Back-office moves to the forefront

At a recent conference of the British Banker’s Association it was suggested that back-office processes would soon move up the strategic agenda of private banks. Based on Scorpio Partnership’s recent research into this area, it appears there is still considerable scope to improve operational efficiency by modernising back-office processes. Scorpio research, which looked at transaction processing practices among a sample of 30 Swiss, US and UK private banks, showed that nearly one-third have partially or completely manual processes for trade execution, confirmation and affirmation. As the chart illustrates, UK and Swiss private banks were twice as likely to have a manual element in their connection to their brokers compared with their US peers. While this research related specifically to trade processing, it reflects the broader back-office environment at most private banks where there often remains a high level of manual involvement, or a patchwork of automated methods that are not entirely suitable for the task. The result is some shocking examples of private banks passing on extraordinarily high settlement costs directly to the client – not to mention the unnecessary operational risks. Scorpio’s research highlighted that alongside the Markets in Financial Instruments Directive (MiFID), fund transaction processing is already top of the back-office strategic agenda. Fund transactions already account for 31 per cent of all private banking trades worldwide among the sample, and the figure is expected to rise in Switzerland and the UK. While there are sizeable fund trading platforms available, not one is universally acceptable or seen as having the requisite coverage of global funds. Another area of concern is the growing percentage of overseas trades. While an automated institution might be able to predict a straight-through processing ratio of 98-99 per cent in its home market through in-house brokers, links to the domestic stock exchanges and systems set-up with its prime brokers, it will often have no such luxury in foreign markets, especially in the less developed jurisdictions. This is a particular problem in Switzerland where investment strategies are biased to overseas markets. The third significant area of concern is related to trading exotic instruments such as structured products, hedge funds and derivatives. These are increasing in use, but require a higher level of manual intervention. One way for private banks to cut operational inefficiencies and their back-office costs and improve risk management would be to work with a third party. But the Scorpio study showed most private banks prefer to retain most, if not all, back-office processes in-house. Interestingly, given the high rate of manual processing, many banks indicated that an in-house solution is more likely to result in a smooth (if costly) administrative function. This would suggest that large-scale outsourcing still remains a matter of industry debate rather than industry practice. However, the trend is clearly in that direction with many banks already outsourcing back-office processes piecemeal. Ultimately, this will mean that banks opting to manage the back office in-house will be forced by the competitive environment to compete on a value-added basis. Moreover, private banks may increasingly need to look at their back-office processes as a potential source of differentiation. While private banks continue to wrestle with how to differentiate their front-office solution, Scorpio research clearly demonstrates that most clients view investment products as commodities, while their relationships are judged by the staff, the quality of reporting and timeliness of administration. It may not be sexy, but there are growing indicators that the back-office may be the next battleground for service differentiation. If so, it is not a moment too soon. Ted Wilson is managing partner at wealth management strategy think-tank, Scorpio Partnership