At present that may express itself in two possible ways. The first is focused on European growth, the second on global growth. Differentiation of services will hinge upon the support for new services, led by the one resource all firms are aggregating – data. However, there are clear operational challenges that need to be addressed by Nordic banks in order to realise this potential.
1. Considering new service offerings
Firstly, banks need to assess how they can provide differentiated services to clients in order to win their business. The 2019 Blue Paper from Oliver Wyman and Morgan Stanley on asset management and wholesale banks noted that “Full service banks could look to increase outsourcing for their asset manager clients in activities that are expensive and provide little competitive differentiation, such as regulatory reporting.”
Large banks are developing data services in order to add greater value for clients. In a presentation to investors this year, JP Morgan noted under the heading ‘Reshaping our approach to data’ that it was unlocking the power of machine learning to change the way it does business with clients, while BNY Mellon said in its end of year report that it was making investments to provide data management solutions to clients.
These services not only provide additional revenues, they potentially change the dynamic with their clients – asset managers. Sell-side firms need to support their clients as they transition from fundamental investment towards more structured investment models. Where asset managers are able to extract quantitative information from their sell-side partners, their relationships are more symbiotic; for example if the broker can quickly adapt its service to fit a new investment model, investment outcomes are more likely to be achieved.
2. A single view
Nordic banks have been keen adopters of new technology, but replacing legacy technology has been difficult, as it has across the whole industry. To offer better access to data for clients, and even to deliver outsourced reporting services, banks need to have a centralised data architecture that will enable them to manage access to information in a controlled manner.
That requires one of two things; a data layer that sits above the existing legacy technology or the replacement of the legacy technology. To step in where other European banks are not able to support client need, Nordic firms must adopt data- and client-focused technology strategies that allow them to take existing data flows and centralise them.
This model has a very practical value. For example, having a clear understanding of securities inventory and its use helps both settlement and collateral management, processes which carry very expensive consequences when mistakes are made. Asset delivery is costly if poorly managed and the reconciliation of assets and – where delivery is missed – there is the issue of managing the subsequent fines; after which there is the planning, reconciling and accounting of cost, all of which require careful management.
3. Taking a long-term approach
Building a data-led business offering will not create success over night. Banking is a relationship business and sell-side firms need to build services that create a relationship over the long-term. By reducing response times and providing tangible benefits, from cutting administration costs to helping clients realise tighter spreads when trading, Nordic banks will win new customers over time. The key metric to success is the cost/income ratio, which banks will need to work down from the industry average of 60% to below 50%.To achieve that, they will have to underpin their business with a more flexible technology architecture, helping it to rapidly build scale and launch new products, without becoming uneconomical.
Senior management needs to assess how their technological investment has been focused on ‘game-changing’ technology historically, and how that compares to longer-term service improvements in the future, with greater investment in their back-office systems which can support and deliver front office returns.
There is still a strong reliance on legacy mainframe applications in the Nordic markets, particularly in the back office. Replacing these with cloud-based systems will support the ability of sell-side firms to help clients with change and innovation.
4. Steady change
Building relationships with clients through data-led services will maintain slow-burn, long-term advantages against other banks. The strengths that Nordic banks have in dedicated balance sheet commitment and strong early adoption of front end systems are often in contrast to the support provided by other European banks, and supporting risk trades for clients will be complemented to a great extent by tailored services based upon data analysis.
Within Europe, the common data protection architecture will help a bank using data-led services to grow rapidly, easing the access to other European jurisdictions that share that rule set. As a result the use of cloud-enabled services will flourish. That will support cross-border revenue growth and create a flexible revenue/cost balance.
In other regions such as Asia Pacific, the use of cloud-based technology will need to be tempered by careful permissioning and controls, to ensure that local data protection rules, specifically around cross border movement of client information, are not breached.
Turning the increased collection of data for regulatory purposes into an advantage, fuelled by the data that is collected, can allow Nordic banks to build a new line through organic growth.
About Torstone Technology
Torstone is a leading global provider of cross-asset securities and derivatives post-trade processing technology. Torstone’s cloud-based, award-winning Inferno platform is fast, flexible and future-proof. It enables global financial firms to reduce their costs, achieve greater control, minimise risk, and drive operational efficiency. Combining many decades of investment banking expertise with in-depth global financial market and technology industry knowledge, Torstone offers agile, secure, scalable, and cost-effective solutions.