An IBM / Economist survey of the top 200 banks globally concludes that banks are too complex and not client-centric enough, and that the lower leverage required by new regulations holds the promise of motivating banks to address their complex infrastructures and pricing models.
Last year, as regulations were changing, we started to look at the cost of banking and what banks need to do to make a profit,” says Srini Giridhar, IBM IBV Banking lead, who spoke to us in a recent interview. “One of the major impediments of making a profit is the complexity of how large banks are set up. From our analysis, we think this complexity costs $200 billion dollars across the industry.” The fix, he says: simple, smart services. Banks can increase their pre-tax profits by 20% by reducing complexity, Giridhar says.
Almost all (90%) of the bankers said that to be profitable in the future, given regulatory changes occurring, transforming out of the status quo is critical. “It was either major transformation or incremental transformation but by and large, they were rejecting the status quo as a method to go forward,” Giridhar says. The top banks have already increased their capital levels substantially to comply with heightened Basel recommendations and are trimming riskier assets (that call for higher capital) from their books. But for every 1% of income from risky assets that banks reduce, they will have to at least double or triple their income from low risk assets to maintain the same level of profit, Giridhar points out.
The survey asked bankers about their pricing models, where they are with pricing today and what they want to improve on for tomorrow, Giridhar says. “In all cases, 65% of bankers that came back to us were in favor of moving away from their current system of pricing,” he reports. “All the big banks are saying they need to make pricing more customizable.”
For additional information read the article in Bank Systems & Technology: http://www.banktech.com/articles/229400509