August 20, 2021 - 340 views|
By taking a front-to-back digital approach to focused fee areas, banks can begin the process of optimizing trade expense.
Trade expense is one of the toughest topics in banking. These transaction-related fees cost banks billions of dollars every year. Yet most banks lack transparency into the drivers of those costs — and therein lies the problem. With limited insight into what they’re spending, banks struggle to make informed business decisions or develop a focused strategy to optimize the spend.
The combination of digital infrastructure, data lineage and analytics provides a path forward. By breaking the complexities of trade expense into initiatives that tackle small, manageable pieces, banks can begin to digitize data and automate the calculations and reconciliations.
In so doing, they also gain granular data to help them better understand their business. Data analytics and optimization across all of trade expense is now a realistic aspiration.
Every day, banks generate millions of post-trade expenses associated with executing transactions. The related costs fall into dozens of categories, from brokerage and exchange fees, to clearing, settlement and regulatory fees. Most banks manage the monthly invoice process and bilateral rate agreements using information stored in PDFs or spreadsheets.
This approach offers little opportunity to analyze data at a macro level or effectively calculate expense at a trade level to facilitate more granular micro-level analysis for different products.
Without full visibility into the costs associated with a particular product or client, banks struggle to make informed decisions. Because they lack clear counterparty and consistent pricing, there’s limited opportunity to optimize their spend through renegotiation or to redirect flow based on liquidity and benefit from discounting.
For a trade expense solution to provide value for senior management, it has to occur at the corporate level and run across all products. Yet keeping up with regulatory changes such as European Market Infrastructure Regulation (EMIR) and Markets in Financial Instruments Directive II (MiFID II) has taken its toll on banks’ discretionary funds, absorbing much of the capital they could have used for large digital initiatives.
In virtual roundtables and client discussions over the last 12 months, chief operating officers and operations heads have been candid about their need to overhaul trade expense. They’ve shared frustrations such as the lack of agreement on the definition of trade expenses. Which fees does it encompass? Is market connectivity included?
Most COOs admit that their banks have only a rough estimate of the impact of trade expense on the business, and without one, they’re unable to write a business case to outline the ROI for fixing the trade expense process.
Where banks struggle to create the short-term business case, they may need to think about an initial proof of value. Instead of first tackling brokerage fees, for instance —which is tempting because these costs can be in the hundreds of millions a year — they might be better off digitizing first to gain transparency into some of the many smaller fee categories.
The fact is, while brokerage fees represent the greatest opportunity for savings, there are many other fee types (such as custody, tri-party and funding fees) that are less complex to address. By starting with a front-to-back solution — from digital ingestion of invoices through to automated calculation, reconciliation and allocation — in one of these more focused fee areas, banks can learn to walk before they run.
By taking this approach, banks can discover and fix potential problems, such as underlying data quality issues, that will be helpful to them when they take on brokerage fees. Equally important, they’ll gain insight into factors that drive their costs and be better able to demonstrate the business value of tackling trade expense.
Starting with one of these smaller fee categories can provide the quick wins as well as the transparency and granularity that help propel banks forward in remaking trade expense. Here are a few initial considerations:
In 2021, the technology and capabilities are here to finally resolve trade expense. By getting a better handle on trade expense, banks can reduce costs and gain transparency that will drive insight and value to their underlying businesses.