IDC Financial Insights believes that a “Banking Utility Model” would allow banks to train their focus on customer-facing innovations while keeping the commoditized parts of their business as low cost and efficient as possible.
The key tenet of the utility model is an agreement between banks to pool their resources for a particular line of business (LOB), setting up a dedicated entity to manage the processing. Different areas can call for a different degree of mutualization, whether just in the back or middle office, or covering specific end-to-end processes.
The rationale for the utility model includes:
Cost savings. By sharing development, infrastructure, and operational costs across an industry, individual banks can cut duplication and save money. A utility can benefit from specialization, economies of scale, and potentially also monopsony, as the only buyer of certain services.
Investment efficiencies. By combining investment dollars in a single entity, that entity will have higher purchasing power than individual banks. Capital-intensive projects are more viable when an individual bank only has to provide part of the capital, and share only part of the risk.
Consistent delivery. A utility can specialize in perfecting its narrow remit, while banks have a broader focus. Having a single utility across an industry for a particular process can also serve to standardize customer expectations, with industry standards and benchmarks supporting the utility.
Innovation. Banks can focus on innovation in their profit centers, and leave utilities to attend to their cost centers. In turn, the utilities can become more innovative since the cost of failure is shared among banks.
Lawrence Freeborn, senior research analyst, IDC Financial Insights said: “The banking industry in Europe is beset by challenges from many directions. Regulations such as the Dodd-Frank Act and Basel III will ensure that compliance remains a headache for banks, at the same time that pressure is building from new entrants to the market.
“A new generation of start-up banks in countries such as the U.K., plus technology firms like Apple and retailers like Marks & Spencer, are encroaching on the banking space. They are forcing banks to cut costs and innovate in order to stay competitive and indeed relevant in the emerging landscape, which is increasingly centered around mobility, analytics, and personalized banking services. This industrial utility model could be the part of the answer to all these pressures.”