RegionsEEABenchmarking Operational Efficiency: A Study of the Treasury Back Office in Central and Eastern Europe

Benchmarking Operational Efficiency: A Study of the Treasury Back Office in Central and Eastern Europe

Following a decade of relentless automation, have the banks in Central and Eastern Europe received satisfaction from their investment in automating their operations? This was the question that City Networks was looking to answer when it sponsored a study conducted by independent researcher IDL Strategic Services. The results show that Central and Eastern European banks are squaring up to the same challenges as their global counterparts. Ten years on, further processing efficiencies are still being sought by the Operations Managers of the major banks headquartered in the financial centres of Central and Eastern Europe.

The survey raises several juxtapositions. Asked about the value of straight through processing (STP) on various areas of their treasury operation, 64% feel that front/middle/back office integration represents great value, whilst only 11% report that they have achieved full integration in this area. Similarly, with 79% recording that their organisation places great value on STP within settlements and payments, only 16% believe they have achieved a high level of automation.

Process efficiency improvements

The survey started by establishing the urgency sought in improving processing efficiency. Asked about the timeframe for improvements, payments and confirmations came out as strong leaders with 68% and 66% respectively wanting to see progress within a year. (Figure 1)

Fig1 Timeframe for Improving Processing Efficiency:

Risk management systems were also seen as in need of improvement inside 12 months, ranking third at 61% alongside the maintenance of standard settlement instructions. Over half the managers would like to see short term enhancements in their reconciliations processing and trading systems. Monitoring of derivatives transactions was also seen as a short term desire by 52%. Overall, with the exception of consolidating information from other branches, over half those interviewed on this subject felt that increased processing efficiency in the next year is desirable.

Straight Through Processing

Looking specifically at straight through processing (STP), the managers were asked their opinion on the value their banks place on achieving STP in a number of areas. Understandably, the most significant finding was that 92% of managers responsible for back office operations cite the STP of settlements and payments to be of value. (Figure 2). However, both electronic trading/broking and front/middle office integration are also viewed as fundamental, scoring 89% and 86% respectively. The value of STP of post trade reconciliations (83%) together with investigations and exception processing (72%) both score highly.

Fig 2 The value placed on achieving Straight Through Processing

Perhaps surprisingly, STP value in the area of customer connectivity and service features in the middle order, belying the customer-centric focus found more globally.

Having sought opinions as to the relative value of STP to their banks, the treasury operations managers were then asked to evaluate the level of STP that has been achieved. (Figure 3). Most work has concentrated on the areas of settlement and payments (90% having some degree of STP), with 77% having achieved electronic trading/broking integration, and 68% integrating the front and middle office operations. These results correlate well with the previous responses on value, with 71% of banks having no STP in the voice broking area and 74% have no pre-trade matching.

Fig 3 The level of STP achieved so far

Looking ahead

The question focussed on profit growth. (Figure 4). Not surprisingly merger and acquisition is not seen by the participating banks as the way to grow profit, with 64% rating this as ‘Not important’. Profit growth, in the opinion of those surveyed, is going to come from the introduction of new business lines/products and increased automation, both scoring 100%. These two profit contributors are rated as ‘Critical’ by approximately one third in both cases. Over half the respondents consider staff reduction/redeployment as having no importance in relation to profit growth, although automation and staff realignment often go hand-in-hand. Another growth factor seen as important by 89% of the treasury operations managers is growing the corporate client base, yet it appears only modest effort has been made to ’embrace’ customers electronically.

Fig4 The organisations’ view of the best way to grow profit

Risk Management and Compliance

Finally the question of risk management and compliance was raised. Of heavy concern is the impact of the forthcoming BASEL II regulations, with 92% of respondents expressing concern. Money laundering regulations are also causing concern with 79% of respondents. (Figure 5). The results support wider predictions of growth in IT compliance investment of up to 9% CAGR over the next three years.

Fig5 To what extent are the following regulatory areas likely to be a concern over the next three years?

The survey also shows that ‘other’ regulatory reporting requirements cause 91% of respondents to express concern. This also reflects in Figure 1, where 61% of respondents flag improvements in risk management to be needed in the short term.

Conclusion

Taking the survey results in total and looking at the correspondence between value and achievement of STP draws an interesting conclusion (Figure 6).

Fig6 Comparison between the levels of STP achieved within the organisation Vs the perceived value that STP delivers

Significantly 50% of respondents place great value on post-trade reconciliation but 43% have no STP. As may be expected, it then follows that STP is even less prevalent in investigations and exception processing. Settlements and payments are identified as being reasonably automated already, although further improvements in processing efficiencies are required in the short term. Looking at the importance of new instruments to profit growth, it would be sensible to assume that systems must have the inherent flexibility to incorporate new asset classes and product options.

The answer to the original question ‘Have the banks in Central and Eastern Europe received satisfaction from their investment in automating their operations?’ appears to be a ‘quiet yes’, but the strong demand for continuing improvement in the short-term is heard loud and clear. Overall, the survey findings that further progress in STP, compliance and risk management is imminent supports global expectations that IT investment is set to grow by up to 5% in the year ahead, with a larger than average contribution from the Central and Eastern European banking community.

The survey

The survey’s 44 respondents were Heads of Operations in Treasury and Security divisions within major Central and Eastern European banks, with headquarters in Bulgaria, Czech Republic, Hungary, Poland, Romania and Slovenia.

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