Improving efficiency to enable future growth
Banks, especially small and mid-sized banks, are currently dealing with several difficult cost and growth challenges. Low interest rates, regulatory constraints on products and services, high costs for compliance and cybersecurity put significant pressure on their bottom-line. In addition, they face powerful new entrants, e.g., for payment systems and finance companies who seek to find and exploit regulatory arbitrage opportunities.
Given these pressures, banks are challenged to deliver their products and services in the most efficient manner. What concrete steps should you take to align your operations with your strategy, given the uncertainties about customer adoption and technologies? How can you fund the investments required for new growth?
We believe that banks should start by taking a hard look at their current operations and reengineer them with a vision of the future in mind. Before adding new features, you may want to streamline your existing platforms to both facilitate the implementation of new technologies, and to provide the capital for the new investments required. While a blueprint for operational improvements is obviously bank-specific, the questions to be addressed are similar across institutions. Here is a suggested five-step approach for creating an efficient operating platform:
Review your existing strategy. Operations can be expensive because of inherent (and unnecessary) complexities and/or because of the goals set by your strategy. If a bank seeks to differentiate itself from its competitors by pursuing a high-touch service strategy with numerous branches in non-growth markets and if this only results in sub-par margins, it may be time to revisit the strategy.
Components of this review are the determination of the service levels and the type of multi- or omnichannel strategy suitable for the customer segments you choose to serve. Given the migration to online and mobile services, you also need to determine the number and location of branches you need in the future.
In making your decisions, do your systems provide you with the data you need? Do you have a clear understanding of customer, product and channel profitability?
Identify the most important inefficiencies in current day-to-day operations. In every organization, there are processes which can be improved in terms of time, cost or quality. For example, if you compete with a nonbank mortgage lender who can close a loan in eight business days instead of about twenty, the industry average, you may need to reduce your cycle time. Look for process inefficiencies such as workarounds, lack of automation and multiple handoffs. How far away are you from straight-through-processing? If you had to “greenfield” your bank, would you rebuild it the way it currently is? The discrepancies you observe can be triggers for your efficiency initiatives.
Customers want to seamlessly perform transactions through the most convenient channel and on a platform of their choice, be it a smartphone, a tablet or a computer. If your goal is to facilitate this, do you already provide an excellent customer experience through your existing channels, e.g., when opening an account online or in a branch? Are customer data and the associated applications set up efficiently, or does a call center operator need to open numerous screens to access customer information? Does one department deny a customer’s application because they don’t have a full view of the relationship? Are you well on your way to making real-time decisions based on aggregated customer data, as some companies already do for credit scoring?
One of the necessary tasks is also to identify Information Technology (IT) complexities. Since the role of IT is to enable the processes that deliver products and services, process reengineering can automatically lead to changes in IT. In addition, however, there are usually opportunities to simplify the hardware and to reduce the number of applications by selecting the best and sunsetting all others.
Identify opportunities to meet regulatory requirements more easily. New regulations require more detailed reports, deeper expertise and prompt remediation for items flagged by the regulator. Often the systems in place don’t provide the information required at the push of a button, instead the data have to be aggregated and consolidated manually. Examine where automation would have the biggest impact.
Look for opportunities created by “emergencies.” It is a natural human instinct to have “all hands on deck” when a serious matter requires attention. While this might work in the short-run, it often results in duplication, overstaffing and inefficient work in the long run.
Smaller banks have the additional challenge of finding the right tradeoff between regulatory expertise and cost. The best solution for these banks may be to access compliance experts on an as-needed basis, rather than to build up an internal department; call it “compliance-on-demand.”
Identify the operational capabilities and investments needed for the customer experience of the future. Although some early-stage technologies such as cryptocurrency need to prove themselves, other trends are here to stay. In the future, even more people will use different devices and different access technologies to perform banking transactions. Determine the processes and systems required to deliver the customer experience you want to offer to your different segments.
Aggregate, prioritize, decide and execute. Once the different opportunities for cost savings and investments have been gathered, identify linkages, build consensus, rank them and get the executives’ decisions. Start with the most important and urgent needs and develop a concrete multi-phase action plan. Monitor your progress by developing leading and lagging metrics that cover both operational and financial aspects. Promptly address any problems that may arise.
The outcome of your endeavor should be a simpler, streamlined organization better capable of meeting the demands of the future.