While the year 2018 ended on a good note for the financial sector, with many analysts projecting double-digit return on equity (ROE) figures, 2019 was a tough one for many global and local financial institutions. During this time, there was a slowdown of economic activity due to political tensions around the world, which included the uncertainties brought about by the United Kingdom’s withdrawal from the European Union and the strained relationship between the United States and China. And with the effect of the ongoing pandemic on the economy, the current year is not much better off. In fact, analysts expect that the ROE of the 50 largest banks in the world will not breach the double-digit mark even by 2021.
Like any other type of business, financial institutions are also set on eliminating unnecessary costs, identifying areas that allow revenue leakage, and reducing overall expenses. During periods of uncertainty, banks, investment companies, brokerages, insurance companies, remittance firms, and other types of businesses under the financial sector are keen on channeling their resources into new technology. In particular, many financial entities are looking into systems that can improve the company’s overall efficiency, support future growth, help the company adapt to the changes brought about by the times, and provide a better experience to the customers that continue to patronize the business.
Here are areas that present financial institutions with opportunities to cut down on expenses:
Compliance doesn’t earn revenue for financial institutions, but it’s a necessary cost that saves the company from having to pay multifold fines due to anti-money laundering (AML), know your customer (KYC), and sanctions violations. In the past 10 years alone, regulators have sanctioned global and local financial institutions with fines amounting to USD 36 billion. In addition to monetary losses, brands that get involved in financial crimes also suffer from reputational damage, as such a scandal can erode the public’s trust in the business.
The cost of compliance, on the other hand, is nothing to sniff at. It’s estimated that the financial sector, as a whole, spends USD 180.9 billion to comply with regulators and to prevent illegal activities from taking place. An average company spends 57 percent of its compliance budget on labor alone, while 40 percent is invested in technologies that will make its AML reporting and investigation teams more efficient. The remaining 3 percent is allotted to other needs.
Changing policies, the need for specialized compliance functions, and the conflicts between the requirements of different regulatory bodies have caused compliance costs to blow up over the years. Many banks and financial institutions have adopted a reactive approach to these changes, which doesn’t work well for their budgets and the future needs of their companies. To curb compliance expenses, financial institutions need to adopt a strategic view of compliance, one that invests in future-proof systems.
Most companies rely on solutions that solely address their current compliance needs, which is a seemingly economical choice. In the long run, however, the cost of overhauling such a system exceeds the cost of signing up for a compliance program that offers updates as new regulatory policies roll out. By investing in future-proof AML solutions, the company can avoid the additional cost of onboarding specialized staff members just to ensure compliance and improve the effectiveness of its financial crime prevention and investigation program.
Process Reengineering and Centralization
Financial processes and services must continually change to suit the demands of the market and the needs of customers. Modern banks and other financial institutions process a large number of transactions every day, so there’s a pressing need to streamline and automate their processes. A highly efficient system will allow banks to attend to the needs of their clients in a timely manner.
Having a centralized processing center, for one, is a solid step in eliminating inefficiencies in the bank’s processes. Because most of the work is done in a centralized back office, the amount of work done in bank branches can be reduced significantly. This can lighten the burgeoning workload of the staff and lessen the need for additional manpower. In addition to this, the financial institution can also look closely into their existing staffing plan. This will expose and address redundancies and inconsistencies in the system, as well as highlight services and tasks that can be greatly improved by standardization.
It’s expected that the revenue growth for businesses in the financial sector will be limited until next year. During this time, it’s a great idea for financial institutions to examine their current systems and focus on areas that provide opportunities for cost reduction. This, in turn, will help them free up capital that they can then divert to areas of the operation that will allow the company to thrive in the current milieu.