February 2024

Oliver Wyman: Harness data automation and Artificial Intelligence to tackle incoming cost challenges

By Rewan Tremethick, Content Manager.

New technology is giving banks the opportunity to tackle cost in a way like never before. Data automation, next generation process management and Artificial Intelligence are the keys to achievable, sustainable cost reduction.

And they couldn’t have come at a better time.

Firms are on the path to being trapped between the rock of investor expectations and the hard place of market conditions. Increasing revenues have been supported by increasing costs over the last few years. Yet now that the revenue outlook is softening, the picture for costs remains level.

There’s an emerging gulf between what firms are earning and what they’re spending to do so – and it needs plugging with cash.

Enter the heroes of the hour: the cutting-edge technology and operating model best practices that will empower firms to do what seemed impossible until now – get costs under control.

Chris Rigby, partner at Oliver Wyman, was on stage at our Customer Innovation Day to explain how these technologies can deliver significant cost savings, and why that’s so important right now.

Why now is the time to renew cost saving efforts

Cost-cutting has always been on the agenda. But now, macro conditions mean it’s becoming increasingly necessary to fill a huge cost hole.

“The last 15 years have been marked by a change in the business model,” Chris explained. “The landscape now has been characterised by low rates. It’s been characterised by cheap money, and we’re experiencing a step change now.”

According to the research by Oliver Wyman and Morgan Stanley, capital supporting the industry is up 60% vs before 2008,  while returns are down from around 18% to 12%. On top of this, new capital requirements in the US and the EU could hit return on equity by another 1-3 percentage points.

Yet during that time costs have risen too, even though returns are weaker. Firms simply haven’t been able to achieve revenue growth that outstrips cost growth.

“There’s a lot of incremental cost in the system to support the revenues that the industry is generating today,” Chris explained.

Chris summarised: “we have a situation now where the revenue environment is challenged. At best it will be flat on this year. And industry costs are at an all-time high and proving quite sticky.”

Luckily, as he explained, data automation, next generation process management and AI are ready to help firms deliver the savings they need in a challenging environment. And it’s not all about savings – operating model changes and process efficiencies can help firms unlock greater value, from accelerating time to market to improving the client experience.

Shift in revenue sources puts greater emphasis on data

Focus on cost is nothing new, of course. Chris remarked that most of the audience who work in a bank have probably gone through some kind of cost cutting action each year for the last ten years. But these efforts have not been as successful as expected.

Focussing on data provides a new and necessary direction.

“The way that banks make money is increasingly reliant on very data intensive, transaction-focused business,” Chris explained, “and we think this is a trend that is only going to continue over the next three to five years.”

So data is going to increasingly become the foundation on which bank revenues are built. But accessing, managing and leveraging data is an area where many inefficiencies already lie.

Chris illustrated this with the results of a survey of 90 capital markets Operations participants Oliver Wyman conducted to examine the level of automation that already exists for the most common operations practices.

“About 65% of operations activity today is still manual,” he revealed. “Only a third has been automated and even that third that is automated still has an awful lot of manual controls, such as manual Excel recs around it.”

Areas such as collateral management, corporate actions, fees and invoice processing are some of the key areas where this kind of intensive manual work still exists.

“There’s a huge amount of opportunity to go after it,” Chris said, then went on to show the true scope of the cost savings that can be achieved if you do.

Plugging a $150m cost hole with data automation

Oliver Wyman recently worked with a global bank’s Operations team to look across the value chain of processes and identify areas of high automation potential. In doing so, they discovered an estimated $150m of cost associated with high-activity, intensive manual data work.

The bank then put a programme in place, leveraging the Duco platform among others, to go after those inefficiencies.

This type of next generation process management is “applicable to all types of bank, regardless of size”. The nuances will vary from organisation to organisation, but the key thing that is common across the different archetypes of wholesale banking, “is the potential for next generation process management, for Artificial intelligence, for data automation, to really move the needle in a way that’s not been possible previously.”

“There is opportunity and potential everywhere. And the trick is how to unlock that.”

AI: from cost-savings to value-add

One of the keys to realising those savings that Chris mentioned above is undoubtedly AI.

Lots of people talk about the ‘potential’ for AI, but as our founder Christian Nentwich noted in his keynote, AI is already here. Chris highlights examples such as JP Morgan’s AI stock picker or the AIs that some institutions are using to translate code from one language into another.

There are many other examples, but as Chris summarises:

“It’s real, it’s here. We think that there is huge opportunity. When we talk about the cost hole being $25-35bn, AI could easily plug half of that gap.”

And, as we heard in our discussion with Securrency’s Nadine Chakar and Mizuho’s Ken Utsonomiya on transformation, automation can help workers provide more value as well.

“It’s not only efficiency,” Chris told our audience. “Yes, AI can help with drafting, it can help with interpreting analysis. But it can also help with decision making, with client interactions, with colleague interactions, with personalisation.”

“AI can come and do some of that activity, free up employee’s time to provide more informed commentary and analysis above and beyond that. We think that there is potential everywhere, really, and we’re just scratching the surface at the moment.”

Equip yourself with the tools to conquer cost

Cost saving is going to be a big item on the agenda for the next few years. Firms need to navigate a soft economy, high investor expectations and stringent new regulations. There’s a cost hole that needs filling in order to do so.

Luckily, firms now have access to new technology to help them overcome these challenges. Data automation and AI, when coupled with a focus on process optimisation, allow firms to remove costly manual work and unlock more value from their teams.

As Chris put it, “the takeaway here is data management, data automation, and Artificial Intelligence are the way that banks are really going to respond to the challenge being posed over the course of the next three years.”

“It’s an exciting time to be working in this space.”