Sep 11, 2015

Seven years on from the financial crisis and the banking sector continues to experience on-going and challenging regulatory driven change. The pace in which new regulations become mandatory is putting pressure on banks and sometimes results in the implementation of short term, inefficient solutions. Whilst the short-term approach enables banks to meet immediate regulatory deadlines, it overlooks a valuable opportunity to undertake a strategic and fundamental review of their current operating model, across the three business capabilities; people, processes and technology.

When the opportunity is grasped, an effective review of the operating model depends on sourcing a review partner who is able to understand not only the business as it is today, but also how the model might be changed to reduce costs, improve efficiency and enhance the overall customer experience. The banks will sometimes use an external provider, with an unbiased approach to design, document and deliver the revised or new operating model.

The first step in the TOM review process is to carry out an initial in-depth analysis of the current operating model – the analysis is paramount in establishing how each individual business process functions today. The current state analysis will be signed off by the client to confirm that the analysis reflects a true picture of how their business operates; understanding this is a vital prerequisite of the ‘target state’. The target state requires consultants to draw on their previous experience and utilise their market knowledge in order to make informed decisions as to how their client can best improve the current operating model. The target state must consider the strategy and vision of the firm, as well as budget drivers and appetite for change in order to tailor the recommendations to the client’s needs.

So, why has there been an increased demand for revised operating models within the banking industry? The dramatic influx of regulation post the 2008 financial crisis and the continuous re-work of such regulation has challenged banks.  But, instead of responding to these challenges in a siloed manner, many banks are pursuing a competitive advantage through undertaking a holistic and strategic examination of their operating models. Banks are turning their gaze towards improving current processes to achieve greater efficiency, straight-through processing (STP) and a potential reduction of full time employees by utilising or improving technology.

Banks are no longer striving merely for adequate regulatory compliance with the likes of Dodd Frank, EMIR and FATCA. They are now concerned with ensuring established processes are more streamlined and efficient. Compliance with regulatory trade reporting and therefore as a direct result, their functions are more STP, provides both long-term cost reductions, risk mitigation and alleviates the chances of regulatory sanctions. In addition, services such as delegated reporting under EMIR are being viewed differently with the aim of improving client service, rather than pure regulatory compliance. These functions are being seen as services, which will strengthen client relationships and ultimately increase revenue.

Given the mounting regulatory requirements and the resultant pressure on banks to increase efficiency and cut costs, the rise in banks shifting their business strategies and adapting current operating models is due to continue. Addressing regulatory challenges in a reactive manner misses the opportunity for banks to gain meaningful insight into their overall structure and strategy. By undertaking TOM reviews and redesign exercises, banks are able to gain a better understanding of their processing capabilities, enabling them to respond innovatively to new regulation and ideally understand the potentially positive impact that regulation is having on their current operating models.