to system

Visi system

• Tailored system for insurance advisors

• Tools reduce meeting preparation time and in-meeting analysis

• Alleviates compliance and administration

Visi finance

• Develops Consilio, an advanced tool for meeting and online advisory

• Allows automation of advisory services

• Advisory services are expected to be key going forward

Visi System Visi Finance

5555© Oliver Wyman

Nasdaq has started to integrate forward in the post-trade space by offering outsourcing of the entire back office functionality, leveraging its size for scale

Case study – Nasdaq back office solution

Outsourcing back office functionality gives cost efficiency savings on 25–50%

• Market infrastructure players are building increasing capabilities to service larger share of the value chain

• This is typically done by relatively small players and hence can be costly; however might be attractive to larger FS institutions at right price

• Can lead to increased power of market infrastructure providers, players which are subject to low competition already

Back office operations

(People)

Back office infrastructure

(Platform)

Market place

Middle office and client

facing activities

Post

-trad

e ac

tiviti

es o

f tra

ders

• Nasdaq’s traditional offering has been limited to market infrastructure products

• Market data storage and input• IT system communicating with the pan-Nordic market• Facilitates cross border transactions

• Direct interaction with the market, no intermediaries• Reporting to client and authorities

• Insights and information from back office system available for middle office operations

Nasdaq – Back office for hire


Source: Interviews with Nasdaq

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The prevailing market conditions across Europe imply a search for volumes, entailing regionalization of infrastructures

Case study – Regional payment systems in Europe

Source: ECB, Svenska Bankföreningen

• Consolidation increases cost efficiency of running the system – Increased scale – Maintenance is centralized– Cost of product innovation and

development is shared

• Harmonization and alleviation of cross border payments

• Helps cross-boarder FS supervision of fragmented EU economies

• Increased systemic risks need to be understood and effectively mitigated


?Suggestion by the Swedish Bankers’ Association for evaluation by the Riksbank

Shared Nordic payments system

Responsibilities are split between the three central banks operating the interbank payment system, e.g.:• Development• Maintenance• Back-up

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joint financial services infrastructures key … · 2018. 4. 26. · • business process ... joint...

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