UK retail banks are ignoring the opportunity to save £6bn. David Royle, MD of SRM Europe tells Douglas Blakey that vendor contract optimisation may be the missing link for UK bank profitability.

Specifically, UK banks are missing out on significant savings simply because they’re not reviewing vendor contracts regularly or thoroughly enough.

Vendor contract optimisation is common practice in the US. But by contrast, it is far less common in the UK or across Continental Europe.

SRM Europe MD David Royle speaks with RBI editor Douglas Blakey

The need for UK banks to make major savings could not be more pressing. Moreover, retail bank revenues are under pressure. According to the latest Kearney Retail Banking Radar report, European banks need to reduce their costs by over £25bn over the next three to five years to meet profitability targets.

Of the 22 countries studied, 19 have seen their income decrease compared to 2019 levels. Indeed, the greatest decline is in the UK, at 10%. Attempts to halt this drop are failing. Banks have repeatedly tried cost-reduction programmes over the past decade. Examples include headcount reductions (9%) and branch network rationalisations (19%).

Current cost-savings programmes are having little impact

The problem is that this is having little impact on cost-income ratios. The average CIR in 2008 was 62%, which has actually worsened to 63% in 2020.

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Royle tells RBI: “Banks’ fixation with headcount and branch cuts ignores the real issue. They are continuing to pay too much for third-party contracts. These are a huge proportion of banks’ operational costs. IT including core processing, payment providers, automation and digital platforms for example, have increased 80% since 2015.

“Based upon our extensive work within financial services in the US, we have identified up to £6bn billion within UK banking third party vendor costs which could be saved. By any measure is a significant contribution to the £25 billion sought.”

Royle says that the average-sized business has four to 10 substantial supplier agreements in place to keep it running. The bigger the business, the greater the number of vendors.

Negotiating and commercial imbalance

However, there is a negotiating and commercial imbalance between global payment, technology and operational vendors, and retail banks. Vendors have large teams negotiating and renegotiating these contracts year in, year out.

But such tasks may typically only be considered by the bank every three to seven years. Not only this, but many contracts were written to reflect very different business environments than we have today.

For example, 35% of customers have increased their online banking usage during Covid. Contactless transactions globally are up sharply over the same period. 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.

Vendor contract optimisation: saving clients billions

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.

Vendor-contract optimisation is as common in the US as it is overlooked in Europe. In the US, specialist firms such as SRM have worked extensively with the financial services market.

Royle adds: “We have saved clients billions in vendor fees just from renegotiating contracts alone. This includes major payment and digital platform providers. Another feature of this service is basing payment on a risk-reward basis.

“The initial assessment, analysis, and renegotiation are all free. Payment is only received via a shared savings model once the client’s new contracts and rates are negotiated.”

SRM is now active in the European retail banking market. It will be fascinating to observe if it results in the banking sector re-assessing contract negotiation tactics.

SRM services include cost reduction offerings – including RFP services, vendor scorecards, contract negotiations, and conversion management.