Banks are being asked to do more with less, at a much faster pace than ever before. Increased market volatility, surging trading volumes, regulatory change and the onward march of new technologies all pose significant challenges.

These factors, coupled with rising operational costs, margin erosion, and increasingly complex client demands mean striking the right business balance is critical. The traditional ways banks have faced market challenges – optimizing infrastructure and operating models, cost cutting, and exploring new products – on their own might no longer be enough for some institutions. That’s where Cate Dawson, our Head of Product for Financial Institutions, sees partnership playing a pivotal role.

In this conversation with Cate, she digs into:

• The top three challenges banks are facing 
• The tools they are using to adapt 
• The potential of bank-to-bank partnerships

Q: Cate, the financial services sector overall is going through a lot of changes. What specifically is impacting banks?

Cate: The financial services sector is seeing a tremendous amount of disruptive change. Increased market volatility, major fluctuations in asset values and shifting client demands are just some of the factors driving banks to re-examine their business models.

Many banks have recorded record profits due to a sustained period of elevated interest rates coupled with high asset values and transactional volumes. They are now considering how best to invest, to adapt their businesses in ways that can help them flourish in an unpredictable and increasingly complex investment landscape.

However, despite how these increased revenues are reported, financial institutions continue to face rising costs, shrinking margins from increasingly competitive pricing, and evolving service demands, which potentially create a significant burden to the ability of small to mid-sized institutions to compete.

From a cost perspective, there’s been significant increases in infrastructure, vendor, and operational costs largely due to legacy infrastructure modernization, regulatory change, and increasing cyber needs. These areas are eating into resources and funding pools which historically have been available for new product development.

The sector is also in an environment of highly competitive pricing, driven by significant fee compression. The top four providers represent 60% of the market and the top 10 representing 85%¹. The competitive pricing being established by a small group of providers at the top is driving a race to the bottom for pricing and is challenging the value of other historical differentiators.

Client demands are also accelerating as they seek more modern technology, innovative products and services, and support in solving their own business challenges.

Basically, banks are being asked to do more with less, but at a much faster pace than ever before.

Q: How are banks working to solve these challenges?

Cate: The most common first steps are to review your infrastructure and operating model to look for cost cutting opportunities. Is your operating model “fit for purpose?” Do you have duplicate functions or platforms? What can be automated?

And of course, banks are exploring emerging technologies and intelligent automation tools like AI, machine learning and large language models to address some of those costs. For example, some banks are looking at these technologies as an option to solve manual exception processes that historically couldn’t be automated or to act as a replacement model for some of their more straightforward client facing engagements.

Additionally, they may also look to launch new products that open access to new revenue streams, client segments, or regions. This includes investing in areas of growth like ETFs and private markets or expanding higher margin capital markets products.

However, it’s important to be highly strategic with these initiatives and plan ahead. Steps taken today to address costs or increase revenue may have long-term adverse impacts. Launching new products or implementing new technology today may reap immediate benefits, however, they require a long-term commitment to ongoing investment to ensure these products remain competitive and effective. Today’s investment strategy may inadvertently be creating additional contention in the future to an already challenged pool of investment resources.

Q: Do you think there are other solutions they should be considering?

Cate: We believe that partnerships offer a new path forward and create the opportunity for mutually beneficial and long-term success for financial institutions, especially for smaller and mid-sized banks where the current landscape is exceptionally competitive.

Two institutions with complementary business models or client books coming together to strengthen their competitiveness can create a formidable business proposition. Strategic bank-to-bank partnerships create a bi-directional opportunity to share expertise and innovative technology while also sharing costs which ultimately creates an attractive value proposition for their clients.

For example, in one of our own partnerships, another bank leverages our custody platform and technology to provide a competitive global product to their clients, which affords scale, expertise and coverage.

It also creates a foundation of shared investment focused on growth and future development of differentiated products and features on the platform. Through partnership, the bank can retain their home market presence and focus on providing the expertise their clients expect.

Q: Do you think we’ll see more banks looking to partner with one another?

Cate: Absolutely.

In the institutional space, we have seen some acquisitions of tech vendors by the large global banks, which is not a feasible route for smaller and mid-sized banks. While all banks leverage several technology vendors or Fintechs today, we anticipate a growing opportunity for bank-to-bank collaborations and we are seeing an uptick in banks reviewing their business models to ensure they have the right partners and structure.

As just one example of successful collaboration, two smaller banks which both contend with the same challenges and which don’t compete directly with each other, can complement each other strategically and grow business together across different geographies and different product segments, while sharing lower costs. This makes the partnership far more attractive to both parties and increases their ability to compete with the large global banks in their respective home markets. In essence, these banks come together to grow and differentiate the services that they can provide their clients.

In today’s fast-moving market environment, a bank can’t be everything to everyone. Partnerships provide the opportunity to do more with less and help prepare for the future.