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Data Management

02:15 PM
Michele Trogni
Michele Trogni

The Perks of 'SmartSourcing' Shared Services in Financial Industry

A breadth of vital but undifferentiated business processes are still being replicated across the industry. They are all candidates for centralization.

A perfect storm has engulfed the financial industry. Increased regulation comes amid a structural shift toward lower margins in trading and other businesses. The collision of these two elements -- one demanding increased costs and new technology investments, and the other demanding cost cuts in order to improve profitability -- creates waves that require the industry to chart a new course.

To be successful, firms need to think differently about their business, their core competencies, and their competitive advantages. Some organizations have retrenched as they race to cut costs, but the most sustainable approach is to seek solutions that standardize processes and provide access to updated technology in order to lower costs, improve quality, and reduce risk at the same time.

This is no easy task. In many ways, the financial services sector has much to learn from other industries that have thrived when forced to reinvent their operating models. Arguably, financial firms have not focused sufficiently on what really creates competitive advantage. They have resorted to replicating nondifferentiating processes. This results in uneven quality, higher costs, and more risk.

Today's regulatory environment requires firms to have higher standards for, among other things, generating and retaining customer information, trade reporting, and risk measurement standards. To be able to meet these standards, an institution needs to have high-performance office systems. In practice, most banks, particularly those built through mergers, have multiple back-office systems and cannot easily achieve the compliance standards required by regulators.

This poses real risks to shareholders. There has been a surge in the number of fines and sanctions for failure to comply with regulatory requirements. And the reputational damage can be immense.

The industry is increasingly acknowledging that certain business-critical processes are most effectively addressed by centralizing them. Shared services provide levels of efficiency, scale, purpose-built technology, and uniform standards that cannot be easily replicated by a single firm or by traditional outsourcing arrangements.

There are a number of examples of highly successful shared services companies in the financial industry. Visa and MasterCard manage vast IT networks and a range of supporting technology services on behalf of many credit card issuers. As a result, banks can focus their resources on product innovation, marketing, and customer service. In Germany, companies like Fiducia IT and GAD provide a range of technology and processing services to hundreds of financial institutions.

What other functions and processes are suitable for centralizing in today's environment? Areas that clearly differentiate a firm are important contributors to growth, and they would never be centralized. On the other end of the spectrum, areas of low differentiation are candidates for outsourcing or even elimination. The things in the middle -- those processes that are vital but are replicated across the industry, such as know-your-customer data management, reference data management, corporate actions validation, portfolio reconciliation, and tax data management -- are all viable candidates for centralization.

As the credit card industry discovered years ago, centralized services combine people, expertise, data, processes, and technology to deliver high-quality solutions. Users benefit from subscribing to a predefined standard of service, rather than managing complex processes in-house or through outsourcing arrangements. Operational risk is minimized, governance is improved, and costs are reduced by shifting from a fixed to a variable cost structure. In addition, centralization future proofs operations in the face of changing regulation, and it is more efficient for the industry when a service (rather than multiple firms) updates its workflows centrally.

Moving to a shared services model does not mean that banks are giving up control over decision making. In the case of KYC, for example, the service provides a verified customer profile. The decisions about whether to initiate new trading relationships, and what risk parameters to assign, remain with the bank. That's how firms can continue to differentiate themselves and compete in an environment where certain services are shared across the industry. The important distinction between the shared service scenario and the old approach is that the service delivers a standardized level of data quality globally that is both difficult and costly for any given firm to replicate.

Cost reduction is a near-term benefit, but there are longer-term advantages, too. For example, with the operational and technological burdens of managing KYC data lifted, a firm can shift resources toward areas where it has competitive advantages and can further differentiate itself from its competitors. Firms can become more nimble, be more customer-focused, and initiate relationships quicker while being more confident about meeting their compliance obligations.

It is time for the industry to change course and recognize that effective shared services are the key to compliance in the short term and vital drivers of growth in the medium term.

Monty Singh was appointed to the role of business leader of Genpact's capital markets and IT services (CMITS) business in October 2013. In this capacity, he is working to further strengthen Genpact's IT services offerings to create greater impact for clients, as well as to drive additional growth of its capital markets business. Before his current leadership position, he was the senior vice president and global leader for sales and marketing at Genpact, responsible for significantly strengthening the sales and marketing functions, including building enterprise-wide sales programs, bolstering global account management efforts, and applying best practices. In this capacity, he also led the company's growing process re-engineering business and led its relationships with all GE businesses, which he continues to do in his current role.

Michele Trogni is a managing director and head of enterprise services within the Solutions division at Markit. The Solutions business delivers versatile and scalable software platforms and services that help firms improve operational efficiency, improve quality and offer a ... View Full Bio
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