In 2011, global banking ROE dropped to 7.6%, significantly below the average cost of equity. Industry profitability is currently hovering at around 8%, down from the pre-crisis levels of 14-15%. Revenue growth continues to be weak, if not in decline, across most markets. The cost-to-income ratio, on the other hand, seems stuck at an unhealthy level of 60.
Across the world, bankers are pulling out all the stops to cut costs, increase efficiencies and reinvent their businesses around their customers. Managing cost, in fact, has emerged as one of the top priorities for the financial services sector. Given the acute focus on costs, it may be time to appraise the cost efficiency of one of the most strategic assets of the banking sector – technology.
Most banking technology infrastructures in play today are most likely the product of an evolutionary process that can be traced back to the days of product-centric vertically integrated businesses. Along the way, channel proliferation, industry consolidation and ad hoc modernization have resulted in complex over-engineered systems that struggle to conform to current standards of cost, flexibility or innovation. It is estimated that just simplification of these IT environments can result in a reduction of application and infrastructure costs by up to 50% and total IT costs by as much as 30%.
A first step towards IT simplification would be to eliminate or reduce the number of systems that are duplicating functions across business lines. In most cases, system duplication can be resolved by deploying enterprise-class components that not only reduce operational and management costs but also enhance business agility and innovation capability. These components also breaks down traditional silos to create a unified view that affords better operational control. Consolidating and standardizing operations across subsidiaries, by leveraging multi-entity, multi-country solutions, can also help banks manage costs more efficiently.
The road to new revenue streams and improved profitability has to start with a focus on reducing operating costs and maximizing current revenue opportunities. Decades of ‘bolt on’ systems upgrades have resulted in banking infrastructures that are too clunky, complex and costly to serve today’s business needs. Enterprise-class banking components can help banks rejuvenate their IT systems without having to shake existing infrastructure to its foundations.
Read our previous blog in the “Simplified Banking” series