Bank operations are a general term for a variety of experts in the middle and the back office, ranging from Treasury & Financial Markets, Payments & Accounts, Credits, Securities and more. No bank can survive without their support, and no successful change is possible without their contributions to make that change.

We spoke to Olivier Heindryckx, Practice Lead Operations at TriFinance to better understand the waves of change that these departments undergo as part of the general transformation of the banking industry.

The middle and back office are instrumental in a bank's organisation. Change in the front is impossible without considering what's behind the scenes. What do you see as the most critical drivers for change programs within operations?

Olivier Heindryckx: We see several elements to take into consideration. First, there is the workload distribution, which shifted as a result of the evolution to straight-through processing, an evolution that started 10-15 years ago. The computer processes most of the cases and the basic transactions.

People are there to solve issues and problems for which the machine has no solution. Exception management is now the rule. That means the work is concentrated with the few experts with the right analytical and problem-solving skills, whereas others see a decline in the workload.

On top of that, more reporting is needed to meet the expectations of the regulator and facilitate the decision process of top management. In combination with the creation of more complex products and activities, the middle office is no longer optional today, but an integral part of every financial institution, just like the back office.

Automation of processes improved efficiency at the cost of higher technical complexity. In the spaghetti of the past, specific cases and transactions had a clear path with many interfaces between systems. People knew where in the processes the weaknesses were. Today, banks have a core banking platform where transactions are expected to enter the black box for execution and at the moment of an issue, it is much harder to find the root cause.

We also see that regulatory pressure has increased over the years. Although compliance and risk departments are there to understand all the details, people in operations must know the basics of MiFID, FATCA, KYC/KYT, PSD2, CCD (consumer credit), Basel 3 and other regulations to ease communication with these risks and compliance departments on the one hand, and the customer on the other.

People working on these products and processes must understand these to do their job correctly. Colleagues that lack this knowledge, and problem-solving skillset, the ones recruited for pure execution tasks, become increasingly redundant in such an environment. This creates a gap between people that are constantly working overtime while others can leave at 16h CET because they cannot contribute to the more complex cases.

Finding more experts isn't easy because these jobs are not appealing. The tasks are perceived as basic and repetitive, and it is hard to change that perception to attract the required talent for the middle or back office.

Obviously, this bottleneck clashes with another driver for change: customer expectations. Clients expect online answers today, which is a real challenge, especially in mid-size and small banks. Big institutions can process most online, but some smaller banks still depend on manual work in specific processes.

The importance of operational risk is the last important driver for change. Do you remember Jérôme Kerviel, 15 years ago? That case initially started in the back and middle office. Despite the four eyes principles and other procedures, we can never prevent any kind of IT failure or fraud, which can have serious consequences, purely financial, and, next to that, reputational damage.

For these support functions, we often see waves of in-and outsourcing. One period, it's all about cost reduction, and banks will outsource certain tasks or jobs to an external partner to realise afterwards that the quality was insufficient and customers are not getting the required services they asked for. It always makes me wonder why these institutions don't learn their lessons from the past.

We all know that the unique driver for outsourcing is cost reduction. This has not always been a success because the workforce of the outsourcing partner is not always on par with those of the client. Financial institutions outsource to other countries. Clearly, the people working there know how to process a predefined script, but in case of a problem, they cannot solve them.

Outsourcing may lower direct costs, but some indirect costs may increase. Suddenly, the bank registers more claims for failed transactions and not meeting SLAs, the operational risk increases, or the overall quality decreases, leading to a higher cost and a possible impact on revenues.

To avoid the reputational risk, some organisations will outsource certain activities and keep a centre of excellence locally as a gate between the customer and the outsourced entities. This affects the business case of the outsourcing projects and potentially creates a bottleneck domestically, which affects the processing time.

That partly explains why some organisations decided to bring the work back to Belgium, to insource the back and middle office jobs that they initially externalised. They've done their cost-benefit analysis, concluding that it is inefficient.

I believe we will see this more in the future, with incremental improvements in AI technology, robotics and automation that further improve the work machines can process.

Further adoption of AI and robotics may even end outsourcing basic tasks to lower-income countries. Smart investments in this field have the potential to significantly reduce operational costs while keeping control over the exceptions that require local expert teams to take over from these robots.

An in-between solution is a hybrid form where a third-party provider will assist within the organisation. I believe TriFinance has a similar service. How does the sector welcome those kinds of initiatives?

For two, or three years, the paradigm is changing a bit. So far, third-party providers were contacted on an ad-hoc basis, in a reactive way, where the organisations would be in a firefighting mode with an immediate need for assistance.

At Trifinance, we developed new offerings, suggesting a structural partnership with a proactive approach. Some needs of the client can be perfectly projected. This is not just long-term change programmes or mergers, for example, but also operational work that requires temporarily more and simply different talent to the existing talent pool.

The first one is what we call backfilling. We see a trend of banks asking people sitting in the business to be part of a project management team to get the expertise inside the bank once the consultant has left. This means these people have to be replaced during the time they are working on a project, and they have to be replaced in the business as usual of the bank. Our role is to close gaps where they are.

Another offering is where we take over part of complete processes from the client, especially during peak periods. We know that some departments in operations have a predictable higher workload at specific moments in the year. For instance, we know that the Batibouw period in Belgium is hot in March-April each year for mortgage departments. We know that the period of May-June creates much more administration in securities because of dividend distribution. Summer is a busy period for fraud in accounts and payments because people are on holiday using their credit cards more often. We observe the effects of higher volumes and less vigilance by the cardholder.

So we know upfront that there are periods when the client faces a higher workload. TriFinance helps mitigate that impact by ensuring that the backlog remains under control and that the quality of service remains good. We can enter into a structural partnership, with ramp-up/down of resources to ensure the day-to-day remains entirely under control, meaning a controlled backlog and good quality.

How do you look at the challenge for banks that often the most experienced people in the middle and back office are also the ones closest to retirement, often without someone to hand over the knowledge, in combination with a labor market under pressure today, making it hard to find replacements?

We see that people with high seniority and sound expertise are progressively leaving while banks need precisely more expertise than 10 or 15 years ago. We can solve some understaffing through automation and process optimisation, but experts will still be needed.

New talented people often prefer another career path, so one of the challenges is to explain, educate and convince people that the expert in the middle and back office is no longer the same as 20 years ago. The scope and competencies required are much larger, the job satisfaction much higher and the opportunities afterwards for one's career much bigger.

HR has an essential role to play. They should facilitate more internal mobility in a bank and clarify that 2 - 3 years in the middle or back office is a good transition for people who desire a front office job in a branch or the dealing room.

Alternatively, analytical and problem-solving skills also prepare people to move transversally to different operations departments, making someone a true bank expert.

Conclusion

The way Operations (or back and middle office) have been managed over the last 10-15 years in banking has drastically changed, driven by lots of new constraints: shorter response time, lower costs, higher regulation, client centricity, the complexity of products, new reporting needs and operational risk. This has led to the implementation of new core banking systems to eliminate the spaghetti of systems, straight-through-processing, outsourcing waves, and many initiatives to optimise the existing processes.

Productivity has improved a lot. That's a fact.

The quality, however, remains a considerable challenge. Expertise is progressively leaving, precisely when banks need more expertise because they evolved their middle and back office into exception management, a world with most of the transactions processed fully STP but the remaining ones needing strong analytical and problem-solving skills. AI and robotisation will keep automating processes and improving productivity, making outsourcing unnecessary.

But the shortage of experts will remain if the financial institutions don't put time and energy into making people realise working in a back or middle office can be challenging and could become a career accelerator.