Joe Bakowski, Director of Procurement and Supplier Management at Metro Bank, and Michael Whitby, Group Sourcing Director at Lloyds Bank, believe financial institutions must join forces to operate more efficiently.
“Think like a startup”. It’s a mantra oft-repeated in financial services but much harder to do than to say.
In a world of risk, regulation and legacy systems, the beguiling promise of being able to sweep it all away and start afresh with the latest, efficient technology is a siren call to chief procurement officers which many hear but few can answer.
There are benefits not just for Lloyds, but for all the suppliers too. Two-and-a-half years ago, when we looked at our supplier assurance programme, we sat round the table with seven or eight banks and there was a general acceptance that collaboration in this area was a good idea
There are glimmers of hope though, principally in areas where there is no competitive advantage to going it alone. One such niche where there are genuine opportunities emerging for collaboration between banks is in third-party supplier pre-qualification.
“Why wouldn’t you?” is Lloyds Bank Group Sourcing Director Michael Whitby’s typically enthusiastic opening gambit. “There are benefits not just for Lloyds, but for all the suppliers too. Two-and-a-half years ago, when we looked at our supplier assurance programme, we sat round the table with seven or eight banks and there was a general acceptance that collaboration in this area was a good idea.”
Helios was commissioned to create an online supplier assurance model on behalf of Lloyds Bank, and Metro Bank came on board as one of those early adopters.
It was a concept that Joe Bakowski, Director of Procurement and Supplier Management at Metro Bank, describes as a “fantastic idea” and “sorely needed”.
Driver of change
There are obstacles though. While the regulator has been supportive of the idea of collaboration, nobody wants to see this turn into a cartel. Within each bank the challenges of regulation, competition, risk and security need to be overcome. Then there’s the matter of focus. Lloyds Bank and Metro Bank have a predominantly domestic slant, whereas the likes of Barclays and HSBC maintain a much more global scope, so you’ve got players with very different needs on the same field.
Then there is a legacy infrastructure that has built up over time to manage the increasing demands regulators have imposed. Each bank has its own chief risk officer and chief technical officer all with their own standards. As Bakowski puts it, “People agree it’s a good idea in principle and would love to share it, but some have 30 people in Poland already doing it.”
But it is exactly this weight of regulation that Whitby thinks will be the driver of change. “The burden and cost of regulation are driving us to a point where we have to collaborate. Let’s use our money in areas of competitive differentiation, not in areas with no advantage.”
That’s a sentiment which chimes with Bakowski. “It’s easier for Metro Bank to collaborate as we simply don’t have legacy infrastructure issues holding us back. The main factor for us is that if you are going to collaborate you need to have an economy of scale to collaborate on. Three challenger banks may not have enough critical mass.
“We chose to collaborate with Lloyds through Helios as we have the benefit of an initiative that has some established procedure that we can piggy-back. In time, other more flexible players can come in and join us.”
But there needs to be, in Whitby’s opinion, “something to make CPOs take interest”. In the case of Lloyds Bank, “we decided that third-party assurance was not a core business so we looked for a partner [Helios] to run stage one – a basic online process where suppliers answer a raft of questions. Stage two develops into more specific areas of interest and stage three is a visit from our supplier assurance team to look at policies and training which finally either validates or rejects potential suppliers. Suppliers were getting 30-40 visits from us a year. Now they get one.”
We need one or two entrepreneurial lynchpins that create a good solution that becomes an island of good practice and attracts the big players around them
Achieving economies of scale
So how best to build that critical mass? Lloyds Bank and Metro Bank are already on board and another major international high street name is about to join, but there is a sense that progress could be faster. Bakowski suggests that progress will come from outside the banking sector. “We need one or two entrepreneurial lynchpins that create a good solution that becomes an island of good practice and attracts the big players around them,” he continues. “This won’t start with just the big banks saying ‘hey, let’s collaborate’, as they won’t have the drive to push it forward. It is worth remembering, however, that banks have collaborated in the past on ATMs and cheque processing and those had huge issues that had to be solved.”
Whitby cites the precedent of cheque clearing too. “It’s the same commercial dynamics. None of us can afford to be arrogantly independent anymore. Why wouldn’t you look at areas where you can collaborate if it saves you money? There are always vested internal politics, but we are all acutely aware of the need to put as much investment into customer-centric activities as possible. All we want is to take bad costs out and run the bank in a better way.”
“I’m convinced it will happen,” says Bakowski. “Not complete collaboration, as people will always want to forge their own paths in some ways. It will start in the due diligence arena where questionnaires are sent out to suppliers and the banks then share the information that comes back. Once this is established, it will move up the chain to shared audit visits to supplier premises – so if three banks have an interest in auditing a data centre and there is a market place of auditors, they commission one auditor to do the assessment for all of them. Markit has a vision for this already.”
Who stands to win the most out of all of this collaboration? Yes, the banks themselves. Cutting out the mounds of process duplication between each of them will save enormous amounts of both time and money. According to Whitby, “Lloyds has to be in the right place and get this done. My hope is that the savings and efficiencies are in fact still ahead of us, but the cost of not getting it right could be huge in terms of fines and regulatory risk.”
However, the standout winner will be the supply chain itself. By standardising third-party supplier due diligence, each supplier has the chance to unlock access to the whole banking sector through one streamlined process.