Front to back strategy: future-proofing operations

Q. What is the relationship between the front- and back-office operations and how do they fit together?

Marcus Sehr: From a front-office perspective, the relationship between my line of business and Ms Campbell and her operations team is critically important. Integrated operations ensure the quality of our service delivery. Quality in transaction banking is non-negotiable. When it comes to product quality and service, you either have it or you are out of business.

As for how the two fit together, there are two ways to evaluate it. The first – and most important – is the client perspective. Our clients expect superior service and products, and it makes no difference to them whether these products come from the back or the front office. As a result, we have to function as a single unit in order to provide a market-leading service provision and solutions set.

However, as important as it is to work holistically, there are several reasons as to why banks have traditionally separated the front and back office. One reason is that auditing requirements dictate that bank departments have distinct functions and a segregation of duties. The other is that these different bank functions need to have a variety of skill sets to adequately accommodate client demands – but these skill sets must work together and complement each other in order to be successful.  

Q. What specific skills are needed for operational success?

Mary Campbell: Teamwork is essential. It is crucial for an operations team to work as a single front-to-back unit, inclusive of the business and IT. This can be challenging because, from time to time, business and IT may have different priorities. As a result, members of the operations team must be good listeners with the ability to influence others in order to align the team’s thoughts and direction. Furthermore, in a rapidly evolving financial services industry, operations personnel need to be able to anticipate change and respond quickly and objectively to developments as they arise.

Q. What qualities do you look for in your team members?

Mr Sehr: For global cash management, we look for bankers who have a technical background. In addition, they must be able to listen to clients and translate their needs into products and services that will make a tangible difference. The team must also have the ability to anticipate clients’ questions and have ready answers. Such proactivity means going the extra mile for the client – although we consider this part of our day-to-day business rather than an additional effort.  

Q. How important is operations for the transaction banking business?

 Mr Sehr: Operations are vital to optimal cross-border cash management services, as they play a key role in investment and innovation. As a leading provider of cash management services, we have to exercise caution with respect to how we invest in order to help our clients generate revenue, reduce costs and mitigate risk. With this in mind, our investment decisions could be affected by regulation, driven by client demand or happen as a result of our efforts to remain a step ahead of the market.

In addition to investment there is the need for scalability, which is critical for future business growth. Scalable operations are key to remaining profitable in what is becoming an increasingly challenging line of business.

Future growth also depends on the ability to deal with peak volumes. For example, at the end of a financial period – be it a quarter or year-end – it is not uncommon for us to have to process up to 200% of our average business-day volumes. We must also be prepared for extreme situations, such as those experienced after the Lehman collapse in 2008 when the volume usually processed throughout the day was coming in delayed and compressed to the end of the day. Our operations were robust enough to cope.

Last but not least, it is vital that operations give us a cost advantage. The expertise and support of the operations team is what allows us to be successful at a practical level – via continual process optimisation, automation or smart sourcing.

Q. What operational advances have been made in recent years?

Ms Campbell: Many of Deutsche Bank’s operational advances have been chiefly driven by changes in the financial landscape, change in client profile and requirements, and increasingly challenging market conditions. Both our financial institutions and corporate clients have, in recent years, adopted a more global outlook, and as a result require a provider with a global presence and expertise. This local-to-global change in attitude has had a major effect on the evolution of our operations, which focuses particularly on the development of global applications that provide consistency across borders.

At the same time we have moved away from localised in-country operational services to developing global processing centres, which are international operating hubs that provide clients with a consistent service offering on a 24-hour, seven-days-a-week basis. Clearly, this also has a positive impact on our cost structure.

Q. What impact have these advances had on Deutsche Bank’s global transaction banking business?

Ms Campbell: Transaction banking is now a standardised business and margins are likely to remain under pressure. As transaction banking is a core business for us, it was important to invest in technology and automation in order to maintain our leading positions in this space.

Our investments in technology have afforded us significant capacity. As Mr Sehr mentioned, we can process significantly increased volumes without any material impact. We have also made notable investment in artificial intelligence within these systems, all of which affords us a high straight-through-processing (STP) rate. Our current STP rate is about 97%, which allows us to stay competitive and continue to provide clients with a high-quality, flexible service in what has become a much commoditised business.

Q. What aspects of operations are of most interest to your clients?

Ms Campbell: Consistency of service quality is highly valued. It is important that clients can rely on our services, and that we have the resilience to provide a continuously high-quality service. With respect to our financial institution clients in particular, we must remember that they have corporate or retail clients who depend on them – so they in turn must be able to depend on us.

 Mr Sehr: In many cases we invite our clients to the operations side. We are not looking to just sell products and services. We want to share our know-how with our clients because we see them as partners. Whenever clients come to the operations side, we see it as critically important for the partnership that we share our knowledge and demonstrate our commitment.

Q. What do you expect to see happen in the industry in the future?

 Ms Campbell: We expect continued pressure on cost and margins in this commoditised business. It is also expected that regulatory requirements and the resulting pressure will continue in the future. Success in transaction banking will be based on the ability to maintain investment in scalable, flexible platforms that make commoditised solutions feel bespoke. This is crucial because, as much as we need to meet client requirements, we need to do so in an automated manner that comprises a high-quality service.

Q. How are you working together to future-proof Deutsche Bank’s operations?

Mr Sehr: Many perceived challenges, such as regulation, may also be opportunities. If you choose to view regulation as an opportunity, you have to analyse it, understand it and ultimately embrace it. There will be new regulations coming to the business and if we deploy the right strategy and maintain the right dialogue, we will continue to be successful.

The other area in which we can future-proof operations is innovation – designing and implementing new products that will help our clients to reduce cost, generate revenue and mitigate risk. If we can deal with new regulation, remain innovative and prepare for the unexpected, we have a healthy, future-proof business model.

 Ms Campbell: In addition, it is important that operations and IT are fully integrated into the business strategy. Although we refer to ‘the strategy of the business’, from my perspective that really means a front-to-back strategy with operations and information technology aligned and integrated.