What could and should Swiss banks do to remain competitive and efficient? The Swiss Finance Institute has brought out a white paper that considers the challenges.
Swiss bank should consider how to “industrialise” to become more efficient and serve clients more effectively at a time when the sector is under relentless competitive pressure, according to a white paper issued by the Swiss Finance Institute.
The SFI’s paper, called Industrialising Swiss Private Banks: A Strategic Road Map, by Pascal Gantenbein Kristof Trautwein, also sets out 10 recommendations to banks, arguing that at present, only a few of those surveyed have completely revised or industrialised their value chains (front, middle and back office). Almost no banks have a cost/income ratio below 70 per cent, the paper said.
The report challenges the notion that it is vital for banks to reach a certain size – “critical mass” – to be profitable – an issue sometimes driving merger and acquisition activity among Swiss and other banks. If banks “industrialise”, the SFI said, critical mass is not so important. “Where large banks can gain scalability while maintaining a larger service offering and more locations, smaller banks can reduce complexity by offering a clear and leaner business model and, as a consequence, a clear and leaner operational setup,” it said.
Banks in the Alpine state have seen the loss of decades-old account secrecy laws, removing one old competitive advantage and forcing financial firms to provide more value-added features to compete with rival hubs such as Singapore. There have been a number of merger and acquisition deals and the total number of banks in Switzerland, once over the 300 mark, now stands at 266 (as at the end of 2015, according to the Swiss Bankers Association). The arrival of fintech models such as "robo" advisors also creates competitive challenges for traditional firms.
Those banks which have specialised business models have industrialised the most, the SFI report finds.
The banking industry is in the early stages of analysing data on how efficient it is, and this seems to apply to large and small players. “Not one single bank measures its progress with regard to industrialisation accurately,” the report said.
Defining what it means by industrialisation, the SFI report says: “A broad structural transformation and simplification of internal processes and procedures, such as the reduction of vertical integration.”
“Adding new processes to the highly complex existing ones makes banks inefficient and leads to a heavy burden from the cost side, especially if accompanied by low margins. This situation is more critical still, since banking is becoming even more complex due to the influence of new competitors, increasing regulation, and a higher level of interconnectivity in banking functions. External service providers will take over more banking services; and within the bank, front-to-back services will increase in numbers, while the function of the client relationship manager will change, moving toward the sharing of tailor-made information with clients. Hence, banks need to undergo radical change, with industrialisation as its foundation,” the report said.
(To see a related article about the future of Swiss private banking, click here.)