What role does Business-Process-as-a-Service (BPaaS) have to play in banking as we move into the new decade? Here are the 4 biggest benefits that BPaaS offers to banks.
We want to focus our attention in this article on four advantages of a BPaaS solution and their significance for banks and wealth managers in the years to come. The recent pandemic has put the operating models of financial institutions (FI) to an unwelcome test. After years of focusing on efficiency and automation, banking operations teams worldwide had to deal with the impact of lockdown rules and quickly-rising transaction volumes in agitated markets. Learn how solid and future-proof operations deliver the efficiency and reliability a wealth management business needs to concentrate on what they do best – providing advice in uncertain times.
1. Focus on what generates your revenue
BPaaS solutions allow banks and wealth managers to focus on what is essential to their core business model, while dedicated service providers handle the rest. The last decade has witnessed the most rapid change in consumer behaviour ever, especially in terms of the channels they prefer to use to interact with banks, such as web & mobile banking or even social messaging.
This means that financial institutions and wealth managers must focus increasingly on channel development and improving user experiences. The focus on the advisory experience and more scalability allows wealth managers to serve a growing affluent segment with personalized services, so far reserved only for ultra- and high-net-worth ((U)HNWI) clients.
The task of enhancing internal operational efficiencies is a distractor in this process, claiming significant change management resources within an FI. This is where BPaaS services can come in handy, taking on the non-core activities. A service provider will not only operate these processes, but also ensure adaptation to new regulations and oversee the implementation of new innovations, like robotic process automation and artificial intelligence, in order to constantly increase reliability and efficiency.
2. Stay flexible and scale on-demand
Cloud-based models obviously provide unparalleled scalability and flexibility. Clients can ramp up or reduce the resources available to them quickly. A good cloud provider should also offer the flexibility to rapidly make changes, using their dedicated and experienced personnel.
BPaaS models provide all of this – and take it to the next level, as the scalability and flexibility apply not only to hardware or software, but also to entire business processes. This means that, if a bank is running behind on customer onboarding during a particularly busy period, for example, they should be able to ramp up the processing volume for tasks that are handled by a BPaaS service provider, in order to deal with the increased demand.
Another proof of the flexibility within a BPaaS model evolved with the start of the pandemic crisis earlier this year. Switzerland has historically taken banking secrecy very seriously and it is in this strict environment that Avaloq, with its true Swiss heritage, developed a solution for relationship managers and banking personnel to access the information they need for their daily job remotely, while staying compliant. Avaloq clients embraced the option to add the Sensitive Data Segregation (SDS) extension within their Avaloq Banking Suite on short notice when lockdown rules started to affect their businesses. With the SDS extension active, it was possible for them to separate the customer facing processes from the back-office processes, thus ensuring the segregation of sensitive client data. This allowed the bank staff to more easily work from home and most importantly it ensured compliance with local regulations during the lockdown.
3. Achieve cost efficiencies
Rather than looking only at the cost of implementing a solution, it is better to look at overall cost efficiencies gained. Implementing a more expensive, customized solution may or may not be better than a standard, off-the-shelf one. It depends entirely on the client’s needs. And that is where the focus should be – meeting the client’s specific needs and offering a solution that works best for them.
The overall operational efficiency of banks, as measured by the cost income ratio (CIR), remained stagnant over the last five years. For European banks, the ratio has stalled at around 68% - 71% since 2015 (McK). For Swiss banks, the CIR shifted from around 55% in 2000 to 65% in 2018 (EY). This is indeed a meagre return, given all the cost-saving efforts we observed over the past years. The underlying reason is of course, that with the current structural pressure on wealth managers’ margins, the savings in costs are constantly obliterated by shrinking revenues.
Some reports even point to a sideward development of operating costs - at least, for European banks. As revealed by the graphic above, the indexed costs for middle, back-office and corporate functions have even slightly increased since 2015. While the increasing investments in sales and marketing may help to tap into future growth, operational costs continue to be a burden on this journey.
4. Ensure resilience
Since the beginning of 2020, we have observed high market volatility, with trading volumes increasing significantly. Despite an increase of 116% in March’s transaction volumes and what’s been happening in the markets globally throughout the pandemic, Avaloq’s BPaaS teams were able to keep the promises made to our clients.
Throughout the first half year, we maintained a service level adherence of 99% and proved our reliability in a period of extraordinary stress. Stable straight-through-processing (STP) rates have secured very low manual handling, thus keeping accuracy levels high. Our proven high and stable STP rates are a major element when it comes to the successful handling of volume peaks. Accuracy rates continued to stay above 99.98% for all BPaaS centers during HY1 2020.
As a specialized banking operations unit with significant scale, working on a solid cloud banking platform with a high level of automation and standardization, our BPaaS teams proved their resilience in the current crisis. To navigate a crisis like COVID-19 successfully, a team needs a critical mass of specialists to ensure operational readiness. In addition, it also relies on a stable and up-to-date IT platform to handle rising transaction volumes automatically, wherever possible. Both these elements of the Avaloq BPaaS solution proved their value in this uncertain time.
The start of the new decade is the right moment for FI to focus on their core business of serving clients. Only with the flexibility to scale will they be able to profit from future growth opportunities. A focus on cost efficiency and operational resilience is a must, in order to navigate a wealth management business through further turbulent years unscathed.
Essentially, this means that there is still much untapped potential for banks to improve profits by targeting operational inefficiencies with a vengeance. And the best way to do that is by making full use of BPaaS solutions that can help banks unlock value and increase operational efficiencies like nothing else can.
Written by Mathias Schütz
Mathias is the Country Head for Switzerland & Liechtenstein at Avaloq as well as the CEO of Avaloq Sourcing (Switzerland & Liechtenstein) AG. As a Senior Executive in Banking Software with 20+ years of experience, he has vast expertise in the banking market and in digital transformation and fintech in specific.