HSBC profits up 10% as technology and digital investments take hold
- Summary:
- HSBC is making 25,000 job cuts and aiming for up to $5 billion in cost savings by 2017. A lot of this is a direct result of its technology and digital investments.
Pre-tax profit stood at $13.6 billion in the first six months, up from $12.3 billion a year ago, beating analyst expectations.
Back in June we reported on how HSBC was looking to technology consolidation, increased digitization and more offshoring of development work, all as part of the group's plans to axe 25,000 jobs globally and radically restructure.
And as my colleague Stuart Lauchlan noted at the time, whilst most of the media attention focused on the job losses, the technology investment story is also worth highlighting. For instance, HSBC is looking for up to $5 billion in transformational cost savings, which are going to be contributed to by a $1 billion injection in its digital and automation programme.
The full story can be here, but some of the tech investments up until 2017 include an end-to-end digitization and optimization of the bank's branch network, a re-platforming of its mainframes, the use of cloud for non-business critical systems, eliminating 750 legacy systems and applications from a total of around 6,700 and introducing a new core banking system.
Commenting on this week's interim results, Group Chairman Douglas Flint said:
We are continuing to invest to capture the opportunities which are arising from changing trade and investment flows and from the clear momentum in greater customer adoption of mobile and digital banking.
In the continuing low interest rate environment, it is essential we build these incremental revenues and use technology and process improvement to generate further cost savings to offset the growing expenditure needed to embed regulatory changes and provide greater assurance over financial crime risks. These factors provided much of the context to our Investor Update in June.
And although HSBC is making tens of thousands of job cuts across the business, Flint took the opportunity to highlight that the bank is actually investing in its IT resources, reflecting the focus being put on this area of investment. Flint noted that the automation of processes will allow HSBC to “release resources” elsewhere in the business. He said:
The global functions and our operations and technology teams continued to add resources to meet the demands of the Global Standards programme and of continuing regulatory change. In the first half of 2015, the Group’s headcount increased by some 2,200. Reflecting the prioritisation being given to the above programmes, more than this number were in fact recruited into Compliance, principally in Financial Crime Compliance and to address the regulatory change programmes.
As systems are upgraded we should realise planned productivity improvements to release resources currently allocated to manual processes and parallel working. The above comments illustrate how the cost dynamics of our business model are clearly changing, and we are challenging afresh the sustainability of some of our smaller operations in light of the cost burdens they are now facing. This analysis, as was highlighted in the Investor Update, will inform some further streamlining of our geographical footprint over the next few years.
This isn't an unfamiliar story across the financial services industry. Last month, for example, we reported on how Barclays bank is introducing a “radical redundancy” programme that could see 30,000 staff lose their job within the next two years – many of which will impact middle and back office operations, as the bank looks to automation of manual processes.
HSBC's Flint, however, also took the opportunity this week to highlight the opportunity presented to banks from the ability to collect and store customer data on a scale that hasn't previously been feasible. He notes that this should allow for better personalisation of banking services to customers and a reduction banking fraud. Flint said:
There is no doubt that banking is in a period of fundamental change as a consequence of technological developments that, firstly, allow storage and analysis of an almost unlimited amount of data and, secondly, allow customers to directly access third party providers when transacting or investing. The opportunities are exciting; the risks are not insignificant.
The benefits to customers and society are potentially substantial. Better use of data will allow more accurate knowledge about the customer to be built, leading to improved customer segmentation and therefore less risk of mis-selling in the future. The same data, together with transaction monitoring, will enhance our ability to identify bad actors within the system, so reducing financial crime.
However, Flint also rightly noted that this use of data requires a public discussion regarding how comfortable customers are with organisations using it to provide better services. We have seen many a time when organisations have not been transparent about their use of data, which has resulted in a backlash from its customer base. Flint said:
A lower cost of delivery will flow through to lower intermediation costs for customers and allow banking services to reach communities currently under-served. The nature, scale and pace of change do, however, pose a number of public policy questions still under review as well as highlighting new risks to financial stability that need to be addressed.
The sheer scale of data to be collected and stored demands clarity over responsibility for data security and transparency over who has access to that data and for what purpose. Customers need to understand the value of their data so that they can assess the bargain that is being offered by non-traditional providers in return for their financial footprint. Customers also need to know in a disaggregated service model to whom they should complain if a transaction goes awry.
Finally, ever larger digital databases of financial credentials and transaction data will need best-
in-class protection from cyber crime. This will require even greater co-operation between the industry and public sector law enforcement and intelligence services than exists today.
My take
An increasingly familiar story from one of the world's largest banks. The use of technology to streamline operations, become more 'global' and reduce costs is hardly surprising – although this doesn't make the job cuts any less painful for those affected.
However, the discussion of data use is a more pertinent one. Not enough companies are openly asking the public: how can we use your data to provide a better service? What are the boundaries? And what are you comfortable with? How HSBC conducts that conversation will very much depend on its success in this area.