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Swiss Private Banking and the Rationale for Global Services Delivery To reduce unrelenting operating cost pressures, Swiss private banks should rethink longstanding third-party sourcing assumptions and update their knowledge of what partners can provide, especially when it comes to handling elements of their back- and middle-office IT and business portfolios.
Executive Summary Switzerland’s hallmark data privacy laws, which once made Swiss banks attractive to wealthy customers worldwide, are increasingly making it difficult for banks to efficiently conduct business. This trend, combined with the pre-crisis level of activity and a general client preference for safer investments, is causing a steep drop in profit margins across the private banking sector. Unfor- tunately, operating costs have also continued to climb. The result: an expected industry shakeout, with the remaining players focusing intensively on cost reduction. Recent settlements with foreign governments on alleged tax evasion claims will hasten this shakeout.
A recent Boston Consulting Group global study noted that the cost base of global private banks has increased from 61 cents to 73 cents to the U.S. dollar1 during the past five years. To reduce costs, private banks are expected to turn to third-party partners for certain operations. In fact, UBS and Credit Suisse already work with partners on large portions of their IT and business services portfo- lios. More recently, Deutsche Bank hired Avaloq Group to handle a majority of its wealth manage-
ment back-office operations in Switzerland, where 80 employees were rebadged to the vendor.2
In general, Swiss private banks are not as mature as their American counterparts or their retail and investment banking peers when it comes to global sourcing. This is primarily due to the following three drivers:
• Process maturity. • Service standardization. • The increasingly competitive landscape.
This point of view paper examines the feasibility of global sourcing for Swiss private banks, which are seeking a return to their historic healthy margins. Bottom-line pressure and the growing clamor for relaxing Swiss secrecy laws will increase receptiv- ity to global sourcing opportunities.
The Business Context: Data Privacy Data security, a strong characteristic of the Swiss private banking industry, has often deterred global sourcing opportunities. Despite the rejection of a bill introduced in the Swiss Parliament seeking to temporarily allow Swiss banks to share informa-
• Cognizant Point of View
cognizant point of view | march 2014
tion with U.S. tax authorities, it is clear that the Swiss banking model is on the verge of a change. As a result, it is only a matter of time before more middle- and back-office functions will be sourced from third parties after incorporating appropriate safeguards.
The Swiss Federal Banking Act of 1934 and its subsequent amendments, which apply to all banks in Switzerland, prohibit the transmission or disclosure of any customer-related data to a third party, unless:
• Banks have complied with provisions in the Financial Market Supervisory Authority (FINMA) outsourcing guidelines and the Data Protection Act (DPA).
• The data that allows the customer to be identified is encrypted, or the unencrypted data transfer is expressly approved by the customer.
• Banks can legally exercise due control over the supplier functions.
As the global services industry has matured, it has become increasingly feasible to conduct control checks and leverage IT appropriately to overcome these challenges. Advanced data encryption and
data masking tools ensure that banks adhere to data privacy laws. Third parties are increasingly adept at providing “clean room”’ facilities with a level of data protection that is considered even more secure than the bank’s own operations. And as these vendors expand globally, many offer a mix of near-shore and offshore facilities to deliver various permutations of a global services delivery matrix.
Global Sourcing Decision Factors Global sourcing is no longer an exception but a competitive necessity. Decisions to hire a global services provider typically pivot around the following:
• What to source: Banks must decide what their core functions are and consider third-party partners to access expertise in noncore func- tions. Doing so frees up resources that can be applied to core strategic initiatives, such as of- fering even more customized client solutions or driving a transformation project. Typically, the middle- and back-office tasks are suitable candidates for turning over to a third-party expert. Figure 1 illustrates the potential global services landscape for a private bank.
cognizant point of view
Sales Front-Office Middle-Office Back-Office
Asset allocation determination
Account and securities deposit
Order validation and routing
Clearing and settlement
Fee calculation and booking
Client relationship management support
Client and management reporting
Trade enrichment and completion
Transaction management and control
Financial statements and custody services
Investment strategy and process
Continuous client relationship management
Risk profile assessment/ regulatory documentation
Risk management and controlling (client rating)
Product management (product rating)
Investment controlling/ monitoring
Complaint and claims management
Risk management and analytics
Portfolio maintenance and rebalancing
Service provider and partner management
IT processes and administration
Regulatory & management reporting
Data and document management
Processes requiring no client data access. Offshorability rating: 80%-90%
Processes requiring minimal access to client data. Offshorability rating: 60%-70%
Data-sensitive processes requiring full access to client data. Offshorability rating: 20%-30%
Source: Based on the domain knowledge and experience of Cognizant’s Private Banking Operations group. Figure 1
Private Banking Outsourcing Landscape
3cognizant point of view
• Sourcing model: The main decision here is whether to follow the captive route (where banks create and manage their own offshore delivery centers) or hire a third party that is primarily responsible for running the opera- tions to meet service level agreements (SLAs). Other options can be considered along the spectrum between these two extremes, such as working with a third party in an affiliate model. An example of this is when a generic IT infrastructure setup is provided by a third- party provider, but the IT security and IT net- works belong to the bank. The bank may retain supervisory functions in such an affiliated set- up. Figure 2 reveals how and why a third-party sourcing decision is typically superior to the captive alternative when the following param- eters are considered:
> Cost effectiveness: Which option tends to have lower operational and setup costs?
> Core activity: Where would the bank prefer to source core/critical activity?
> Competency: What are the general talent competencies in a captive or third-party op- tion?
> Scalability: Which option is more scalable and flexible?
> Talent retention: What is the attrition and longevity of staff within the organization?
> Control: Can sourced work be better con- trolled via a captive or third-party provider?
> Management oversight: Which option re- quires less corporate management band- width?
> Transformational: Can the bank leverage IT and engage in transformational exercises with its captive setup or with a third-party in- tegrated IT and business services provider?
• Sourcing location: The selection of the sourc- ing location is primarily decided upon on the basis of cost-effectiveness, availability of tal- ent, overall business environment, culture, lan- guages spoken and laws. If it’s feasible, banks should consider a ”follow the sun” approach, which provides them with up to 18-24 hours of productivity if the third-party services are delivered from another time zone. When all of these parameters are considered, India of- ten appears on the top of the list for favored sourcing destinations.
Looking Ahead As Swiss private banks continue to experience margin pressure, they will need to review their global services footprint in order to remain com- petitive. This is especially true as pressure rises from both public and governmental entities for increased transparency of Swiss banks. Banks that have chosen to set up captive centers for data privacy reasons are likely to review their decisions, particularly as third-party vendors continue to demonstrate increased process maturity, in addition to a level of industry knowledge and data sensitivity that allows for an equal level of confidentiality. The upside benefits of revisiting such decisions can be substantial. But for banks that do not reconsider their stance on global third-party servi