Despite increasing consumer expectations and increased competition from nontraditional financial institutions, most banks and credit unions were stronger than at any period since the financial crisis of 2008. Other basic cost-cutting techniques include benchmarking costs against comparable services in the market and consolidating vendors. Before you consider completely hacking things off that you may need to keep, like your financial institutions insurance policy , you should map out an efficient and considerate plan for cost-cutting. And the lessons from this story apply to cost reduction in banking, even today. The “gently force” claim simply didn’t work. It featured mechanical filing systems, calculators, and punch-card tabulators. More recently, fintech startups seek to hasten banks’ digital extinction. It was new technology that promised a productivity and cost-saving revolution… 301 East Colorado Blvd, Suite 205 U.S. Bancorp recently announced that it is planning to accelerate branch closures as digital banking … Large-scale office automation technology first appeared in the 1920s. Before you consider completely hacking things off that you may need to keep, like your financial institutions insurance policy, you should map out an efficient and considerate plan for cost-cutting. If financial institutions are to improve profitability in the long term they need to fundamentally improve the productivity of the enterprise. Cost cutting and Convenient: For years, banks have been using paper for transactions, like the monthly bank statements that were sent through mails or the use of a cheque book. While a lot has been written, and will continue to be written, about … As a CIO, your first priority should be to make all IT-related activity costs transparent. Babbage believed it was possible to apply the principles of industrialization, which were revolutionizing the factory floor, to knowledge work. In addition to reducing process costs, automation tools can help improve staff … Before COVID-19, the banking industry was experiencing an unprecedented period of growth and prosperity. Additionally, the technology function should play a critical role in banks’ structural cost transformation efforts. Divide complex banking operations into simple and repetitive sub-routines. But progress toward digitization—toward Babbage’s dream of a “knowledge work assembly line”—stalled. Redesigning the operating model for support functions and reducing the number of employees is expected to cut costs by about 15% (or 3% of the bank’s total costs). Cost cutting strategies for banks rooted in industrialization. Each task could be analyzed and optimized. But it doesn’t. Reports from the time describe abandoned, under-used technology—and minimal gains in productivity. Email: fgib@fgib.com, Copyright ©2021 McKinsey & Co., the consultancy, noted in its recently released annual banking review that "cost-cutting is about the only cylinder still firing in the profit engine." Financial Guaranty Insurance Brokers Before you digitize, analyze. More than 2,000 jobs are to be axed at Lloyds Banking Group, Virgin Money and Direct Line Insurance in the latest spate of job losses to hit the financial sector.. Lloyds said it was cutting … Does this technology-driven approach work in today’s banks, especially in the absence of Babbage-like standardization and industrialization? The particularly challenging task of growing profitability has placed the financial services industry under substantial competitive pressure. First, he divided complex mathematical tasks into simpler, repetitive sub-routines. Research shows that implementing RPA drives about 25% to 50% cost savings, improving the output metrics of applied functions. ... while cost-cutting has eliminated hundreds of thousands of jobs. However, with the innovations in the banking sector, blockchain helps the industry to go paperless, which again helps in cost cutting. our self-funding business model and money-back guarantee. If, say, your data center costs are above industry averages, that area might be a potential candidate for cost optimization. To receive timely, personalized service from a knowledgeable and experienced staff, call us today at (626) 793-3330 to speak with one of our professionals. But the executives of the era refused. This method is an effective way of decreasing operational costs and intricacies. The following is a small sample of ideas that might be appropriate to your organisation: 1. It was a breakthrough for sales materials. Cost cutting strategies for banks rooted in industrialization. Banks’ rising costs can be attributed to … Deep Digitization in Utilities Operations. Sound familiar? Cost cutting in the banking sector: Examples. Everyone agrees: To cut costs, and to simply survive, banks must transform their digital initiatives. The tech vendors simply changed their sales pitch. We promised a follow-up on how value is destroyed in relation to disposals and acquisitions. Banks will stop all the loose talk about “platforms.” The word “platform” has been stretched to the … It also warned about the potential for a future leadership crisis in the banking sector. From going over staff size to looking at expenses, cutting costs is not an easy task, especially with so much information and data to go over. Fax: 626.793.1886 Rather than looking to massive across-the-board cuts to boost returns, most financial companies are seeking to trim expenses selectively with an eye to keeping employees content, customers well-served and avoiding harm to client retention and sales growth. Outsourcing is always a go-to method for trimming the fat on employee expenditures. And the opportunities to reduce cost in banking can be simply staggering. Applying the lessons learned to reduce operating expenses in banks. SocGen CEO Frédéric Oudéa said the Covid-19 pandemic had accelerated changes in the retail banking sector. Yahoo! These cost-cutting efforts differ from the massive cuts seen lately at crisis-ridden companies such as Ford. Even then, automation required standardization. At the heart of a successful cost cutting initiative is the good old 80-20 Pareto principle… 80% of cost cuttings can come from 20% of items you control… This means that companies should start with a detailed analysis and understanding of their cost items and opportunities for improvement, before launching draconian cost cutting measures. The key priority in strategic cost reduction is targeting resources where they can earn the best return, rather than just cutting costs in itself. Cost-cutting will only deliver so much. Let’s not leave Charles Babbage in the pages of history. Since 1983, Financial Guaranty Insurance Brokers has distinguished itself as a provider of Professional Liability, Cyber Liability, and Crime insurance products for entities of all types. France’s Societe Generale (SocGen) bank is merging two of its French retail brands to cut costs and enable it to focus on a single IT system. Automate Paycheck Protection Program Loans, Lean Six Sigma Projects for Finance and Accounting, Robotic Process Automation in Credit Unions, Robotic Process Automation in Finance and Accounting, Robotic Process Automation in Financial Services, Robotic Process Automation in Health Insurance, Robotic Process Automation in Investment and Asset Management, Robotic Process Automation Insurance Claims, what are retail banks doing to control costs and improve efficiency. At the same time, the bank will invest in its digital banking offering, Boursorama, which aims to have over four million customers by 2025. Resource requirements are determined by multiple factors like service levels. Consider these steps: It seems simple, but it’s radical. The new technology, they claimed, would “gently force” office workers to change the way they worked. Institutions in the banking sector, such as retail banks, commercial banks, … He didn’t have computer chips or the Internet. Avenues for Optimizing Costs in the Banking Sector Taking a broad view of cost efficiency requires understanding that all areas of the bank need to come under scrutiny and, for the purposes of optimization, the key areas to address are: » Cost of funds » Fund distribution and infrastructure costs Misaligned incentives still reign in the banking industry, turning cost cutting into a hot potato passed around divisions. Even more important, it’s applicable today. The starting point is differentiating the capabilities needed to fuel profitable growth (‘good costs’ targeted for investment) from low-performing business JPMorgan Chase and Bank of America have been conducting massive layoffs recently and will see more layoffs over time. Are U.S. Bancorp's Cost Cutting Plans a Preview of What's to Come in the Industry? From the top-down, there needs to be communication and transparency to gain trust and grow reassurance. Sadly, you know where this story is headed. The bank will invest more ... Allied Irish Bank is cutting its operating costs … The banking sector is currently dominated by Europe, which accounts for approximately 43% of the market share across the globe. By allocating the right resources based on a changing market demand, an inevitable run-in, you can be inspired to create cross-functional responsibilities. a more strategic approach by viewing cost-cutting as part of a broader efficiency effort. Cost cutting measures may include laying … But he conceived the programmable computer…back in the 1830s. These provide clients with a number of suggestions that contribute to making effective decisions about cost reductions. How might an “industrial redesign” look—and how might it slash costs—in today’s bank or credit union? Pricing for the Banking Industry Unlocking value through pricing excellence. Fast-forward more than a century. It featured mechanical filing systems, calculators, and punch-card tabulators. Imagine a “knowledge work assembly line.” Next, he sought to automate these tasks. It would compel them to standardize, in order to use the new equipment. But it was hardly a breakthrough when it came to productivity or cost reduction. In our experience with the financial sector, we see that banks are shifting the focus of controlling costs towards reducing non-personnel-related operating expenses. And success could be quantified. His work was brilliant. Pasadena, CA 91101 But, the cost ratios and economics for banking operations and IT spending are unsustainable given banks’ increasing capital requirements, declining margins and the rise in operational costs. By the late 1960s, early efforts at cost cutting in the banking sector—ATMs—were taking shape. Copyright © Lab Consulting Partnership, 2021 | All rights reserved, Cut Banking Costs Now: Achieve “The New Normal” for Productivity “Big Rock” 1 of 3: The retail branch network. Phone: 626.793.3330 From going over staff size to looking at expenses, cutting costs is not an easy task, especially with so much information and data to go over. Expediting the Operational Efficiency How did he do it? For example, Lloyds Banking Group expects reduction in external spend to contribute 17 percent towards its £2 billion savings target for 2011. By 1994, Bill Gates referred to banks as “dinosaurs,” sliding fast down the slope toward extinction. Since opening its doors in 1993, The Lab has helped some of the best companies in the world become even better. Here are a few things you can start with. You’ll be impressed with our self-funding business model and money-back guarantee. Finding a balance between customer centricity and cost efficiency will help to be more streamlined. First, this can help ensure technologies are used deliberately to change cost structures. It’s commonly believed that digital banking technology will automatically reduce expenses in front- and back-office operations. It was new technology that promised a productivity and cost-saving revolution. Additionally, customer centricity is the main focus for financial institutions during normal economic times, therefore service level targets are usually set very aggressively, but companies should be smart when lowering service levels, as the impact on your bottom-line could be drastic. Otherwise, you’re simply digitizing a bad system. The bank said it wanted to slash another €1bn in costs this year and was targeting an adjusted cost base of €21.8bn at the end of this year, compared with the previous goal of €22bn. You must “feed the machine” with the right input. In this article, we’re going to show how cost reduction in banking first requires that underlying processes are examined—and streamlined. Instead of putting groups of employees on the chopping block, Bank Director suggests finding ways to optimize staff at each of your locations. At the heart of this are core banking systems, which comprise the largest area of IT spending for banks. Second, to cut costs, banks should reexamine the build-buy-outsource/offshore model for technology projects. Cost cutting refers to measures implemented by a company to reduce its expenses and improve profitability. Think of ways you can implement outsourcing at your financial institution like call center, IT, remote workers, and freelance content writers. In the meantime, learn more about how The Lab helps with cost cutting in the banking sector. That’s how to cut costs in banks. Long-term efficiency is not easy to come by without a corporate culture at your financial institution that values it. A century later, digital vendors still claim that their technology will “gently force” knowledge workers to adapt. The global banking sector is highly fragmented and comprises of retail, corporate, and investment banking, and asset and wealth management companies. Thanks to the RPA. Partner With Fintech Providers. Then you’re in a position to automate, using today’s digital technology. Next, benchmark how your organization’s spending compares to your peers’. Cost-Cutting Tips for Revenue-Squeezed Bankers. The banking sector's profitability increases with interest rate hikes. Financial Guaranty Insurance Brokers Reduce the root cause of problems upstream: Create clearer instructions and simpler forms. When The Lab studied this bank’s branch operations, and compared them to our proprietary templates, we identified numerous areas for improvement: Low-value activities were everywhere. Still, using these, he conceived what he called a “Difference Engine.” It was a “knowledge work factory.” And it would eventually tip the scales at 15 tons. Balancing short-term tactical cost reductions with longer-term strategic cost initiatives will leave banks much better positioned for future high performance. Babbage recognized that the heart of every project was a procedure, which could be broken down into smaller tasks. Create a transparent view of costs. Implementing these initiatives is expected to improve efficiency in the respective units by about 25% and reduce the bank’s total costs by 4%. Yet, from 2010 through 2016, banks in the US and the European Union saw costs increase by 8%, on average. Staff productivity. Making a payment when you don’t have sufficient funds still costs around $33 per incident in the U.S., netting the top three banks $1.5 to $2 billion each. And the opportunities to reduce cost in banking can be simply staggering. As we wrote in our last piece, there is a certain mindset in the banking industry that still runs contrary to value creation. Bank cost cutting: A lesson from the past. Whether it’s hard times for the economy or just some ups and downs for your own financial institution, having a tried and true system to cut costs and be more efficient is always key. The first step is to apply the principles of industrialization—borrowed straight from the factory floor—to any digital transition. Faced with a slow-growth economy and shrinking revenues, bank managers are pulling the only lever they have left: expense control. You probably never heard of Charles Babbage. All Rights Reserved, Non Bank Lender Management Professional Liability, Steps to Improving Banking Security and Authentication, Reimagining Banking in the Age of COVID-19, Directors and Officers Liability Insurance. If there’s less time for customers to wait on the phone through your call center then there are more available agents able to help. Break down the intake operations for new loan applications, such as home equity, mortgage, and consumer loans. Standardize the most common fixes, such as “missing information” or “unsigned document.”. Cost Cutting Strategies in Banks, Step 1: Root out built-in waste. Banks are always looking to cut cost in such competitive industry. Banks have been digitizing their products, services, and processes over the past decade—a shift that was expected to reduce operating costs. 3 Transform the way you cut costs PwC has identified a bank of over 100 Cost Reduction Initiatives and Techniques. It seems simple, but it’s radical. With banks struggling to improve their return on capital, many institutions are being forced to restructure and cut costs. He had the clockwork technologies available at the time. Large-scale office automation technology first appeared in the 1920s. So what happened? Data entry was often redundant, manual, and error-prone. Your staff may wear a lot of hats, but this will only help to outfit a well-rounded employee base. Industrialization. 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