For banks and other financial institutions, the trade expense process is outdated and exacerbated with complexities. However, when this process is reconceptualized, with digital modernization and analytics, it leads to transparency that can improve cost optimization, as well as help financial leaders, make decisions informed by data. To understand the challenges related to trade expense and what banks can do to improve their processes, we sat down with Alex Duggan, Head of Investment Banking, Capital Market Solutions, at Cognizant.
Financial Technology Today (FTT): What is the trade expense challenge faced by financial organizations today?
Alex Duggan (AD): Trade expense is typically the second-largest expense for financial organizations after people. The process is typically outdated and uses bilateral complex rate agreements to support the monthly invoice management process. And, as a result of that, banks and financial organizations, in general, struggle to understand what’s driving their costs at a macro and a micro-level.
Adding to this challenge, as they begin to analyze trade expense, banks start to uncover outdated rate agreements, aged and inconsistent counterparty data with no central standardized store. This goes hand in hand with another challenge faced by financial organizations which is data quality.
Typically, banks have different front-office systems for the complex businesses they support. However, much of the data attributes required to support complex calculations are not fed from these systems downstream to the underlying trade expense management process, which are often dated legacy systems. As a result, it is not possible to calculate and reconcile invoices or provide the data analytics and reporting required for businesses to make informed decisions.
FTT: What factors impact the trade expense challenge?
AD: Regulatory changes have continued to impact financial organizations, eating up most of the discretionary budget whilst making expense calculations more complex. This leaves banks with limited capability to focus on areas like trade expense. Adding to this is the complexity of financial organizations today. When you think about a typical bank or financial institution, it’s global. It has global businesses, entities, and structures making the ownership of a standard trade expense solution and sponsorship even more challenging. And, while trade expense has always been important it’s not usually the top priority.
FTT: What roles do modernization and transparency play in the trade expense process?
AD: In terms of modernization, data lineage and digitization of counterparty data and agreements are key activities that drive the ability to effectively calculate and validate. To that point,data analytics on digitized rates and trade calculation drives transparency. From a trade expense perspective, making transparency integral to this process supports a bank’s first line of defense regarding compliance. It provides insight into what’s driving costs and also, how to optimize spend through renegotiation, moving flow, or investment. Transparency also helps people make investment decisions and better understand the costs of business in the future. Most, if not all, banks struggle with data transparency and the granular analytics that are required to understand it. This is where financial institutions are looking to catch up with other industries.
FTT: How can banks renovate their trade expense processes?
AD: To be able to update this process successfully, quality data will always be king. It’s all about centralization and digitalization so that banks can have a clear view of their data. To have clear and transparent data, a central operationally efficient process that helps to manage all of the trade expense and invoices, is critical. This partnered with data analytics will ultimately provide the transparency needed to identify cost optimization opportunities.
Another important part of the renovation process is collaboration. We haven’t really seen collaboration in the industry but it’s interesting because most banks have the same issues. They’re struggling with their data, transparency, analytics, and optimization. So, from our perspective, there’s a real opportunity here to get people together and help them use the right technology that brings this process up to date.
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