Banks are being asked to do more with less, at a much faster pace than ever before. Facing challenges such as rising operational costs, margin erosion, and increasingly complex client demands, it can be difficult to choose between protect mode and growth mode. Striking the right balance is critical.

The traditional ways banks have faced those challenges – optimizing infrastructure and operating models, cost cutting, and exploring new products – on their own might no longer be enough for some institutions. That’s where Cate Dawson, our Head of Product for Financial Institutions, sees partnership playing a pivotal role.

In this first conversation in a series with Cate, she digs into:

• The top three challenges banks are facing
• The tools they are using to adapt
• The potential of bank-to-bank partnerships

Q: Cate, the financial services sector overall is going through a lot of changes. What specifically is impacting banks?

Cate: The financial services sector has seen a tremendous amount of disruptive change recently, with the increasingly complex regulatory and compliance landscape, the accelerated advancement of technology, the constant evolution of cyber threats, and rising expectations from clients. 

All financial institutions continue to face rising costs, shrinking margins, and evolving service demands, however potentially creating significant burden for the small to mid-sized institutions.

From a cost perspective, there’s been significant increases in infrastructure, vendor, and operational costs largely due to legacy infrastructure modernization, regulatory change, and increasing cyber needs. These areas are eating into resources and funding pools which historically have been available for new product development. 

The sector is also in an environment of highly competitive pricing, driven by significant fee compression. The top four providers represent 60% of the market and the top 10 representing 85%¹. The competitive pricing being established by a small group of providers is driving a race to the bottom for pricing and is challenging the value of other historical differentiators.

Client demands are also accelerating as they seek more modern technology, innovative products and services, and support in solving their own business challenges.

Basically, banks are being asked to do more with less, but at a much faster pace than ever before.  

Q: How are banks working to solve these challenges?

Cate: The most common first steps are to review your infrastructure and operating model to look for cost cutting opportunities. Is your operating model “fit for purpose?” Do you have duplicate functions or platforms? What can be automated?

And of course banks are exploring emerging technologies and intelligent automation tools like AI and machine learning to address some of those costs. For example, looking to these technologies as an option to solve manual exception processes that historically couldn’t be automated.

They are also looking, in the short term, to launch new products that open access to new revenue streams, client segments, or regions. This includes investing in areas of growth like ETFs and alternatives or expanding higher margin capital markets products.  

However, it’s important to be highly strategic with these initiatives and plan ahead. Steps taken today to address costs or increase revenue may actually have long-term adverse impacts.  Launching new products or implementing new technology today may reap immediate benefits, however, they require a long-term commitment to ongoing investment to ensure these products remain competitive and effective. Today’s investment strategy may inadvertently be creating additional contention in the future to an already challenged pool of investment resources.  

Q: Do you think there are other solutions they should be considering?

Cate: We believe that partnerships offer a new path forward and create the opportunity for mutually beneficial and long term success for financial institutions, especially for smaller and mid-sized banks where the current landscape is exceptionally competitive.

Two institutions with complementary business models or client books coming together to strengthen their competitiveness can create a formidable business proposition. Strategic bank-to-bank partnerships create a bi-directional opportunity to share expertise and innovative technology while also sharing costs which ultimately creates an attractive value proposition for their clients.

For example, in one of our own partnerships, another bank leverages our custody platform and technology to provide a competitive and best in class global product to their clients, which affords scale, expertise and coverage.  It also creates a foundation of shared investment focused on growth and future development of differentiated products and features on the platform. Through partnership, the bank can retain their home market presence and focus on providing the expertise their clients expect.

Q: Do you think we’ll see more banks looking to partner with one another?

Cate: Absolutely.

In the institutional space, we have seen some acquisitions of tech vendors by the large global banks, which is not a feasible route for smaller and mid-sized banks. While all banks leverage a number of technology vendors or Fintechs today, we anticipate a growing opportunity for bank-to-bank collaborations. Two smaller banks who both contend with the same challenges, who don’t compete directly with each other, can complement each other strategically and grow business together across different geographies and different product segments, while sharing lower costs. This makes the partnership far more attractive to both parties and increases their ability to compete with the large global banks in their respective home markets.  In essence, these banks come together to grow and differentiate the services that they can provide their clients. 

In today’s environment, a bank can’t be everything to everyone. Partnerships provide the opportunity to do more with less.

In our next conversation with Cate, she’ll share more about how to decide if partnership is the right option for your institution and the factors to consider when building it.