By: Srinivas R
And finally, for procurement in financial services sector, the mist is parting, and the clear light of day is shining through. That the procurement organization has a manifest destiny and a value proposition that can suffuse the entire enterprise is now becoming increasingly evident not just to its practitioners but to financial sector C-suites, as well. Any reason why the procurement discipline, for long relegated to a back-office existence, is bubbling to the top of the corporate agenda in the financial sector now of all times? On the face of it, banks are making a killing out of elevated interest rates. So far, so good, but only as long as the party lasts. Besides, there are the usual pains that accompany any gain. Once inflation cools, banks will be left with hardly any reason to push up loan pricing any further. Elevated interest rates, which are working in favor of lending institutions, will likely slow credit take-up in the future. As banks enter the trough of this virtuous cycle, credit growth may not keep pace with interest payouts to customers. Last year, US banks paid out a whopping $78.7 billion to domestic account holders, a more than 3x jump over the previous year. Plus, there is the rising burden of compliance costs. So, there is a strong case for narrowing spreads (margins) for the sector in the future, and the only way financial sector players can prop up weaker profits is by allowing procurement in financial services industry to realize its full potential and deliver across-the-board savings. So, the question no longer is – what is procurement in financial services?Far from that, financial sector CXOs are keener about how much more value procurement in financial services can bring to the table.
Drive cost-to-serve improvements while meeting compliance obligations
Since early 2020, the Covid-19 pandemic has driven a worldwide surge in digital payments and, by so doing, helped financial services expand their reach to “unbanked” demographics as well as narrow the gender gap in account ownerships. Digital-native financial services organizations obviously held an advantage here compared to traditional incumbents reeling under the weight of legacy systems and processes. By all accounts, the coronavirus seems to have beaten a retreat. Even so, it’s highly unlikely that customers are going to give up the convenience of digital services anytime soon, and the number of online users is clearly on the rise, year on year. However, given the faceless nature of online transactions, customers have genuine concerns about Internet deception and fraud. So, trust is a non-negotiable instrument in online financial services, and this applies just as well to traditional and nascent providers. Therefore, it goes without saying that financial services must firewall their customer-facing processes behind multiple layers of security. While creating trust is sure to increase online traction for insurance players, retail banks, and wealth management firms, it is important that they closely monitor and progressively cut back the true cost of every online customer (“cost to serve”) as well as meet compliance mandates. That’s a call to action for procurement in financial services industry,difficult but doable all the same.
Cut out legacy assets, cut back their cost downsides
On average, profit margins in financial services hover in the range of 12-15%, and many banks are cashing in on surging interest rates. That said, averages don’t always reveal the full story since financial service is an umbrella of subsectors (e.g., investment groups, financial advisory, mobile banking apps, fintechs, nonprofit cooperative financial unions, and more). Besides, the cost of regulatory burden needs to be factored in. 9 out of 10 market participants in the sector report rising compliance costs. Pruning the assets portfolio and replacing or letting go of underperforming assets as well as consolidating siloed business processes is among the top agenda items at most financial services. Legacy applications are not just slow but often don’t “talk” to each other. Their upgradation costs might be steep and antiquated systems are not going to help financial services keep up with evolving regulatory compliance standards. Besides, legacy systems are not necessarily configured to deliver the analytics that procurement in financial services needs to make improved decisions for better business outcomes.
Digitize more – It’s the sure-fire way out of procurement woes
During the pandemic, financial services customers leaned heavily on digital services, and the lessons derived from such digital adaptation and general acceptance of the phenomenon are here to stay. On the other side of the spectrum, financial services players have made opportunistic gains during the lockdown by pivoting to an era of secure and convenient digital services, restricting physical contact. The opportunity (as well as challenge) before financial sector participants is to skate to the next level of digital engagement without backtracking on in-person banking. There is also an imminent need to step up user privacy and security in the light of growing credential thefts and phishing. To live up to these challenges and meet rising customer aspirations, including of digital natives, financial services must recalibrate their supplier selection, so it maps to contemporary needs. Going beyond age-old criteria, such as price, quality, service, delivery, and ESG scores, procurement in financial services industry must vet vendors for their capability to leverage digital capabilities for best results before bringing them to the negotiation table.
How can SpendEdge can help BFSI companies:
Build stronger supplier relationships, mitigate ESG risks
In theory, measuring supplier KPIs is as simple as understanding the supplier base and evaluating it effectively. We wish real-life supplier evaluations were as simple as theory and precept. In fact, supplier failure, especially on key ESG parameters, is a leading cause of reputational damage. At SpendEdge, with time-tested supplier evaluation techniques, our experts help organizations, including procurement in financial services industry, onboard suppliers with sterling ESG credentials to fend off sustainability risks.
Get 360-degree supply-side visibility
Realizing transparency in procurement in financial services is easier said than done, given the complexity of products, processes, regulatory mandates, and a diversified supplier base. A deep and accurate understanding of the financial services “food chain” and comprehensive visibility of activities is very much a possibility. At SpendEdge, our experts assist clients, including in financial services, in building bespoke solutions to enable supply chain transparency.
Discover optimal sourcing destinations and suppliers
Procurement in financial services industry is one that is buffeted by volatilities and headwinds, and identifying fail-safe sourcing destinations and suppliers is crucial for businesses to tide over troubling times. Picking the right supplier and country market involves careful considerations not limited to cost, quality, and reliability. Suppliers’ ESG credentials, for instance, has now top of mind at most financial services organizations, and our country market assessments take cognizance of clients’ sustainability considerations, apart from labor pool availability as well as political and economic stability in target markets.
Leverage procurement market intelligence leadership
With experience spanning two decades, we deliver deal-clinching insights to more than 200 global procurement organizations, and our expertise straddles multiple areas like category landscape, supplier identification, negotiation strategies, price benchmarking, cost modeling, and sustainability practices. We help businesses get ahead! Is procurement in financial services industry listening?
Success story: A banker engages with ESG-committed suppliers as a procurement priority
Our client is a leading player in Western Europe’s BFSI landscape with a dominant presence in key financial services segments like corporate, commercial, and institutional banking as well as wealth management. Though the bank continues to maintain a core Europe-focus, over the years, it has expanded its footprint to nearly 50 countries in Asia, Africa, and the Middle East. In an industry that is seeing shrinking margins and rising compliance overheads, our client is indeed comfortably placed, going by KPIs like net interest margin, loan-to-assets margin, return-on-assets, loan-loss ratio, and customer retention.
In furtherance of its commitment to fight human-made climate change, our client looks ahead to embedding ESG in all its processes, including procurement in financial services. Going forward, our client would like to be seen increasingly as a caring and responsible corporate citizen. Setting its focus on the future, the client prefers that it be led by a sustainability compass with the following as its main points: reducing carbon footprint, human rights violations, workplace injuries and illnesses, workforce inequities, corrupt practices, and opaqueness in decision making. The client looked to extend its conscious ESG choices to procurement in financial services (i.e., acquisition of goods, services, and consultancies) and ensure such activities make only one kind of impact on the environment: positive! However, noble intentions themselves don’t translate into good business results, and if they are not put into practice, they aren’t worth anything. Large banks often work with an opaque network of vendors worldwide, including in places with lax ESG compliance. Rippling the client’s ethical obligation to ESG across its distributed vendor base is no easy task. Moreover, ESG is a multifaceted discipline, and to rise to the challenge of assimilating ESG across its supply networks, key decision makers at the client’s procurement organization wanted to develop a finer understanding of how it can improve business results and win over investments.
In early spring 2023, the client had a kickoff call with our experts to discuss ways to navigate issues in procurement in financial services industry, with a focus on ESG adoption, and soon after, our teams applied themselves to ensure an early resolution. In a short while, our experts outlined a roadmap for evaluating suppliers’ ESG credentials with high confidence and precision. Our granular detailing covers vendor certifications (ISO 9001, ISO 14001, ISO 45001, OSHAS 18001), CSR policy, fair wage plans, health and safety management, environmental policy, water management practices, diversity scores, and fair wage plans. Furthermore, our teams framed a bespoke solution to help the client stay on top of what is happening upstream in the supply chain, continuously track vendors’ ESG performance, and recommend timely improvements. The client is satisfied with the data-driven approach and the results thereof, and the client continues to engage with our experts to push the envelope of possibilities in the ESG realm and other key result areas of procurement in financial services.
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Author’s Details
Srinivas R
Associate Vice President, Sourcing and Procurement Intelligence
Srinivas is a solution design specialist at Infiniti Research and provides advisory services to clients across the medical devices, pharmaceutical, CPG & FMCG, energy, and ICT sectors. He specializes in the procurement areas of industry benchmarking, cost modeling, rate card benchmarking, negotiation advisory, and supplier intelligence.
