UK retail banks stand to save £6bn simply by reviewing the contracts they have in place with third-party vendors. This is the claim made today by Strategic Resource Management (SRM) Europe and comes shortly after the Kearney Retail Banking Radar reported that European banks must reduce costs by over £25bn in order to become profitable within five years.
Vendor contract optimisation is a common business practice in the US, but far less adopted in the UK and the rest of Europe. SRM specialises in vendor-contract negotiations and the recently-appointed managing director in the UK, David Royle, comments:
“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.
“Those banks have historically been fixated on reducing headcount and branch cuts as a means of balancing the books. In doing so, they ignore the real issue: they are continuing to pay their vendors too much. IT costs alone, including core processing, payment providers, automation, and digital platforms have increased a staggering 80% since 2015.
“Despite being so-called strategic partners, and regardless of their business alignment with the bank, it is in every vendor’s best interest to keep the banks paying as much as possible, for as long as possible. We want to change this in the UK market.”
SRM’s US operation, which has delivered vendor-contract negotiation services for nearly 30 years, has saved over $3.6 billion in vendor fees, for more than 1000 clients. The process has become an essential aspect of meeting profitability targets and transformation initiatives in US banking organisations.
Not only are the UK and Europe behind their US counterparts in this respect, but the pandemic has exacerbated the situation further. With COVID-19 having made long-lasting changes to retail banking consumer behaviour, SRM Europe believes that UK banks are now overpaying billions of pounds on third-party contracts. David continues:
“The public’s increasing reliance on online banking, driven by repeated lockdowns, has skewed the conditions that many of those contracts are based on.
“Figures from Mastercard recently showed that 35% of customers have increased their online banking usage since the start of the pandemic, and that there has been a 40% global increase in contactless transactions. As a result, many volume-based commercial agreements, with contract caps and performance criteria, are now causing significant price hikes and contract anomalies for banks.
“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. Based on our experience in the US, we estimate up to £6 billion of third-party vendor costs could be saved in UK financial services – that’s surely an opportunity to be seized?”