Suresh Gupta, Partner, Global Financial Services, Kurt Salmon, discusses the growing importance of technology in the banking space and how current trends are further shaping banking processes and augmenting the role of the CIO in the organization.
ADAM MEHRER: Can you start by giving us a better understanding of your background and your role at Kurt Salmon?
SURESH GUPTA: My career began with Citi in their investment bank, and then I moved to Bankers Trust. I later joined Coopers & Lybrand, which became PricewaterhouseCoopers (PwC) following the merger with Price Waterhouse, and was a partner with PwC Consulting for 14 years. Prior to my arrival at Kurt Salmon, I worked as a partner at Capco for seven years—two years as an outside consultant and then five years as a fulltime partner.
Now I’m a partner at Kurt Salmon in our global financial services practice, where my role is to help drive the consulting practice for banks.
Why has it become so important over the last five or 10 years for banks and other industries to start business processes with technology? Why should the two be intertwined and work together to make business better?
It all stems from the changes that have occurred over the years in the financial services industry. When I was at Citi in the 1980s, the industry processes were highly labor intensive because it was a paper-based environment. For example, at the time, mortgage-backed securities were physically settled every third Wednesday of the month by exchanging paper delivery tickets with counter parties. Given the volume of paper we had to track, it was often an exceptionally hectic and chaotic process. I recall one specific occasion when Charlie Niessner, Citi’s head of mortgage-backed securities operations at the time, hunted for 2,000 lost trade tickets at two o’clock in the morning!
We’ve come a long way since those days. With straight-through processing (though most banks are not quite there yet, given their fragmented technology platforms), paperless securities, and settlement networks, the need for human intervention is greatly reduced. Bank business processes today are driven by a heavy dose of technology. All of our services involve processing information and data through technology, and we deliver those technology applications as products to our clients. Correspondingly, the nature of the business is more heavily intertwined with technology than ever before.
What is the importance of reference data for banks, and what are some new trends you are noticing in that area?
Reference data is the raw material we use for any processing we do for our clients, and it includes instruments, securities and bonds our clients have invested in as well as customer reference files and customer attributes. Customer attributes are demographic data that tell us whether the customer is married or single, if they have a family, etc. Reference data is a key input for any business process in financial services.
In the old days, we had separate reference data for every business line. If you were dealing with the DDAs, the bank deposit business had its own database, mortgage-backed securities its own reference file, and so on. One of the impediments in creating straight-through processing was figuring out how to create a "golden copy" of securities, or a client master account, and use that to support multiple business lines. We eventually figured that out, and now there are instances where reference data is not only shared across multiple business lines within an institution but also across multiple institutions. For example, while with a previous company, we had a reference data service that provided security master reference data to multiple banks.
Years ago, banks were quite hesitant about sharing data with other banks. Recently, we’re noticing with increasing frequency that banks are beginning to view at least the securities master account as a utility that multiple institutions can share. They don’t, however, share their client master data, since each bank is naturally intent on keeping its client base confidential from other banks.
How has the volatility of the market affected the industry and made way for technology to become a necessity as banks look at cost processes and efficiencies?
The 2007 crisis really turned the financial sector upside down. I was recently looking over some data that submitted that, in just the four years between 2008 and 2012, 461 banks have failed. I read another report from one of the research houses that revealed that Dodd-Frank and other regulations in Europe as well as North America had at least a 360 basis point impact on a bank’s operating costs. The crisis was really a wakeup call that the heady days of growth masking inefficiencies are over. Today’s banks are feeling increased pressure to reduce their operating costs, and those lower cost requirements will be expected year after year.
In banking and financial services in general, technology is the glue that integrates the different parts of the business process and thereby improves businesses’ capacities to process millions of transactions. If we have highly integrated business processes, then the only variable is the amount of hardware needed. For example, if there are a trillion trades, I might need an extra piece of hardware to store the increased amount of transactions, but I wouldn’t need to hire a thousand new employees. So technology is a great way to lower costs.
Another strategy for lowering costs, if you read some of the best practices advice for banks, is to move some processing activities to your customers. For instance, in the past, if I wanted to deposit a check, I was required to go to a teller. Now all I have to do is scan a check with my iPhone for it to be instantly deposited into my banking system. So the work that was traditionally done by bank employees is now being done by me, the customer, and I’m happier for it because it’s more convenient and makes me feel more in control. On top of that, the bank is able to run at a lower cost.
How does all of this work? And how does it help banks identify which customer segment to target?
There was a recent news article about Dodd-Frank and similar regulations that stated if you’re going to have a 320 basis point impact on your operating costs, the trick is to create an operating model that makes it much easier to exit certain businesses and/or make better use of capital by underinvesting in businesses or market segments that are not delivering superior margins. The only way to do that is to come up with a component business model that allows an organization to look at their business and services as components and to string together multiple components into a business process that services a particular market or customer segment.
The alternative, whereby one must deploy a monolithic legacy platform to service a particular business, is prohibitively expensive. A monolithic doesn’t provide you with the ability to disaggregate different parts of your application system, so it is much harder to string together only those components that are needed and to retire components that are no longer useful. Some of the leaders in the financial services marketplace are now moving away from those monolithic technology platforms to more component-oriented platforms—which is not a new concept, by the way. What is new is that that concept has now expanded into looking at businesses as a string of components which allows one to bring together various disparate business components to service new markets or divorce old markets that are no longer profitable.
Let’s talk a little about the new hybrid models and how they increase efficiency. Why should banks avoid the use of an industry model?
In the time period shortly after 9/11, we were advising banks to look at their businesses as a set of independent, discrete components and then bring those components together to service their markets and clients. We were also creating reference data as a shared utility across multiple business lines. Eventually, we realized if there’s a specific portion of reference data that is specialized for specific businesses, the client master account doesn’t work as a utility even if you combine it with other data because you still have a specialized team of professionals or bank employees working only for that line of business.
In working with a particular bank between 2008 and 2010, we found that the optimal solution was to adopt a hybrid approach. That hybrid approach allowed us to treat, for example, three separate but related components as one large component. Together, those components were so specific to a particular business that they were akin to a black box. This gave the bank much greater agility and efficiency than if those three components had continued to be treated as purely discrete in nature.
How has having technology function as part of bank processes reduced costs? What are banks doing to set that up?
Straight-through processing technology, which I mentioned earlier, is a great example because it has allowed us to continually minimize human intervention. A bank’s labor costs are typically more than 60 percent of their operating costs. Comparatively, technology costs are no more than 10 to 20 percent. Hiring a hundred new employees is a major cost, but in terms of hardware, the technology cost to buy extra storage doesn’t impact as much. Using technology to replace some of the human effort and reduce interventions in processing transactions makes it possible for banks to yield big dividends. And, as I mentioned earlier, having customers do part of the work reduces costs as well and is only possible with technology.
With this shift in the financial world post-crisis, we’ve also witnessed a shift in the role of the CIO in the organization. They’re now being asked to provide solutions for the business because products like the technologies you’ve mentioned help drive business growth and keep costs down. Why is this shift occurring, and how should CIOs approach this task not just in the financial sector but in a broad sense?
It all boils down to innovation in financial services. One could argue that an aspect of innovation is having an expert in quantitative analysis, or a quant, come up with a new CDO design, a structured finance product or another innovation through which you can create more liquidity and lower risk. In 2007, we saw the downside to innovation going haywire; people didn’t fully understand how illiquid or risky those products were. Having said that, it is innovation that has continued to drive the financial services business, and once you accept that, you can assign quants and other employees to come up with new products and services to further improve your business processes.
You can also use technologies to provide new products and services. Remote check deposit is an example of that. Or, if we look in the payments arena, one can use a tool like Google Wallet or Square. There’s a new Starbucks partnership with Square offering a smartphone app to Starbucks customers that automatically notifies a Starbucks shop when the customer enters. The customer’s name and face appears on the cashier’s screen, and all the customer has to do to complete the transaction is confirm his or her name with the cashier who will then verify it by matching the photo.
All of these innovations are obviously technology-driven, and CIOs have to be at the forefront of driving that innovation because they are the ones who can translate the use of new technologies to service business transactions. You’ll often find in big banks and financial services firms, such as Citi, Bank of America and JP Morgan, that the head of operations and technology is the CIO. That’s not a new idea—even in the ‘80s, Citi had a CIO as head of operations and technology—but it has become far more common to have the CIO at the table when a company is working together on business strategies and initiatives.
Do you see CIOs having more of a voice in the boardroom or becoming even more influential with the business in the future, given the increasing importance of technology? Or do you think these developments will level off in the next couple of years?
CEOs rely on technology to drive the business because they cannot move a strategy forward without technology expertise. So yes, I think that technology professionals will continue to be necessary, active members in executive management teams.
What are your thoughts on the value that third-party providers bring to financial institutions?
We’re noticing that banks are beginning to feel more comfortable engaging with third-party providers, not only in processing non-core activities but also in using vendors to assume responsibility for their technology infrastructures and operations as a one-stop shop. It allows banks the freedom to focus solely on front office investment banking or business banking activities. This represents a remarkable mindset shift from the ‘90s and even early 2000s when banks would never have considered doing anything like that. That’s a refreshing change, and new business models are now being created as a result.
8 November 2012