Six strategies for improving banks’ operating efficiency

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.

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.

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.

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.

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.

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.

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.