Capco Blog

Davos 2012 – Should everyone bank on innovation?

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

Comments

Banks working together is a fantastic opportunity to cut costs and potentially improve revenues, which will improve shareholder income. Business to business (B2B)in the non Financial services space works very well.

"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." I am interested in how this exact percentage and number was reached.

"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." This correlates directly to the final panel discussion led by the Columbia University professor at the joint event held by Capco and Baruch on February 9 in New York City.

Jason,

Thanks for getting in touch.

Currently our own and industry research puts the global financial services industry costs total at over $2,500 billion. In addition we know that return on equity (RoE) needs to increase 3% or even more to return acceptable ROE above 12 %

The benchmark cost/income ratio for financial institutions is currently around 56%. So a 20% fall in costs overall is required to deliver the RoE required by the industry.

Given the current total cost figure of $2,500 billion, a reduction of 20% is around $500 billion.

Rob Heyvaert, CEO, Capco

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