Capco Institute Blog

Cost cutting and better risk management remained high on the European financial services agenda at the recent World Economic Forum. Institutions worldwide are facing similar concerns, because of the ongoing instability in the current economic environment. Yet cost cutting initiatives and the move to further enhance risk management are often undertaken to the detriment of what customers today are looking for – innovation.

Regulation is intended to create transparency, but if not managed efficiently, it can run the risk of stifling business. Financial institutions need to re-investigate the way they look at regulation. They must think about how they can configure their business and technology to meet the increasing need for transparency.

There are signs, however, that an industry shift is starting to take place. Institutions realize that return on equity demands that the focus on core activities and services can be spun out or procured from technology service providers. In addition, some banks are already working more closely with other banks - in some cases even with competitors - to share non-proprietary IT infrastructure and platforms, and as a result drive down costs.

Our estimate is that global financial services institutions still need to reduce total costs by at least 20% - or approximately $500 billion* as they strive to get back to the return on equity levels they were achieving before the crisis. It goes without saying that this is not an insignificant figure. Any move to further reduce costs, deliver greater shareholder value and provide the customer with the ever increasing levels of experience they continue to demand needs to be well thought through.

Regulatory reform shows no sign of waning resulting in the new normal of higher capital burden. The institutions that will survive will be ones that look at how investments in innovation and restructuring of IT infrastructure will benefit them – and their customers - now and in the future.

*figures are given in US billions