UBS is urging banks to rethink doing everything themselves and to join up back offices instead. The idea of pooling costs in a «superbank» is age-old. One of its earliest backers, SIX chairman Urs Rueegsegger, tells finews.ch how the «seductively simple» idea can work.

Sergio Ermotti reignited the debate last month over a bank-for-banks service to pool administrative costs, create economies of scale, and improve profitability.

Banks must structurally reduce their costs, Ermotti said.

«This will, for example, only be achievable through closer collaboration between financial institutions in order to create economies of scale, without necessarily pursuing mergers-and-acquisitions,» Ermotti told investors UBS' second-quarter results.

Slash and Burn

Most recent efforts in financial service have been slash-and-burn cost-cutting such as letting staff in high-cost locations go, but have done little to address the industry’s underlying pricey structure and set-up.

Experts say banks need to find a way to cooperate where the consumer can't discern any difference in service from bank to bank anyway – typically called non-differentiating functions, reflecting their unsexy nature.

These can include anything from payments to card and securities processing to legal obligations like identifying politically sensitive clients or suspicious money transactions.

Resistance to Jointly Tackling Costs

Ermotti is the highest-profile banker in Switzerland to tackle the issue, to which there has been substantial resistance until now despite the need to tackle costs – at some firms urgently.

Ten percent of Switzerland's private banks were wiped out last year. Bigger players aren't immune: Tidjane Thiam is seeking to chop more than 4 billion Swiss francs from Credit Suisse's cost base.

To SIX chairman Urs Rueegsegger, Ermotti is preaching to the converted.

«It’s a great thing that Sergio Ermotti as one of the most visible executives in the Swiss financial center has initiated this discussion,» Rueegsegger told finews.ch in an interview.

SIX as a Banking Utility

«The building of a financial sector utility – where control is with the banks and there is a very close cooperation between the service provider and the clients, who agree on the level of profit to be achieved – is an absolutely logical step,» Rueegsegger says.

«If I take all those elements together, SIX fulfills these requirements in an near-perfect way, and that’s why we think we can do this.»

The idea has been around for nearly 20 years in Switzerland: cantonal banks, already loosely organized in an organizational structure, were the first to pool their data centers in the mid-1990s.

First «Superbank» Failed

In 1998, Swiss Bank Corp. and Union Bank of Switzerland merged to form modern-day UBS. Just two years later, Credit Suisse backed out of a plan to partner up with UBS on a «transaction bank» for their smaller rivals – the same debate that Ermotti has now relaunched, more than 15 years later.

The view from banks outside of Switzerland is similar: «easy» savings have been exhausted, but firms have made little headway in structurally lowering how much they spend. 

This is in stark contrast to manufacturing industries such as automotive, which has faced several existential crises since the 1970s. Carmakers eventually switched to automated IT processes, which lowered costs dramatically and made production more efficient. 

Digesting IT Migrations

There is little parallel in banking, where consumer protection and other regulation is arguably tougher and varies widely from country to country.

Swiss-based SIX, owned by its member banks with UBS and Credit Suisse holding the majority, has long seen itself as a public utility of and for banks. The exchange operator has pushed efforts to pool bank services, but come up against resistance among Switzerland’s banks.

The biggest obstacle has been complexity and the combination of banks, services, processes, software and business process outsourcing firms 

Another is money: many banks still carry goodwill on their books from migrating to new IT platforms offered by Avaloq, Temenos and Finnova in recent years. Enthusiasm to spend even more – even if it means a long-term benefit – is nearly non-existent.

Not Enough Pain Yet

A third reason is cultural: banks are loath to give up control over their clients to other providers – either rival banks or business outsourcing providers. This is only exacerbated by Switzerland's tradition of confidentiality in private banking, where the strongest asset is the client relationship – including the nitty-gritty unsexy details.

And yet the need for banks to industrialize or make their processes more efficient comes as digitization and emerging players pose an imminent threat. Banks are still unmoved, or in the words of one banker, «the pain threshold isn’t high enough yet». 

To make the idea fly, «superbank» would have to lower costs substantially, according to Rueegsegger – which means by at least 30 percent as a rule of thumb.

«Making Bankers Lives Easier»

In Germany, negotiations to pool certain back-office activities between Deutsche Bank, Commerzbank and DWP, a cooperatively-organized body of savings and loans banks, are reportedly proceeding at a torturous pace.

Several banks have tried themselves: Lombard Odier offers a transaction banking services for family offices, independent asset managers, and rival private banks, while Maerki Baumann's InCore promises services that «make bankers lives easier». No firm has made any real break-through as a bank for banks.

Two years ago, SIX changed its strategy away from a «superbank» for banks and began piloting individual projects for banks like ATM management, levying withholding tax on certain forms of income, and centralizing a register for dormant accounts.

«Seductively Simple»

These have been largely successful, encouraging Rueegsegger to think bigger. SIX, which is unaffiliated with any other exchange operator, is thinking of offering services such as securities management or central checks for new bank clients, including a digital ID.

SIX has been successful with individual projects for banks, but not an overall utility-style service provider.

«There hasn't been a quantum leap in this area despite working on it for years. The gap between a seductively simple idea and the complexity of practical implementations have made actual progress in this area is glaringly obvious,» Rueegsegger says.