The Fabian strategy: Nordic financial firms eye growth in Europe

Nordic banks and brokers are faced with a strategic dichotomy. They have an opportunity to invest in their operations and steal a march on their European peers, growing their business in the wider region, or not invest, stay niche and risk their market share being reduced as international players continue to push into Northern Europe. Faced with bigger, international rivals, Nordic firms will need to develop strategies that can maximise their natural advantages to win market share.

When opposing the literally elephantine army of Hannibal, the ancient Roman general Fabius Maximus used his smaller force to defeat his rival by winning numerous, small victories. This ‘Fabian strategy’ is also the key to Nordic bank growth in Northern Europe. Facing competition from large global players, and with the wider European banking industry having experienced lower growth in recent years, Nordic banks have an opportunity to increase their market share by outmanoeuvring their larger rivals and overcoming other banks through the smart application of capital and technology.

Know your advantage

The first step in this quest for an increase in market share should be for Nordic firms to closely match their service offerings with client demand. Banks and brokers seeking to provide outsourced middle and back office services for buy-side clients have found that growing regulatory costs and downward pressure on fees are major drivers, according to a recent white paper by BNP Paribas, ‘The future of post-trade outsourcing’. If banks are to provide cost savings for their clients, they will have to address cost challenges within their own operations.

Speed is a key requirement as people want access to more information, in real time, and with certainty of delivery. In the Nordic markets where brokers often service retail and institutional clients, the pressure to deliver app-level usability and speed at a much greater scale is very present.

The second step is to realise where change can be effective in providing this service – Nordic banks will need to create lean and efficient back-offices if they are to compete against larger banks, while ensuring costs are kept low for buy-side clients.

There is a groundswell of concern around market infrastructure providers, central counterparties (CCPs) and central securities depositaries (CSDs), around the best approach to managing risk on behalf of their members. Banks and brokers must reassure clients that their own operations are delivering maximum efficiency and have the requisite risk management infrastructures in place.

There are some post-trade support functions which are not achieving the required level of efficiency. One example, with the advent of CSDR, is inventory management, which involves knowing the bank’s position at a firm-wide level, managing the timely delivery of assets and, where delivery is missed, managing any fines from the CSD, planning, reconciling and accounting for those fines and thereafter reporting on them. Another example is post-trade reporting under MiFID II, which can be a manual and labour-intensive task for high touch trading, slowing down both the sales traders and middle/back office staff. A single data architecture that supports reporting from a common data model can enable better service through the trade lifecycle, which in turn enables a higher level of service and client satisfaction; all key to long-term growth.

Build for the long game

To achieve this, banks will need to build a service offering that is consistently high in quality and performance, reduces response times and delivers tangible benefits, from lowering administration to supporting tighter spreads. By improving their cost/income ratio, from the average of 60% typical in Nordic markets today, to below 50%, banks will derive greater value from every small victory, winning the long term competition over their flabbier peers.

A flexible technology architecture will be needed to underpin such a business, so that the architecture is not challenged by rapidly building scale and launching new products or becoming uneconomical.

Technological investment has often been skewed towards the building or buying of ‘game-changing’ solutions, which are intended to provide a critical advantage. As a result, investment is more often seen in front-office systems. For many banks globally, the pace of change in middle and back office systems has been relatively slow. However, that has been evolving as business models and regulation mature, which have forced organisations to evolve and innovate or get left behind.

Nordic sell-side firms have the opportunity to invest in their back office to drive growth, by increasing the efficiency and reliability of service to ensure they succeed in the long run. Investment is needed because there is still a heavy dependence in the back office around on-premise, legacy mainframe applications. A solution to this issue is cloud-based systems which are an enabler for change and innovation. Not only do they allow a firm to expand rapidly, in jurisdictions with common data regulation, cloud-enabled services can support cross-border growth. The costs of cloud services are tied to that growth and to associated, increased revenues.

In order to compete with the larger banks, the Nordic banking sector must adopt a Fabian Strategy by building flexibility, scalability and reliability into its middle and back office. The biggest hurdle to success is inefficient technology which acts as a sponge, soaking up profit and energy. By replacing it with lean, flexible systems a bank can boost its cost/income ratio and use its capital far more effectively.

The first step in adopting the Fabian strategy is to make their operations fit for purpose. Taking this approach will not only enable Nordic players to adapt and compete in both their home markets and the wider European market place; it will also build a culture of efficiency and longer-term investment within the bank, serving shareholder and employees alike.

June 4, 2019

Jonny Speers

Global Head of Sales, Torstone Technology