Banks and insurers need to better manage complexity if they want to restore “sustainable profitability” in the post-crisis environment, according to a report released Wednesday at the World Economic Forum in Davos.
The report by Oliver Wyman says large financial institutions on average posted returns of 7% in 2013 — “the level of utilities companies” and significantly lower than the 20% on average posted by such firms in the early 2000s.
The consulting firm’s 18th annual State of the Financial Services Industry report also says that eight U.S. and 16 European institutions designated as global systemically important have seen their returns decline by 70% since 2006. While absolute profits rose from the 1988 peak in interest rates until 2006, productivity has not improved since 2001, and the report blames increased complexity created by regulation, multi-channel customer interaction, fragmented systems, product proliferation and geographic expansion.
For example, Oliver Wyman estimates that between 2.5% and 3.5% of North American, European and Australian financial institutions’ total costs come from meeting “elaborate” new regulatory guidelines.
In another sign of costly complexity, “the average bank in the United States and Europe now has five board committees overseeing risk and compliance, whereas before the crisis the average was less than three.”
“But eliminating complexity completely is not an option,” the Oliver Wyman report authors write. “Economies of scale, risk diversification, technological advances and ongoing globalization require financial firms to sustain a large number of diverse customers, to whom they offer many products through a range of channels. To restore profitability, banks and insurers must become better at managing complexity.”
Oliver Wyman recommends five measures to reduce the costs of complexity, while retaining the benefits: standardize metrics for core financial and nonfinancial functions and make them available to all decision makers; employ advanced statistical analysis and analytical decision-making; automate or standardize core processes; leverage technologies such as artificial intelligence; delegate decision-making to those closest to the subject matter; and build a strong corporate culture “that supports consistent conduct standards without the need for micro-management.”
A Forbes article Wednesday explaining Oliver Wyman’s report said that, “in the end it comes down to human beings. … Or to put it another way, perhaps ‘managing complexity’ is also about taking the mystique out of financial services.”
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