Banks that have opened innovation hubs, invested in digital startups and learnt the language of fintech can now provide the digital banking services that consumers want – but at what cost?
Although banks have thrown billions of pounds at fintech (financial technology) and become part of the fabric of the industry, they are still lumbered with massive workforces, which means they can’t compete on cost with native fintechs.
Fintechs use technology to automate business processes and minimise costs and although banks can use the same technologies, they still have to pay their large workforces.
Banks are some of the largest employers in the world and HSBC is a one of the biggest. It has about 230,000 staff, while Deutsche Bank has around 90,000 and Barclays about 80,000.
HSBC is the latest bank to plan major cuts to its workforce, with 10,000 reportedly at risk. This follows July’s announcement that Deutsche Bank is cutting costs, including reducing its workforce by 18,000.
While there is scant detail of where the HSBC cuts will come, it raises questions about why a bank that reported a pre-tax profit $19.89bn (£15.8bn) last year makes these kinds of cutbacks. It is not like the bank is in financial trouble – but it must see a different future in its banking crystal ball.
So what will technology’s role be in the latest round of banking cuts? Technology is both a cause and a solution. The customer-facing parts of banks have been transformed by technology, and consumer demand for funky and easy-to-use banking services has increased the prominence of digital-first challenger banks.
This, in turn, has forced traditional banks to compete with companies that have low costs. One of the easiest ways for banks to get near the challengers in terms of cost base is to cut staff, and digital transformation in the middle and back office is helping them to do this gradually.
In the past, banks would sign contracts with IT and business process outsourcing (BPO) providers, which would provide full-time equivalents at a much lower cost when the banks wanted to reduce staff costs, but the trend today is automation through computers.
Big battle is cost, not innovation
Speaking at the Innovate Finance annual summit in March last year, leading fintech industry figure Anne Boden, CEO at Starling Bank, said the big battle in banking now involved the cost base rather than innovation. And Boden knows a thing or two about the cost of operations at traditional banks, having previously served as chief operating officer at Allied Irish Banks.
All traditional banks can innovate. They have huge budgets, so there is nothing stopping them from creating the same fintech services as challengers – in fact, they are already doing it. But rather than having hundreds of staff, they have tens of thousands, so the new players have a huge advantage in terms of cost base.
Ten years ago, when the financial crash was at its peak, banks were also slimming down for a new reality – less business and more regulation. Such was the regularity of redundancies that in 2009, Unite the Union, which represents workers in the sector, accused the then Lloyds TSB of embarking on a strategy of death by a thousand cuts.
The cuts today could be described by banks as essential surgery to keep them alive, like removing an essential organ that isn’t functioning properly and replacing it with a digital option. For banks, the equivalent might be replacing manual fraud checks with an artificial intelligence (AI)-based service. Or perhaps job cuts will come from removing an unwanted growth, otherwise known as closing an unprofitable business arm.
A huge proportion of the jobs at banks involve repetitive tasks that are carried out manually, so cutting thousands of jobs is made possible by automation through technology such as software robots.
Automating document processing
HSBC is, for example, already using IBM AI technology to process documents related to international trade. At the time when the bank announced this in 2017, about 100 million pages of documents, such as invoices and insurance documents, were manually reviewed and processed by staff. But now, using optical character recognition (OCR) and robotics technology from IBM, HSBC’s Global Trade and Receivables Finance (GTRF) automates the review of documents and then sends them automatically to the bank’s transaction processing systems.
HSBC said this improves accuracy and gives staff more time to do “value-adding activities”. It makes such manual roles redundant.
And the bank is not alone – the entire financial services sector is a rich seam for automation. A report from financial services management consultancy Opimas said finance firms in the investment sector spent $1.5bn on AI technologies in 2017, and it predicted that this would increase by 75% to $2.8bn in 2021.
Opimas also said technologies such as machine learning, deep learning and cognitive analytics will replace 230,000 jobs in investment banking by 2025. The asset management sector will be hardest hit, with 90,000 staff being replaced, it said.
The cuts will happen quickly as the cloud computing services from fintech suppliers increase, making services available to banks that automate manual processes at a much lower cost.
In September 2017, John Cryan, former CEO of Deutsche Bank, said that a “big number of staff at Deutsche Bank will eventually be replaced by robots”.
Cryan added: “In our banks, we have people behaving like robots doing mechanical things. Tomorrow, we’re going to have robots behaving like people.”
You only have to look at the number of jobs being cut in bank branches and the increased use of automated support in contact centres to realise that banks can function with fewer people in the front office. If you then translate the use of automation into the middle and back offices, the number of staff that can be replaced is multiplied many times over.
Automating compliance roles
Compliance is an area that takes up a large proportion of banking staff, and the use of tech to automate roles carried out by compliance staff has been proven.
For example, automating the activity of meeting global tax requirements requires manually reading and checking hundreds of millions of tax forms. This would previously have been outsourced to an accountancy company to perform the checks, but today it can be done through the use of OCR and AI.
Then there is automation of the know your customer (KYC) process. When potential customers sign up to products and services at a bank, all their documentation is read and cross-checked automatically by software, which can then make a decision on whether the customer qualifies. In the past, this was done manually.
Although already widely used in the financial services industry, AI is set to take automation to another level, said David Bannister, analyst at Aite. Cost reduction through automation has been a major factor in the past, he said, but this is now changing, not because machines can do the job faster and cheaper, but because they can do it more accurately.
“Much of the cost in banking transactions comes from manual intervention when the computer says ‘what?’ instead of yes or no,” said Bannister. “It’s called ‘exception handling’, but the reality is that in some areas, such as international payments, exceptions can be as much as 40% of all transactions.
“AI – specifically machine learning and robotic process automation – can help here, along with data cleansing and more harmonised business processes between financial institutions.”