By Bharat Malesha, EVP Fees and Expense, SmartStream
In the evolving landscape of the banking industry, the drive towards optimising the Cost of Income (COI) is more critical than ever. Banks and financial institutions are actively seeking strategies to enhance cost efficiency while also improving the transparency in their market facing fee. This pursuit is not just about cost savings; it’s about enabling transparency in their cost of income, making informed decisions, and aligning with firms efficiency and cost objective.
A recent executive roundtable in Singapore, brought together industry leaders to tackle the challenges of achieving transparency in COI. A focal point of discussion was the complexity surrounding various fee categories such as Brokerage, Clearing, and Exchange (BC&E) fees, Agent Bank, and Custody charges.
During the discussions, participants highlighted several key challenges:
- Difficulty in allocating internal costs: The intricate nature of financial services operations often leads to challenges in accurately allocating internal costs. This complexity is amplified by the multifaceted interactions between different departments and services, making it challenging to pinpoint the exact cost contribution of each unit.
- Escalating costs, particularly around technology: As banks and financial institutions leverage advanced technologies to streamline operations and enhance service delivery, the associated costs have been on an upward trend. This includes investments in gen AI, cloud computing, and bespoke analytical tools, which, while beneficial, add significant financial burden.
- Cost opaqueness for less liquid and more complex products and markets: The roundtable participants also expressed concerns over the lack of transparency in the costs associated with trading in complex products and markets. This opaqueness hinders effective cost management and risk assessment, complicating strategic decision-making.
Firms employ the services of 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 conversation also looked at the transformative potential of gen AI in fees and volume analytics. Gen AI is poised to significantly improve productivity and analytical capabilities by automating data analysis and decision-making processes. The emergence of in-house AI solutions, akin to ChatGPT, underscores a trend towards bespoke analytical tools that can enhance data accuracy, governance, and control.
With more and more institutions transitioning towards cloud technologies and adopting a SaaS model, cost management becomes a crucial aspect for savings, necessitating the adoption of industry best practices to monitor and manage these infrastructures (such as analytics tools, system monitoring tools capable of notifying the metrics in real-time to the stakeholders).
The roundtable discussions highlighted the significant importance of cost transparency:
- Ability to understand client profitability: Transparent cost structures enable financial institutions to accurately assess the profitability of each client, fostering more informed strategic decisions and client relationship management.
- Aid in allocating risk and influence pricing: Clear insights into operational and product costs help in better risk allocation and can significantly influence pricing strategies, ensuring that pricing is both competitive and reflective of the true cost base.
The roundtable also highlighted the importance of regulatory compliance and operational resilience in financial reporting and cost management. Specifically, regulations (like MAS658 in Singapore) mandate banks to maintain operational resilience, including robust cloud strategies and BCP. This regulatory requirement adds additional complexity to the strategic management of COI, requiring a delicate balance between innovation, cost optimisation, and compliance.
The journey towards enhanced COI efficiency is deeply intertwined with the need for increased transparency and the strategic use of technology. Solutions like ‘TLM 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 roundtable underscore the challenges and opportunities in managing COI, from navigating complex fee structures and regulatory landscapes to harnessing the power of AI and cloud computing. 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.
