UK banks have been striving for years to reduce their cost base. Yet despite these efforts, downward pressure on revenue is continuing to squeeze profitability.
The effect is to put banks’ cost-to-income ratio in the spotlight. Even before the pandemic, only a handful of banks had a satisfactory and sustainable C:I ratio. With most still at 60% or more, and revenues flat at best, the efficiency that traditionally earned UK banks the envy of their counterparts worldwide is becoming the bare minimum for remaining competitive.
The pandemic has not only accelerated changes in consumer behaviour and customer needs but has brought into focus the importance of operational efficiency and agility as market conditions change. The challenge is twofold, firstly to understand and identify opportunities to drive simplification for both cost reduction and customer and colleague benefit, and secondly to encourage the right design mindset to architect change in a way that avoids future operational cost bubbles. It is commonplace in Banking to discuss the “technical debt” created by change, but not enough focus is put on the “operational debt” that is created by design decisions.
A burning platform…
What’s become clear is that years of cost initiatives have failed to generate sustained value. Combined with other headwinds, this has put banks on the brink of a precipice: an inflection point where they must find substantial savings just to stand still while also adapt operations for new customer demands. As our recent Future-Ready Banking Operations Study demonstrates, banks cannot afford to continue lagging behind other industries in terms of operational maturity. It’s a burning platform – and while profitable growth is as important as ever, transformation of operations including unlocking cost, and improving efficiency both for now and for the future will be key.
However, tackling costs won’t be easy. Legacy cost structures persist, with high fixed staff and premises costs. Meanwhile, interest rates at historically low levels are limiting growth, and creating an intensifying need to transform the cost base in line with revenues and demand.
…and several common pain points
Against this challenging background, my everyday conversations with banks highlight several common operational pain points that drive cost and inefficiencies. In particular, digital front ends insufficiently supported by digital back ends are creating demand and workload for operations. This is exacerbated by fragmented processes and a lack of end-to-end service integration, leading to disjointed customer journeys.
Meanwhile, at an enterprise level, widespread legacy systems and a lack of technology integration following successive acquisitions and restructuring are hampering digitisation programmes. What’s more, data and analytics are not yet truly embedded and optimised, and banks’ large fixed workforces, combined with the traditional co-location of operations teams, are keeping property costs high.
Add in other intensifying pain points such as slow, outdated supplier management and onboarding processes – fundamentally unsuited to new partnering models – and the challenges in achieving additional cost reductions and efficiency improvements are clear. That said, there are also lots of opportunities to go for, provided banks target the right areas.
Zeroing in on operations
So, where to start? In a word: operations. Not just in the back office, but the end-to-end process of accepting customer requests, facilitating their progress through the bank and overseeing them to a satisfactory conclusion. As an area that is not revenue-generating in itself but often accounts for about 20% of costs, operations is the logical place to begin the quest for a sustainable cost improvement.
It’s a journey that has to begin now. Based on Bank of England stress tests and expectations on impairments, traded risk losses and reduced income, banks that do nothing to reduce costs in the post-pandemic environment will see profits eradicated over 2020-2021 and will face further challenges in the following years. Just to maintain margins at their current level – let alone restart growth – we believe costs may need to be reduced by over 40%.
Addressing the problem
The fact is, traditional cost reduction methods won’t deliver savings on anything like this scale. More radical action – possibly including removing non-profitable services or channel offerings – is the only option. But banks’ operations continue to lag behind other industries in their use of digital. To cut deep into costs and generate sustained benefit, what’s needed is nothing short of an operational revolution.
To deliver this, banks need to tackle three key questions:
- What should future operations aspire to look like? This means defining the key capabilities and characteristics that operations will need to run efficiently and compliantly, while increasingly stepping away from their traditional back-office or ‘support’ remit to deliver on the customer experience and fuel growth.
- What are the logical steps to get there? Planning and organising a sequenced programme to drive the most value at the fastest pace and deliver on cost ambitions while building for the future.
- How do we fund the journey? Identifying the next-generation levers and proven use cases to effect significant cost reduction and create sustained value.
In my next blog I’ll move on from the “why?” to the “how?” by mapping out the best way for banks to address these questions. Stay tuned.