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Banking Efficiency BeyondCost Cutting

It may only be a slight exaggeration to say that thefinancial crisis has divided the corporate world intotwo groups - companies that have gone belly-upand others that are striving to survive. For over ayear now, business news has featured little elsebesides organizations’ attempts to trim costs- through lay-offs, cutbacks, downsizing and othermeans.

For the banking industry, which finds itself in theeye of the storm, the need to raise efficiency hasperhaps never been more crucial. Although costcutting is the first thing that comes to mind, impulsiveslashing of expenditure across the board couldactually do more harm than good. While there areseveral ways to trim the fat, not all of them areappropriate for all banks. Banking institutions needto realize that there is no one size-fits-all solutionto cost cutting; they need to do a great deal ofanalysis to arrive at the one that works best forthem.

A successful banking efficiency optimization planmust look beyond mere cost cutting and draw upona combination of the following strategies:

Raise cost consciousness:

Cost consciousness cannot be driven by the beancounters alone; rather, the entire bankingorganization needs to orient itself towards this goal.It is also time that banks looked beyond cuttingcosts in isolated pockets; for the needle to move,the philosophy of cost consciousness must pervadeall activities at all levels. Top management mustplay a lead role in securing the buy-in of otheremployees, who must be encouraged to come upwith innovative cost cutting possibilities in theirsphere of work.

Increase process efficiency:

In recent years, Business Process Re-engineering(BPR) has been a choice mantra of banks seekingto transform themselves. Since banking is soprocess driven, the slightest inefficiency inprocesses can seriously dent the bottom-line.Therefore, banking institutions need to get theirprocesses right. Unfortunately, a number of bankscontinue to struggle with legacy processes– designed at a time when markets were lesscompetitive and customers less demanding – which

are simply not efficient enough in the current context.These banks may need to consider acomprehensive transformation strategy tore-examine their processes, from design toorchestration, and overhaul them if necessary.

That being said, even non-legacy banks can findseveral avenues to improve process efficiency.The reduction of error incidence is an obvioustarget. Efficiency also increases when processesare rendered capable and robust enough to handlevery large volumes of transactions without breakingdown. Exception handling must be separated fromroutine processes in order to avoid operationalbottlenecks.

Over time, cost inefficiencies may creep into bankingprocesses by way of excessive overheads. Anexample is the use of the maker-checker principle,wherein one person is hired to perform an operation,and another to verify or authorize it. While this isjustified for operations highly susceptible to securityrisk, when extended to routine or non-coreprocesses, it only serves to drain resources. A keypoint is that excessive service level targets couldalso create process overheads. If customers arenot to be kept waiting, the bank needs to maintaina larger service staff. During slack times, theoverheads can begin to hurt. However, it is a toughcall for banks to lower service levels in order toimprove cost efficiency, since that runs a high riskof alienating customers.

Automation of processes can reduce both errorsand overheads. An efficient process design triesto minimize manual intervention and enable StraightThrough Processing (STP). Besides needing toemploy fewer people to perform the sameoperations, banks can save time and reducewastage.

Unfortunately, a number of banks defer or abandontheir IT investment plans when faced with toughmarket conditions. This is detrimental in the longrun, when most judicious technology investmentsstart to pay back by way of higher cost savings.

Improve productivity:

Being colossal entities, banks need a huge amountof resources to keep them going. On the flip side,

Banking Efficiency BeyondCost Cutting

there are many opportunities to chop and trim– ranging from staffing to marketing to procurement.

The first port of call in the journey of productivityimprovement is the utilization of human resources,since staffing costs form a large part of operatingexpenses. Large scale layoffs are not the onlyanswer; banks can consider improving staffutilization by allocating cross-functional tasks orpursuing a flexible hiring policy.

Marketing budgets are usually the earliest casualtyduring tough times. Rather than do away with theactivity altogether, banks can restrict their promotionto low cost media such as email or SMS. The useof social media, powered by Web 2.0 technology,is another inexpensive option for banks to interactclosely with their customers.

The centralization of the procurement function canbring higher cost efficiency through better negotiatedprices and rationalized order quantities. The useof cheaper alternatives is also worthy ofconsideration.

Productivity improvement can also be broughtabout through elimination of redundancy andsmarter inventory management in less obviousareas. For example, many banks use a plethoraof IT applications, performing similar functions, butworking in silos. Banks don’t just end up payingbig money to maintain several applications – theyneed to spend even more to integrate and supportthem. An integrated universal banking solution canhelp banks overcome these and several otherissues. In addition to pursuing low cost deposits toreduce interest expenses, banks can generatehuge savings by managing their cash smartly. Thereduction of cash inventory at branches and ATMs,and automation of cash handling are a couple ofways to do so.

The flow of information can also be made moreproductive by enabling self-help and automation,and consequently lowering the need for manualsupport. Tools such as information repositories,FAQ registers and process documentation can beused to make information more accessible toemployees, whereas unassisted channels such askiosks and Internet banking help customers becomemore self-reliant.

Although the sales team brings home the bacon,they too must do so at reasonable cost. Unqualifiedleads and lengthy sales closure add significantlyto the cost of doing business. Clearly, sales activitiesmust be underpinned by process excellence inorder to yield maximum value.

Banks must also maximize customer productivity.While it is recognized that the top 20 percentcustomers contribute 80 percent of profits, what isless known is that the bottom 30 percent eat intothe same. If productivity is to be maximized, banksmust have a strategy to retire their nonpayingcustomers.

Migrate transactions to electronic channels:

Branches are banks’ most resource drainingchannel, and hence, their capacity must be reservedfor processing complex, high value transactions.Routine activities such as funds transfer, cashwithdrawal or account opening are best handledonline or at an ATM. Customers must beencouraged to transact on unassisted channels asfar as possible. Given the savings that could accruethrough the migration of transactions to alternativechannels, the provision of incentives in the form ofreward points or better rates to customers is alsojustified.

Once again, banks must train their eyes on channelproductivity, and do away with redundant ornon-performing channel elements.

Right-source:

The outsourcing of non-core processes to thirdparty vendors can deliver the twin benefits of loweremployee overheads and higher productivity amongbank employees who can now focus their energieson the core business. Banks with smaller operationscan also go down the shared services route.

Clearly, banks have found value in this approach.Two years ago, a study of 50 retail banks worldwiderevealed that over three-fourths of the banksoutsourced at least one function related to IT,support or back office. The study also showed thatoutsourcing of back office processes was mostintensive in the payments, life insurance andmortgage segments.

Banking Efficiency BeyondCost Cutting

Author:Jaymalya PalitHead-Finacle Product StrategyInfosys Technologies Limited

Banks can also leverage the opportunity tooutsource some processes to their sales and servicepartners. Agents that sell mortgage or insurancecan be prevailed upon to complete some of theroutine data entry or due diligence requirements,which are currently being processed at the bank.The creation of partner portals – which allow secureaccess to specific areas where partners can findupdated information on their prospects or customersand the status of their transactions – can streamlinethis activity.

Outsourcing of IT operations, maintenance anddevelopment is another source of cost saving forbanks. Although there is a preference among largebanks to build their own applications, a shift towardsoff the shelf applications is predicted in the future.An interesting development is the emergence ofthe Software-as-a-Service (SaaS) model – in future,more and more IT applications could be deliveredover a cloud, thereby reducing banks’ outrightinvestment towards sof tware l icenses.

Rationalize product portfolio:

Under pressure to attract or retain customers,banks have enlarged their product and serviceportfolio to appeal to a variety of segments.However, the sales of marginal products do notjustify the considerable investment that must bemade towards maintenance, promotion and support.Rather than build and own such products, bankscan enter into smart alliances with other banks topromote their products for a fee. The success ofBancassurance is a good example of a win-winarrangement of this kind.

Explore low cost business models:

By employing a direct banking strategy to enternew markets, banks can defer the cost ofestablishing physical infrastructure until they aredone “testing the waters”. That apart, a directbanking model could potentially yield huge costsavings on a sustained basis, and hence, is worthtrying out in other markets as well.

Summation

Important as it may be during good times, theimprovement of banking efficiency assumes

paramount significance during bad. However, thiscalls for more than cost cutting – an indiscriminateslash and burn approach will not provide the rightanswers. 80 percent of cost savings can comefrom 20 percent of expense items; therefore, banksneed to do some careful analysis before arrivingat those that present the best opportunity. Thatapart, they must institute a host of measures toensure all-round productivity.

Needless to say, for any such drive to be successful,it must have the full support of the organization. Itis the responsibility of the top management toinculcate a sense of accountability among theirsubordinates. More than ever, the buck stops here!

Reference:

‘Outsourcing: Transforming Operating Models inRetail Banks’, Capgemini, 2007

Banking Efficiency BeyondCost Cutting

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