Six strategies for improving banks’ operating efficiency

By Timothy J. Reimink
| 4/19/2019

With the challenges banks are facing these days, it’s becoming clear that banking executives must get the best “bang for the buck” from all resource expenditures. Continued inefficiency at a bank might be robbing important efforts of the resources banks need to be fully successful. But a focus on cutting costs alone is not a formula for long-term success. A balanced approach – one that enables a bank not only to improve operating efficiency but also to upgrade its capabilities to respond to market needs and prepare for the future – is imperative to the success of a bank’s operations and profitability.


digital-banking

Why efficiency matters for bank operations

As with any business, banks must be vigilant about spending wisely. Today, however, the banking industry faces a new combination of circumstances that are giving special impetus to the need for efficiency. Changes in customer preferences and expectations, new competition, and new technologies are transforming the nature of banking. The business of banking is morphing toward a digital- and technology-based model while retaining important aspects of the traditional person-to-person business model. To remain competitive, banks need to invest in technology, marketing, automation, and self-service capabilities, and also must optimize their legacy investments in branches and traditional systems. All of these changes are occurring in an industry environment that is experiencing narrowing margins, slow deposit growth, and the potential of an economic downturn.

These factors put exceptional pressure on banks’ operating budgets and generate an understandable appetite among executives for strategies to reduce expenditures in some areas in order to afford the necessary expenditures in technology, marketing, and new capabilities to remain competitive. Becoming more efficient in everything they do is an important strategic objective for banks, and most banks already put forth significant effort to improve their costs after the last recession. 

Setting operating targets for improvement

Bank executives today are asking themselves how, and by how much, efficiency and costs can be improved. Every institution is unique, of course, so the size of the improvement opportunity will vary greatly from one bank to another. Industry experience suggests that a concentrated and carefully executed efficiency initiative should be able to achieve significant savings. The outcomes are not always realized through direct cost reductions. Ideally, improved efficiency means processes that are scalable and that support a faster pace of growth for the bank’s revenue stream and asset base than for its overhead costs.

Six strategies for improving efficiencies of banking operations

So how can a bank move toward such outcomes? Across-the-board budget cuts inevitably are a recipe for disaster. Such cuts typically are more than is needed in areas that already are productive and are not enough for the most inefficient areas. The most successful efficiency initiatives follow a more analytic approach that reflects the specific circumstances facing each line of business and support function. Following are six strategic areas where today’s industry leaders are focusing their efforts.

1. Business realignment

The basic premise of business realignment is to exit business lines that have low margins and move instead into lines that are inherently more cost-effective and increase bank profitability. Leading banks take a robust approach to strategic planning, assessing the minimum commitment of resources needed to compete in a particular line of business and identifying opportunities to differentiate themselves from competitors. In many instances, this means that traditional banks might choose to move into nontraditional businesses, such as specialty financing and payment processing – provided, of course, their analysis reveals they can compete effectively and efficiently. Counterintuitively, these strategic transitions might require the bank to increase its investment and costs in the short term in order to realize improved margins and efficiency in the long term.

2. Channel optimization 

The goal of channel optimization is to assess the various ways customers interact with a bank in order to create a cost-effective combination that is adapted to each bank’s specific customer base. Given the rapidly changing nature of customer channel preferences, this process of optimization requires branches to be fairly aggressively closed, consolidated, sold, and bought as banks adjust their geographic presence. Many banks also are significantly reconfiguring roles, duties, and staffing within the branches and employing new metrics for analyzing branch performance and value.
Channel optimization should not be about branches alone, as contact centers, online and mobile banking, ATMs, and relationship managers also are important channels for customers. Banks are working to enhance their contact centers via better operating hours and technical knowledge, as well as their chat, text, and social media capabilities in order to meet customers’ changing expectations.

Again, there is no one-size-fits-all approach. Some banks assertively promote electronic account openings, remote deposit capture via smart devices, and accounts that are designed to be virtually paperless. Other banks – often those with large commercial customers – pursue a fundamentally different approach, focusing on personal service with a relationship manager and support team assigned to each qualifying account. The high-value business generated by this approach can more than offset the added costs.

3. Process costs 

The opportunity to improve process costs often is underappreciated in banks, in part because it involves taking a more manufacturing view of business processes. The goal is to improve the bank’s efficiency ratio by reducing the unit cost-to-value ratio of each activity or transaction – such as the cost of opening an account, creating a loan document package, or handling a specific type of transaction. Process improvement in this area involves continual performance monitoring and often comes about as a result of analyzing, mapping, benchmarking, and ultimately rethinking back-office processes. Important trends (discussed in more detail later) include greater reliance on electronic documents, automated routing and processing, and process automation driven by machine learning models.

4. Staff productivity 

In addition to reducing process costs, automation tools can help improve staff productivity, enabling banks to handle more transactions and greater volumes of activity with the same number of personnel. But productivity improvement is not dependent on technology alone. Some of the most significant opportunities involve using established performance management techniques, such as clearly defined expectations and scorecards, improved motivation and rewards systems, and better training and supervision.
Other useful tools include visible metrics and performance charts along with “line-of-sight” incentives – such as bonuses that are directly related to individual or team performances and practices, not just institutional performances. Many institutions also find success in redefining job roles, using more flexible work arrangements, providing mobility for off-site work, and outsourcing more specialized activities.

5. Technology and automation 

The role of technology in banking has been mentioned several times already, but because of its broad, enterprisewide impact, the use of technology and automation also merits individual attention as part of the overall efficiency improvement effort. The overarching goal is threefold: 1) to have applications that allow customers to make transactions or obtain information on a self-service basis without requiring employee efforts; 2) to use technology to reduce the time employees spend on finding information; and 3) to use automated business rules and decision models to move work more quickly and efficiently through processes.
For example, automated workflow processing gives managers greater visibility into the activities being performed, allowing them to monitor work queues, identify bottlenecks or problems, and reallocate work to respond to changing conditions. One increasingly important practice is to convert all hard-copy documents into electronic images as early as possible in a transaction or process instead of as a final document storage step after the transaction.
 
Electronic documents can move from step to step with minimal delay and virtually no added cost. Even more important, electronic imaging allows parallel processing of documents so that several steps in a transaction’s progress can be completed simultaneously. In many instances, of course, using electronic signatures, signature pads, and online processes can eliminate paper altogether – thus taking one more step out of the process.
 
Beyond helping to automate core processes, technology also has an obvious role to play in a bank’s channel optimization efforts. It affects not only how customers interact with the bank but also how banks communicate important information internally and how they manage their sales and customer relationship activities.

6. Vendor relationships

Improved vendor management does not mean simply pressuring vendors to lower their prices. Rather, it is a focused effort designed to derive the greatest possible value from a vendor relationship. Selecting vendors that closely align to the bank’s business objectives is critical. Maintaining strong vendor performance is supported by service-level agreements and vendor scorecards to monitor performance issues such as system availability, response times, and direct expenditures. Such tools help provide a more complete view of the vendor relationship.

Other basic cost-cutting techniques include consolidating vendors and benchmarking costs against comparable services in the market. Bear in mind as well that vendor relationships can have an effect on regulators’ view of the institution’s risk profile. 

Instilling a culture that values efficiency

Looking beyond the six specific cost-saving strategies discussed here, it’s important to recognize that long-term efficiency is impossible to achieve without a corporate culture that supports and values it. This requires a visible commitment from top management to balance value and cost, reduce unnecessary expenditures, and implement metrics and accountability that encourage individual attention to efficiency improvement and profitability.
 
Ultimately, organizational success and improved bank profitability require more than just efficiency. A successful bank must be able to provide customers with value and service at a competitive price with costs that still generate an acceptable return.

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Tim Reimink
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