At first sight, banking productivity improvements in Europe have been slow. Average cost-to-income ratios for 2018 are at the same level they were three years ago. Too often, banks have seen their early productivity gains offset by increased digital and regulatory requirements. Add to this an increasingly challenging economic and interest-rate environment, and banks seem unlikely to meet their cost of equity without concerted action.
But this is not true for all banks. Several European banks sit in what we call the “Golden Quadrant” (Exhibit 1). They have a strong cost-to-income ratio, and positive “jaws” (their income is growing faster/shrinking slower than their costs). Put simply, these leaders are not only highly productive but also improve their productivity every year. Most of these outperformers are from continental Europe, including some banks from the more attractive European markets (such as the Nordics) as well as more challenged markets like Spain and Italy.
So how can a bank win a place in this Golden Quadrant? There are ten levers European banks can deploy (Exhibit 2). The potential productivity gains across this full set of levers are much greater than most banks are realizing today we estimate 10 to 15 percentage points’ improvement in cost-to-income ratio for a typical European bank.
Five of these ten levers come up frequently in our discussions with European banking CEOs and COOs.
IT costs are a struggle for most banks given the need to invest in digitization, data/analytics, and cybersecurity. We believe CIOs will need to seek 25 to 40 percent productivity improvements in the next three to five years just to keep costs flat. Fortunately, rapid payback levers like demand reduction, vendor optimization, and better use of staff are available. These can fund more structural technology transformation initiatives like “DevOps”/infrastructure automation, agile, architecture simplification, cloud, and re-engineering culture. One major Asian bank used such reforms to reduce their IT run costs by 40 percent.
Channel optimization offers opportunities to improve efficiency while also transforming customer experience. Digital and mobile channels are increasingly the norm for customer care, with digital penetration above fifty percent in Europe. However, call center costs remain high as reducing call volumes are offset by the increasing complexity of calls. The best banks are reimagining how new technologies could reshape the call center experience. Online self-service journeys handle the simplest queries. Chat bots provide instant and convenient assistance with medium-complexity queries, and sometimes serve as gatekeepers for live channels. Only high-complexity queries require the customer to contact the call center, resulting in fewer calls and higher customer satisfaction. Even for these high complexity queries, AI tools can support and “live coach” agents, and provide automated script compliance monitoring. One major retail bank identified 30 to 40 percent efficiency potential in its contact centers while also improving customer experience.
Branches continue to be highly relevant in many countries, especially in certain customer segments that choose branch interactions over digital servicing. Some banks are reinventing branches by adding digital self-service technology into the branches themselves, introducing new desk-free and teller-free branch formats, deepening the understanding of what dictates the time for individual transactions, and using analytics to achieve personalized recommendations, dynamic staffing, and real-time performance management. These “smart branches” provide a true multichannel customer experience, focus the branch staff on the complex sales and service queries that only they can do, while also reducing costs by 20 to 30 percent.
Next-generation operations and automation uses two complementary approaches. Firstly, banks are transforming the costliest end-to-end customer journeys by completely reimagining them to digitize the customer touchpoints, reduce the extra work created by errors, and streamline any remaining manual work. One bank digitized its small and medium size enterprise onboarding process, and more than halved the time and cost to onboard customers while also improving customer experience.
Secondly, in parallel, banks are improving the smaller processes site by site. This approach uses a variety of levers including stopping low-value activity upstream before it comes into the site, applying robotics automation, simplifying any manual work, applying traditional performance management, and better managing location and sourcing. One bank identified 35 percent potential in one of its major operations sites by applying the full set of levers.
Addressing staff function productivity in finance, risk, HR, legal and compliance is also important so that the overall shape of the organization remains balanced. Many banks are already achieving savings of four to six percent per annum through traditional methods. Typically, this is done by standardizing activity across business units and moving it into centrally managed, shared, services with lean processes that achieve economies of scale, sometimes in low-cost locations.
The next leap forward will be digitally enabled redesign of staff functions. Many standard processes can be digitized. For example, digitizing the HR recruitment process can improve efficiency and reduce time to hire. Robotics can automate routine behind-the-scenes activity. One bank achieved 30 percent savings in their key finance processes while also reducing error rates. And AI technology can enhance many risk monitoring and reporting processes such as producing regulatory reports.
Advanced analytics is not yet deployed at scale in many banks, but there are significant efficiency opportunities. Our work with banks across the world is showing promise in both channels and operational processes. In the channels this includes improving branch footprint, call center capacity planning, RM effectiveness, and a better use of ATMs. Then in key operational processes, banks are starting to achieve impact from triaging credit analyst workflows, collections processes, AML detection, fraud detection, and regulatory reporting. For example, several financial institutions have automated their corporate credit review work, using analytics-powered credit-scoring engines to prioritize credit analyst work. One bank halved the time and effort needed to conduct a credit review, while enhancing compliance through reduced operational risks and improved controls.
Of course, just identifying productivity improvements is not enough. Real machinery is required to turn this into cash savings and stop costs from creeping back in. Leading banks create a transformation office to make sure there are robust plans to deliver the savings, relentlessly track the impact, and provide early warnings of any potential problems. Some banks are experimenting with zero-based budgeting, which requires business units and functions to disaggregate their costs, and attack both the volume and unit-cost aspects. And reskilling programs are critical for minimizing disruptions to employees and minimizing restructuring.
Productivity is high on the agenda once again, and there is much more potential available than banks realize. In a recent survey, most European banking COOs aspired to a cost-to-income ratio of below 40 percent. Banks need to ask themselves: What level of ambition and return on equity do we aspire to? What is the full potential across all the levers? And what kind of execution machinery will we need? Those that act boldly can make transformational gains.