UK banks could find £6 billion in savings via vendor contract reviews

26 July 2021 3 min. read
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Contract reviews in European banking are currently much rarer than in the US, but this will need to change if the continent’s financial industry wants to remain competitive. According to a new study, UK retail banks could save as much as £6 billion by reviewing the contracts they have in place with third-party vendors.

Earlier in July 2021, the annual edition of the Kearney Retail Banking Radar suggested that European banks were struggling to remain competitive with US banks. If Europe’s banks want to become profitable in the next five years, the researchers came to the conclusion that they would need to reduce costs by a massive £25 billion.

This is much easier said than done. Banks have constantly tried to reduce their spending over the last decade, with 9% saying they had committed to headcount reductions, and 19% having performed branch network rationalisations – without having much impact on cost income ratios (CIR). The average CIR before the last financial crisis was 62% – and by 2020, the situation actually worsened to 63% in 2020. This is because of 22 countries studied, 19 saw their income decrease from 2019 levels – and the UK saw the greatest decline in that regard, at 10%.

Cost to income ratio by region

According to a further study by Strategic Resource Management (SRM) in Europe, though, making a sizeable dent in the £25 billion target could be well with in reach of European and UK banks. If they would take steps toward vendor contract optimisation – a common practice in the US – they could find big savings relatively quickly.

David Royle, a Managing Director with SRM in the UK, commented, “Third-party contracts are a huge proportion of banks’ operational costs, but where vendors have entire teams permanently negotiating and renegotiating their contracts day in day out, banks will typically only review their contracts once every few years, with little point of reference to comparative data. This leads to a negotiating imbalance and sub optimal contracts.”

According to SRM, by fixating on branch cuts or headcount reductions, banks are overlooking a major issue of paying their vendors too much. Royle noted that IT costs alone, including core processing, payment providers, automation, and digital platforms “have increased a staggering 80% since 2015,” something which is draining the profitability of European banks.

In particular, financial institutions in the UK could find key savings by reviewing their contracts. SRM’s US operation has helped its banking clients save more than $3.6 billion in vendor fees for more than 1,000 clients over the last 30 years. Based on this experience, the firm estimates that as much as £6 billion of third-party vendor costs could be saved in UK financial services.

One example of where contracts need to be reviewed is “volume-based” commercial agreements. SRM pointed to Mastercard, which recently stated 35% of customers have increased online banking use during the pandemic – so volume-based agreements drawn up to save money under different conditions are now resulting in up-surges in pricing for many banks.

Royle concluded, “Coming out of this unprecedented period of disruption which will affect long-lasting change in so many ways, means that now is the time for banks to take action, revisit these outdated contracts, and correct the negotiation expertise imbalance.”