The shared
service utility model:
a lifeline for the
financial industry?
© Konstantin Yolshin / Shutterstock.com
EXPERT VIEW
With financial institutions under pressure from increased costs, lower margins, and a
growing regulatory burden, it is clear that the industry needs a new way of doing business.
Nowhere is the need for a rethink more pressing than in the area of post trade processing.
Darryl Twiggs, EVP Product Management, SmartStream, considers the benefits the shared
service utility model can bring.
A shared service is a single source of data or
Initially, our knowledge was gained in relation to reconciliations
an operation provided to multiple consumers.
processing, developing internal utilities for large financial institutions.
The single source approach offers immediate
Today, we are helping to build new external shared services for our
benefits. It enables processes to be standard-
customers and providing our own utilities.
ised and allows the number of steps or touches
During the past ten years we have witnessed the significant,
involved in these processes to be reduced,
measurable benefits that can be achieved by making use of the single
cutting down the opportunity for errors to arise.
source approach. Take, for example, reconciliations processing. In our
Costs are lowered, the STP rate improved and
experience, cost reductions of 20%-30% are delivered by banks’
the processing timeline shortened. It is also
in-house utilities when carrying out this activity. We have seen equally
possible to gain a unified picture, for the first time, of the information
impressive gains in relation to confirmations processing, with timelines
and processes being managed. A company can establish proper
reduced from days to minutes, substantially reducing counterparty risk.
Darryl Twiggs
SmartStream
measurement, making it feasible to put in place key performance
For the last five years SmartStream has operated its Reference
indicators and service level agreements. Continuous improvements
Data Utility (RDU). This is a data management service, available as a
can also be achieved.
utility, which provides high quality data to financial institutions’ front
At SmartStream we have focussed on developing shared services
line systems. The provision of superior quality data ensures that not
as a means of bringing greater efficiency to financial institutions’ post
only are benefits delivered to target systems but that all subsequent
trade operations, and we now have ten years’ experience in this area.
downstream services operate more efficiently. For example, if clean
· Volume 21 · Issue 3 · April 2015
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EXPERT VIEW
data is provided to front office applications then fewer errors occur
authorities keen to see improved reporting, greater transparency
downstream with reconciliations.
and more robust risk controls. Regulatory demands for new industry
practice are driving a search amongst financial institutions for a
The recent transformation
flexible and cost-effective alternative to traditional ways of doing
Interestingly, over the last three years, we have begun to see an
business. The shared service utility model provides just such a
evolution take place in outsourcing. Initiatives that started out life as
route, offering a mutualised operation which can take on regulatory
outsourcing projects have developed into complete back office
reporting demands with ease. Process adjustments made necessary
utilities, as part of which service providers have taken on all the “heavy
by changing regulation can be undertaken by the utility on behalf
lifting” associated with back office operations. End users have
of users. This removes the need for financial institutions to re-
benefitted from economies of scale, efficiency gains, lower costs, as
engineer their own processes, minimising costs and potential
well as measurable operations.
disruption to business.
Today, the market has an increasing appetite for outsourcing
Importantly, shared services also provide financial institutions with
operations, in part driven by improvements in technology. In 2009,
the opportunity to move from a capital expenditure model to a
SmartStream first offered its reconciliations processing solution as an
consumer pay-as-you-go approach. As the shared service market
on-demand service in our own secure hosting environment. We are now
becomes more sophisticated, commoditisation is likely to take place,
seeing an increased willingness amongst financial institutions to move
enabling consumers to switch from one provider to another with
to the cloud. This reflects the fact that the cloud has, in recent years,
increasing ease, creating the ability to achieve improved cost savings.
become a highly secure and certified environment, offering the
For service providers, a growing challenge will be to offer competitive
capability to guarantee regionalisation of data and security of operation,
advantage at lower cost.
at the lowest possible cost or, even, as a pay-as-you-go consumable.
One area in which we are seeing greater appetite for shared
For the last three years, SmartStream has provided a
services is the buy-side. This market typically does not follow an on-
brokerage reconciliations service, making
available its TLM Transaction Fees Invoice
Management (TLM TFIM) solution, on a
utility basis, to financial institutions.
A number of banks are already taking
advantage of its benefits. Milestone projects
include those undertaken with Société
premise software model and looks to
Faced with increasing IT and operations
costs, as well as a greater regulatory
burden and margins that have not
recovered to pre-crisis levels, financial
institutions need to seek out a new and
more sustainable business model
Générale and Credit Suisse. Our TLM TFIM
outsource both IT support and solutions.
It is incoming regulation, however, and
rule-making such as Basel III, the DoddFrank Act and the Alternative Investment
Fund Managers Directive (AIFIMD), that is
the driving force behind the current high
levels of buy-side interest. Firms are under
solution enables banks to reconcile brokers’ invoices and, as part of the
greater pressure than ever to find solutions that allow them to respond
service, we normalise invoice data and banks’ trading fees schedules.
promptly to the increased constraints and controls imposed by
We work with a wide community of brokers, which allows new
regulation (especially in relation to collateral management,
customers to come on board in a short time, and, as more customers
reconciliation, liquidity and corporate actions), as well to stringent
have taken up the offering we have been able to expand our services.
regulatory deadlines. Not surprisingly, the ability to access the most
A typical example of a mutualised shared service, TLM TFIM
up-to-date solutions, via the cloud, on an on-demand utility basis,
provides operational efficiencies that banks themselves simply
without the need for costly and time-consuming implementations, is
cannot accomplish. It enables major savings to be identified and tens
proving hugely attractive to buy-side firms.
of millions of dollars to be returned to banks. Another important
In summary, shared services look set to develop across the post
feature of this type of service is the rapid time to market it allows
trade processing area. Demand for them will, I believe, grow
financial institutions to achieve. If a large bank were to create an
significantly over the next three to five years. And for good reason.
in-house utility to reconcile brokers’ invoices, the project could well
Faced with increasing IT and operations costs, as well as a greater
take many years to complete. By using a shared service, the lead
regulatory burden and margins that have not recovered to pre-crisis
time required shortens significantly, allowing the bank to be up and
levels, financial institutions need to seek out a new and more
running with the new technology – and therefore seeing operational
sustainable business model. The shared service utility model offers a
efficiencies and cost savings – within a few months.
way forward. Companies that ignore it do so at their peril: firms that
pursue a traditional approach – fixing breaks in trades using large
Transparency and control
numbers of costly staff – will simply not survive.
In today’s post-crisis environment, banks are under pressure to
For further information: www.smartstream-stp.com
respond to a host of new regulatory initiatives, with financial
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· Volume 21 · Issue 3 · April 2015