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Six strategies for improving banks’ operating

efficiency
By Timothy J. Reimink
Banking Performance
| 4/19/2019
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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.
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.
Banking Performance Insights
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Tim Reimink
Managing Director
+1 616 774 6711
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