How BNY Mellon Aims to Stay on Top for the Next 230 Years
The chairmen of BNY Mellon and Signature Bank tackled cyber threats, the future of interest rates and "too big to fail" in a wide-ranging discussion on the state of the industry.
The bank is placing its stake in the crowded global treasury management market by taking on the tricky IT task of building a centralized payments hub for its financial services and corporate clients.
The Bank of New York Mellon has slashed expenses by hundreds of millions of dollars in recent years by focusing on what Executive Vice President Jeffrey Kuhn calls "the low-hanging fruit" moving jobs to lower-cost locations, merging back-office functions of companies it acquired and eliminating some layers of middle management.
Now comes the hard part. If BNY Mellon is to maintain its status as the world's largest custody bank, Kuhn says it needs to ramp up its efficiency drive. That means lowering real estate costs by consolidating offices, streamlining the procurement process by reducing its number of suppliers and minimizing bottlenecks in its transaction processing.
The 230-year-old bank is counting on its recently launched Continuous Process Improvement strategy to drive its transformation. Overseen by Kuhn, who is also the bank's co-head of client service delivery, CPI is a broad-based initiative that aims to not just increase efficiency, but also boost quality, improve service and reduce risk.
There are goals linked to the initiative generate up to $200 million in savings by 2016, for one but, as the name implies, Continuous Process Improvement is a mindset, "not a project or a program," according to Kuhn.
"This is about looking at the work flowing through the organization and making it continually better," Kuhn says.
A case in point is transaction processing. BNY Mellon, which has $1.6 trillion of assets under management, processes millions of wire transfers, currency transfers and other transactions each day for clients worldwide, and any number of them can be held up by simple errors, such as incomplete documentation and incorrect coding. These "exceptions" take time and money to resolve and Kuhn says that identifying their cause and effect is crucial to improving the bank's and its clients' productivity.
Kuhn discussed bank's CPI initiative in an interview Tuesday at the Pegaworld conference in Washington, D.C., where he was a keynote speaker. (The conference was hosted by the Cambridge, Mass.-based tech vendor Pegasystems.) What follows is an edited transcript of that discussion.
American Banker: CPI is obviously a huge endeavor for BNY Mellon. How did you come to be in charge of it?
Jeffrey Kuhn: In my career in banking I've been in charge of a lot of projects where I've been asked to fix big thorny issues. For example, you may recall we did this swap with [JPMorgan] Chase where we sold our retail to them and acquired their corporate trust business. I was one of the people managing the onboarding. At the time we were also eight or nine siloed businesses and one of my responsibilities was to look at expense targets by identifying common functions, things like billing, reconciliation, abandoned property, [know-your-customer], each of which were being managed by a different group head. At the end of 2013, we decided we needed to formalize this [efficiency effort] and take it to the next level and create a program that is really focused on continual improvement.
Why is this so important?
No organization should be satisfied with the status quo. Clients change, technology gets optimized there are ways to continually improve.
During your keynote presentation you discussed who this is for. Could you repeat that for our readers?
It's for the financial side and our shareholders. All banks are under tremendous financial pressure in this environment. We think we are an extremely well positioned bank financially, but we have to manage expenses as aggressively as possible, and we have to do it in a way that we can maintain our quality, our controls.
Also, the service levels improve if you do this right, so that benefits the client.
We also manage our operations staff on operational losses, so if I have a more efficient, more controlled process with fewer failures, I'm going to have less operational losses. We do not want operational losses.
Lastly, if we do this right and we're on a journey and it doesn't happen overnight our staff is going to be in a position to do more interesting and more challenging work. My goal is to really up the game and have a more sophisticated team of associates and staff.
BNY Mellon is a huge, complex company. How did you even know where to start?
For the first the time, we looked across all of our operations to identify what are the major processes of work that we do. We identified about 45 and then looked at how these processes line up to our expenses. Then we identified the largest [processes] by dollars and found that the top eight or 10 make up for much of the total expense. These are things like fund accounting, fund administration, data management, cash processing for treasury services, onboarding as a process. Those are the major processes that take up 50% of total expenses.
[Among business lines], the first thing we looked at was cash processing. What does it cost for straight-through, multi-currency wire transfers? How many of those do we have? How many exceptions do we have? Then we started aligning costs, so now we actually know what the unit cost is for a U.S. dollar or multi-currency wire and if it flows through on a straight-through basis. I now know how much it costs if there's an exception that gets kicked out and has to be handled. I know now how much a manual transaction costs. As you would imagine in our dollar-based business we have extremely high straight-through processing rates; however we are so big that even a small percentage of exceptions and manual processes is still a meaningful number, so our goal is to study those exceptions and manual processes and understand what the attributes of those failures are. Is it something we are doing? Is it a change that we can discuss with our client to improve the processing rates?
Now we are kicking off the other eight processes and we are going to keep working down the chain.
You said a couple of times that you "now know" various costs for transactions. Are you using technology differently in some way that allows you to capture this information?
Our [chief information officer] and tech organization have put together some fantastic data tools that we are going to be talking about in the months ahead. These are tools that really help us understand the attributes of the flow of information so that we can track what is creating exceptions and help us address efficiency challenges. That data is beginning to give us insight that we didn't have before.
Could you give an example of how you are using data to arrive at decisions?
In some of our trade processing, we had a situation where there were a specific number of transactions that weren't going through. We really started to look at why and identified one client that had a very high percentage of those fails. We began to analyze what it was about the instructions we were receiving from that client and what they could do to change on their side to allow something to flow through. We began an education process and we were able to change the behaviors on the client side.
And identifying those problems improves overall efficiency?
It improves the client productivity and our productivity.
So the "C" in CPI suggests that this is an ongoing effort, but you must have some short-term goals.
There are financial goals. We have internal targets, they are extremely aggressive. But our real goal is to stop being focused on saving $100 million, but on how do we improve the operating margins for the company.
You've been at this now full bore for about six months. What has been the biggest challenge?
The biggest challenge has been finding the expert resources, moving people out of roles so that they can help with this transformation. Also, getting the money internally to invest in some of the potential solutions [is a challenge] when a lot of money is going toward fixing systems, solving client problems, compliance and regulatory issues. I do not have a blank checkbook so I have to build a business case and an ROI case on the value of this.
Has there been anything that has pleasantly surprised you in this process?
There's been great support and engagement from the top executives. They are really excited about it; they started talking about it before we had a program.
What about rank and file?
You have the people who are involved in projects the people in the initial pilots that are very excited, but [to others] there's a bit of "prove it." And so we need to do that. We need to demonstrate that we're not here today, gone tomorrow. We need to demonstrate that this brings value, that CPI is not just another code word for firing people.