Off-boarding Tail Clients a Short-Sighted Approach – Report

Report by Quinlan & Associates suggests potential for digital transformation to deliver 10-15% boost in top-line revenues and 30% reduction in operating costs, with tail clients a key opportunity.

Financial services consultancy firm Quinlan & Associates has released a report suggesting that a recent trend at leading global banks to off-board ‘tail clients’ represents a short-sighted approach to de-risking and return optimisation.

According to the report, heightened regulatory scrutiny and rising compliance costs following the global financial crisis has led to a “seemingly unanimous decision” by global banks to aggressively off-board ‘tail clients’ – clients that generate low revenues or are associated with high compliance costs.

“This was driven by the view that the profits generated by such clients did not justify the costs (and risks) of servicing them,” said lead author of the report Benjamin Quinlan, CEO & Managing Partner of Quinlan & Associates.

“We estimate that over USD 13 billion in revenues has been off-boarded by the top 15 global banks since 2014 (and ~USD 25 billion by the top 50 global banks),” Quinlan added, suggesting that these new revenue pools are creating opportunities for global tier-2 and regional players.

While the authors of the report recognise the short-term rationale behind a renewed focus on larger accounts, especially in a cost-conscious and resource-constrained environment, they believe the strategy is both short-sighted and economically sub-optimal over the medium-to-long-term.

“Banks have not only failed to create a compelling service proposition for their tail clients over the years, but the move by many firms to focus on their key accounts is weighing considerably on margins and wallet share,” said Quinan. “The future growth potential for a large number of these ‘key clients’ also remains much more subdued than many tail accounts, where future unicorns reside.”

Quinlan & Associates argues that a renewed focus on tail clients remains an attractive long-term strategic proposition for global and regional banks, but a robust, end-to-end digital strategy that is both scalable and cost-efficient is needed to capture this opportunity, estimated to be worth USD25 billion in revenue.

“We see a number of regional banks in Asia Pacific being well-positioned to capitalise on this opportunity, especially those with greater management and operational flexibility, including a willingness to invest and innovate – in other words, those with the appetite to change.”

According to Quinlan & Associates, regional banks are additionally presented with options to “supercharge their digitisation efforts” through partnering with or acquiring existing fintech firms.

“While the digitalisation process comes attached with inevitable upfront costs, it allows a bank to service a vast pool of tail accounts in a standardised fashion at a negligible marginal cost per client,” said Quinlan. He sees the potential for digitisation to deliver a 10-15% increase in top-line revenues and a 30% reduction in operating costs for successful players implementing end-to-end digital change programmes.

“With incumbents being rapidly disrupted by a plethora of FinTech firms, digitalisation is fast moving from a strategic priority to an operational necessity for banks that want to stay relevant in today’s market and capture new revenue pools offered by chasing the tail,” said the report.

The full report is available for download here.

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