Why not build a shared services infrastructure to support the banking sector?

With the US Treasury yesterday making an initial $125 billion stock purchase of nine beleaguered financial institutions, it makes me think seriously about how these colossal investments also could be deployed to create new jobs, better technology investments, and more efficient support processes. 

Our recent survey shows that many financial institutions are ready to grab the low-hanging fruit of outsourcing offerings, where they can make quick cost-savings and transition costs are offset by arbitrage.

However, while outsourcing clearly has its benefits, what about the

significant costs of integrating these merging institutions, the systems integration costs, the re-drafting of contracts with suppliers, the divesting of bloated captive operations etc.?

How about investing 1% of that $125 billion in setting up a shared services facility to support banking services in areas such as systems integration, application development, HR services, finance support, customer service, global trade processing, compliance support, image processing, risk analytics, mortgage processing, credit checks and so on.  Each bank could initially be allocated a fixed number of staff, based on business volume, and service providers can take part in a tender process to help set up and support the center. 

This would have the impact of:

• 1) Creating new jobs;

• 2) Saving banks a lot of money in a very tough market;

• 3) Making M&A activity less complex.

Guess I'm not the best lobbyist...I can't even vote...but I can blog -:)

Comments

[Shourik Chatterjee]

Phil,

Possible but unlikely.

Why unlikely? High cost of employees/contractors and setup costs, as pointed out by other respondents. But the other issue is the high re-training costs. Do autoworkers have the aptitudes AND attitudes necessary to work in an office environment answering calls? For much lower wages?

But assuming your indications are correct and these large-scale outsourcings do happen as the alternative to retaining the engineering function in the USA, conduits will still be needed to ascertain and communicate the needs to the outsourcers; receive work/manage outsourcing projects; and evaluate the effectiveness of the outsourcing arrangement. This could be an area where technical staff could focus on developing their skills in order to keep their jobs.

In developed economies, a number of industries (think forestry in Australia, rice farmers in Japan) are retained and subsidised by governments due to the polifical capital their employees can wield.

Given the recent election results in the US, it seems unlikely that wholesale job losses on the scale you discuss will be allowed to occur. If they do, it will be interesting to see whether the electorate remembers that at the next poll.

Cheers,

Shourik

[Kelvin Meeks]

This model was successfully pioneered by a company called Systematics Financial Services, Inc. (based out of Little Rock, Arkansas) in the mid-1960's. Their success at running a large-scale data center where they provided centralized processing for over 100 banks around the U.S. eventually resulted in their acquisition by ALLTEL in the early 1990's. Later they were acquired by Fidelity National Information Services:

http://www.fidelityinfoservices.com/fnfis/

Kelvin Meeks

[Amit Mittal]

There are two ways to approach the solution:

1. Public sponsorship: If the government takes ownership of this shared services infrastructure on top of the clearing and the securities settlement and RTGS that it already sponsors, there would be the cost of monitoring compliance which theoretically may seem lesser but in real terms would actually increase humongously and create an additional set of breakpoints in the process precipitating failures and shutdowns. On the plus side, the idea however does offer advantages of transparency and cost sharing for all banks which as others have pointed out are already sharing ACH, LCH and other such institutions.

2. Private sponsorship: One could posit that the current securities processing players like JPM and Citi could already be doing the same for securities markets and could extend the shared services in other businesses. In which case, you would end up sharing control ( which is the same argument put forward while BIS struggled to bring Basel II online) and supervision that is not really attractive to banks despite the currently added layers of government participation and regulation. In risk management for example, the IRB models shared with the public investors and central banks are still not reflecting the actual risk management models used internally by the banks to ensure the bank's total control over its portfolio!

Apart from the granular discussion above, I would still like to add that banks would in general find this new process time consuming, disruptive to normal business and not necessarily supportive of the current consolidation efforts.

[Kawika Daguio]

In the late 90's I pursued an initiative to build a banking industry version of the .mil infrastructure. We discussed establishing a new domain with strong validation of the participants and policy based controls and policing of the participants, the backbone and its perimeter. At the center of the initiative were certification infrastructures and strong cryptography, but the most critical component was the identity mapping and restriction of the network to institutions with similar standards and regulatory requirements. We had an agreement to take over a class a and manage the policy, standards, and clearance and certification processes. This would have saved the industry money, reduced risk, and provided a safer, more trusted environment for consumers and corporate bank customers, but banks have enough partnerships, associations, and other partly cooperative and competitive activities that these activities compete against each other.

Beyond bankers banks, card associations, SWIFT, and the exchanges and clearinghouses bankers prefer to diversify rather than concentrate their interests even if it increases costs because it reduces concentration risks.

I have worked with most of the major partnerships and they all work well in part perhaps because of the portfolio approach to partnerships and the competition between the teams within the same institution sponsoring different and competitive initiatives.

As a risk officer I approve but I wish there were more cooperation on standards at least.

Good luck!

Aloha,
Kawika

[Lynn Wheeler]

Phil,

We did some consulting to the person originally setting up FSTC. In the early to mid 90s, there was a push for gov. technology re-use (commercializing gov. technology) and provisions were made for setting up collaborative industry organizations & relaxing anti-trust laws.

FSTC basically looks at various kinds of shared technology projects in the financial sector: http://www.fstc.org

But there are still several issues with regard to anti-trust laws. Also, there are project areas that financial institutions deem to be "competitive" advantages ... which they still do solo.

Lynn Wheeler

[Phil Fersht]

Good points Esteban - and thanks for embracing the spirit of this post. My thoughts are more focused on the establishment of a support center for costly IT and back office support services, than specific equity and trading services (but the govt could even buy up some ailing service centers in these areas and roll them in).

I like the opt-in suggestion - this would avoid a lot of issues regarding preferential treatment, and also give firms the choice of outsourcing. By subsidizing some of the services, this also enables troubled banks to go through M&A - and the government will end up owning its own onshore financial services captive they can spin-off in a couple of years when the economy rebounds.

Of course, this will never, ever happen, but in an ideal world...

[Esteban Herrera]

Brilliant! It would have to be opt-in...otherwise the cries of socialism would kill it before it was born. But that would also force it to be competitive while reducing the complexity.

Most large banks already have huge investments in outsourcing and captives. But I have to believe this would be an attractive (espeically if, as you imply, it is US-based) solution for the banks #20-#100 (in assets), and maybe even a couple of the top 20 that have been laggards in getting their act together.

You convince them to spend the money and I will go set it up. I can't vote either, so we can avoid the politics altogether!

[James Davidson]

Bill made some good points and gave some examples of existing "shared services". The ACH (automated clearing house) also comes to mind.

I would question the likelihood of job creation as a result of such an effort. As each internal service, and its related development and maintenance, is "outsourced" the staff reductions (savings) at each bank could easily outweigh the new jobs created to develop and deploy the new shared services.

James Davidson

[Bill]

Most of what is required already exists, here's some examples (non exhaustive):

Equities: Traded at NASDAQ/NYSE, settle at DTCC (US), LCH (UK)
Bonds: Traded various places, settle at DTCC (US), LCH (UK)
OTCs: LCH SwapClear, DTCC Trade Information Warehouse & CLS, Markit, T:Zero, Fund Admins etc

Many of the major banks already have outsourced internal work to other countries.

Your concept of a single banking processing platform for the entire world would be easier to achieve than sending men (or ladies) to the nearest inhabited planet, but not by much. Too big, too complex!

Bill.