Accenture, Broadridge blaze trail for cost-cutting banks with outsourcing venture
The joint venture between Accenture and Broadridge to process and settle securities trades offers investment banks the opportunity to reduce costs and boost scale. Société Générale is on board. Is this a model for the future?
For nearly 20 years, outsourcing has been touted as a solution to financial institutions’ technology and operations challenges. Large custody banks and consultancy firms tried to lure customers with the promise of reduced costs and improved efficiency.
However, outsourcing never took off. Large lift-out deals – where the insourcing institution acquired and operated the customer’s existing IT platform, staff and processes – often proved to be unwieldy.
Outsourcing also recently suffered a setback when the Swiss Financial Market Supervisory Authority laid some of the blame for the $2.3 billion rogue trader loss at UBS on an outsourcing provider in India.
The inquiry found that the bank’s online trade supervision system and the T+14 report provided by the Indian company were key controls for the detection of suspicious trading activity, but both proved to be ineffective.
Despite such setbacks, outsourcing in various guises is enjoying a renaissance. Market tracking firm FSOkx Deal Tracker estimates 1,285 financial-services outsourcing deals were made during 2012, slightly down on 2011 when 1,348 deals were struck.
However, during the final quarter of 2012 there was an uptick in demand for outsourcing deals, says the firm.
The upsurge in interest has been attributed by various industry observers to a number of factors: an increased regulatory burden that is consuming resources; margin pressures from clients who are looking to reduce their own costs; and the rapid pace of change in technology.
For many institutions, operating back and middle offices is proving to be too costly and outsourcing is seen as the solution.
As bankers perennially tell Euromoney, the stubbornly high fixed costs of back-office functions have soured the prospects of meeting return-on-equity targets in broking and FICC divisions, leading to outsourcing pitches from third-party trade-processing parties.
Against this backdrop, last month Accenture and Broadridge Financial Solutions demonstrated their faith in this upsurge of interest by launching the Accenture Post-Trade Processing solution.
It is designed to help banks to reduce post-trade processing costs, adapt to new regulations and technology, and quickly and efficiently launch new products and enter new markets.
The solution provides post-trade processing and technology services to support settlement, books and records, asset servicing, operational management and control, real-time data access and administrative accounting.
Like many initiatives in the financial technology world, the solution is built on collaboration: Accenture is providing its business process outsourcing capability and global capital markets knowledge; Broadridge is chipping in its post-trade processing technology.
The solution has been designed to accommodate other technology to support specific functions. At the launch, SmartStream was announced as the provider of reconciliations and corporate actions processing capabilities.
The first client for the solution is Société Générale’s corporate and investment banking business, which offers investment banking services and global access to the markets to corporate and financial institutions clients in Europe.
|Christophe Leblanc, COO, Société Générale|
Christophe Leblanc, chief operating officer at the bank, says the solution could become “the future model for securities processing among investment banks: industrializing some services by mutualizing processing activities and costs across multiple institutions”. Onboarding other financial institutions to the solution is very much the idea of Accenture and Broadridge.
Bob Gach, global managing director of Accenture’s capital markets industry practice, says at certain points during the development of the financial services industry, multibank utilities and solutions have been developed, such as the Depository Trust and Clearing Corporation (DTCC), Clearstream and Euroclear.
“These moves were based on the recognition by the industry that something needed to be done on a collaborative basis,” he says.
“At present, there are big pressures on banks to meet the challenges of global regulation and increased cost pressures while also being nimble in reacting to market needs. They cannot easily do this with existing legacy systems.”
Post-trade processing plays a vital role in client service, but represents a substantial and often stubbornly fixed cost for banks, he adds.
The Accenture solution is intended to provide the efficiencies, scalability and regulatory capabilities in post-trade processing that can help banks rebuild their business models around more profitable services and differentiate them from the competition. Post-trade processing is no longer a differentiator, according to Gach.
|Steve Racioppo, CRO, Broadridge|
Steve Racioppo, chief revenue officer at Broadridge, says core settlement processes are now “pretty standard”, and for individual banks to continue to invest in these “makes no sense”. By pooling resources into an industry-standard solution, banks can reduce their costs and improve efficiency. The idea is to bring more financial institutions on to the solution, and the more that join, the lower the costs and risks for all involved.
Existing customers and new prospects will be sought for the solution. Gach says there are already FIs in the pipeline and expects further deals to be announced before the end of the year.
That ambition is certainly grand.
However, reaching the scale of a DTCC or an international central securities depository will be a challenge for Accenture. Some banks might not be comfortable with the outsourcing solution, and/or the multi-bank nature of the solution, and others could fear regulatory-compliance risks, particularly after the UBS incident.
What’s more, the larger FICC players are also betting they will be able to generate savings, or new revenue-streams, from post-trade processing, making it likely that the banks that follow Société Générale’s lead at present lack scale in the securities-settlement business.