Nishant Bhatia, VP Fees and Expense Management
In today’s rapidly evolving banking sector, optimising the Cost of Income (COI) has become increasingly fundamental to the controlling market facing fees like brokerage, clearing, exchange, regulatory, settlement and custody, and market data fees. Financial institutions are actively exploring strategies to optimise market facing costs while also ensuring improved transparency. Implementing a sustainable COI strategy is a wider focus that involves fostering continued transparency within the business, enabling data driven decision, and aligning with the broader objectives of financial institutions’ operational efficiencies and cost management. As financial institutions continue to navigate this landscape, having an effective and sustainable cost optimisation strategy will be key to their success.
Recently, in Singapore, we gathered to discuss the strategic management of COI, particularly the significant expenses associated with Brokerage, Clearing, and Exchange (BC&E) fees. While these costs rank among banks’ highest non-compensation expenses, they are often managed with limited coordination across regions and desks, resulting in inefficiencies and reduced transparency.
As competitive pressures intensify, there is a growing call for financial institutions to adopt a proactive, data-led approach towards managing COI. By aligning technology and analytics with operational goals, financial institutions can identify key cost drivers, optimise spend, and establish a sustainable, strategic expense framework, complemented by a robust and controlled operational process.
Some of the key challenges:
- Lack of unified process: The intricate nature of financial services operations often leads to challenges in consolidating and unifying operational processes. This complexity is amplified by the multifaceted interactions between different departments and services, making it difficult to pinpoint the exact cost contribution of each unit. This is one of the foremost reasons why financial institutions struggle to implement an effective cost strategy.
- Limited technology in day-to-day operations: Operational processes of such complexity require the support of a robust technological framework. Most financial institutions still perform these day-to-day operations manually, making them error-prone, labour-intensive, and unsustainable in the long run.
Firms employ trade data analytics to gain deeper insights into transaction volumes, associated fees, and effective rates, specifically allowing for a more transparent and improved strategy to manage COI.
The discussions highlighted the significant need for:
Transparency in COI management
The management of BC&E costs, while critical, is often fragmented. Many financial institutions lack a consolidated, near-real-time view of these costs, making it difficult to understand spending patterns or to react swiftly to variations in expenses. This lack of visibility limits the ability of COOs, CFOs, and other leaders to make informed decisions about cost allocation and profitability across business lines.
COI transparency is essential for accurate pricing, profit assessment, and strategic decision-making. By establishing a granular, trade-level understanding of COI, firms can pinpoint where expenses occur and take steps to optimise costs in a more targeted manner.
Data-driven approaches to cost optimisation
Data analytics plays an increasingly pivotal role in COI management, allowing banks to examine transaction volumes, fee structures, and effective rates across different trading activities. Such insights make it possible to identify patterns and anomalies, helping institutions to pinpoint cost-saving opportunities.
For example, analysing usage patterns across traders, books, and regions can reveal significant rate disparities and highlight areas for expense reduction. By using dashboards and centralising data from various fee categories, firms gain a holistic view of BC&E costs, enhancing governance and providing a stronger basis for cost management decisions.
Building a strategic framework
A structured, strategic model for COI management offers far-reaching benefits. By embedding governance principles that emphasise transparency, control, and data-driven analysis, financial institutions can unlock sustainable cost efficiencies. Some firms have achieved recurring savings of up to 10% by adopting a structured approach that leverages technology to monitor expense drivers and enhance visibility.
Benefits of a sustainable COI strategy
- Enhanced control and visibility: Centralised data and advanced analytics provide deeper insights into fee structures, enabling a more informed approach to cost management.
- Increased awareness and accountability: Cost awareness within an organisation is essential for implementing effective and sustainable cost strategies. Insights into market-facing costs and trends create an immediate focus on high-spend areas, fostering a controlled and efficient environment.
- Long-term cost reduction: Establishing a strategic COI framework creates ongoing savings potential and improves operational resilience.
The journey towards enhanced COI efficiency is deeply intertwined with the need for increased transparency and the strategic use of technology. Solutions like SmartStream’s Fees and Expense Management are pivotal in providing financial institutions with the tools needed to manage market-facing fees effectively, ensuring accurate expense substantiation and the proper allocation of fees to the appropriate entities. The insights from the discussion underscore the challenges and opportunities in financial institutions face in managing COI. As financial institutions continue to evolve, the focus on regulatory compliance, technological innovation, and strategic decision-making will remain a key aspect of enhancing cost efficiency and operational resilience.
