As economies start to look toward recovery following COVID-19, banks are turning their attention even more closely to the cost agenda. To better understand how banks are changing their cost transformation priorities following the pandemic, KPMG International surveyed more than 200 executives from some of the world's largest banks. The report, New cost imperatives in banking, was released in April, 2021.
I recently sat down with two of our KPMG in Canada Financial Services practice leaders to get a Canadian perspective on this global report. John Armstrong is Head of Financial Services and Tapasvi Narula is Co-Leader, Global Cost Transformation Partner, Management Consulting. Here are some of the highlights of our conversation, which has been edited for clarity and length.
Katie McGarry: According to the global survey respondents, the biggest areas for cost reduction in the next 12 months are digitization (59 per cent), reducing headcount (52 per cent) and legacy IT transformation (50 per cent). Do these priorities ring true as far as Canadian banks are concerned?
Tapasvi Narula: The digitization that has allowed banks to transition to remote work has led to significant enhancements of mid- to back-office capabilities, which has accelerated since the pandemic. Some services have stayed in remote channels, and this has reduced the workload in the branches. But we're also seeing some stickiness with regards to the segments that still like to visit their branch. Even though customers have increased online and mobile channel usage, I don't see a massive reduction in branch networks in in Canada. They are a vital tool for sales and as "points of presence."
John Armstrong: I agree. While banks closed a third of branches on a temporary basis during the pandemic, most of those are open again now, and the tuning of the branch network is really nothing different than has been done over the past few years. The banks have taken full time employees out of the branches and reduced average square footage, but the actual number of branches has not gone down dramatically. That's very different from what you'll see in the UK and in the US.
It's worth pointing out that Canadian banks are highly profitable, and they all had pretty significant cost transformation programs in place prior to COVID-19.
Katie McGarry: Since the pandemic, has cost reduction increased in strategic priority for Canadian banks?
John Armstrong: Yes, I think it has. As I said, it was already a big focus, but COVID-19 accelerated the need to reduce costs, as well as the need for investments in areas like digitization.
Tapasvi Narula: I agree. We're seeing that the focus in cost transformation is more about trying to achieve cost savings that are sustainable and sticky with longer term approaches versus the episodic approaches we have seen before. I think the question now is, how can banks create an operating model that will deliver savings in the long term? Our report looks at three main levers of cost transformation: strategy, simplicity and engineering (see pg. 15). In Canada, I see a lot of focus on optimizing engineering, for example, finding ways to optimize sales and service points across different lines of business. This will let banks operate in a much leaner manner going forward.
John Armstrong: Looking at the levers, I see a new willingness to look at those broader, more strategic questions. As banks evaluate their businesses and geographies, we're starting to see some divestitures. On the other hand, banks also have an opportunity to bulk up and get more scale in specific market segments, such as wealth management or capital markets. As a result, we're seeing more M&A in Canadian banks than previously.
We've already talked about channel optimization and the push to get customers into less expensive channels. In terms of the move to digital uptake, banks saw three years of acceleration in just three months. And now, banks are looking for ways to keep the momentum going. Another area is property optimization. As banks look toward the return to work, what will the future of their workforce look like? I think banks are expecting to move to some sort of hybrid model, and that's an opportunity to decrease the corporate footprint and take costs out on the property side.
Tapasvi Narula: Building on what John just said, another angle here is utilities, both internal and external to the banks, with multiple banks. They are looking for ways to streamline activities done across the banks' various businesses versus doing things in silos. Banks are also starting to look at ways they could develop multi-bank utilities for activities that really don't contribute to differentiation.
John Armstrong: And, of course, it's not limited to utilities; it also includes a greater interest in outsourcing. I think banks have become more willing to look critically at the activities that differentiate them and are interested if a third party can do them better, or cheaper. We're seeing this in back-office operations, even in some of the risk and regulatory areas. A few years ago, for instance, banks wouldn't have thought to outsource AML, but now there's a much greater openness to looking at differentiating activities, and whether or not to keep them.
Tapasvi Narula: I have one more thought about the levers of cost takeout, and that's changes within technology transformation. Banks have been increasingly using robotic process automation (RPA), low-code automation and newer capabilities with quicker testing of new ideas and faster execution. This is helping to accelerate change and reduce overall cost of technology transformation.
Katie McGarry: What barriers do banks face in the current environment?
John Armstrong: I see a couple of barriers. First, there's the "burning platform" issue, when people mobilize to get behind the issue or problem that's top-of-mind. Canadian banks already have pretty good cost positions relative to their global peers. When banks are doing well from a return-on-equity (ROE) standpoint (and they did very well in 2020, relatively speaking), it might be harder to maintain that sense of urgency around cost transformation.
Second, there are organizational barriers or silos. Tapasvi was talking about internal utilities, which let banks look across different product lines and business units, and that's an area that Canadian banks need to look at more closely. How can they identify activities that are consistent across retail banking, capital markets and wealth management, and then find ways to drive cross-platform synergies? I know that Canadian banks are looking at this, but I don't think anyone has the full solution yet.
Tapasvi Narula: I agree. I would also add that these barriers often prevent the banks from getting a true understanding of what the costs are and how much can be optimized. Banks count costs in verticals, looking only at specific lines of business or functions. However, costs are horizontal. Any value chain will cut across the front, mid and back offices, and most banks struggle to measure that. And this means that banks are limited in how much they can measure and optimize. It also means that the stickiness of cost takeout is not there, because the activity often continues the way it was before, in different parts of the business. This is a process—it's not once and done. As John said, Canadian banks are already some of the most efficient in the world. But in this ongoing journey, how can banks continue to drive optimization?
John Armstrong: To pile on a bit, I'd also add that most banks don't know the costs of many activities at the enterprise level. Account open is a good example. Do banks really know what it costs to do account opens for the bank overall, versus in wealth, in personal and commercial banking, or in capital markets? I think they'd be shocked if they knew. And that would be the catalyst to find new opportunities. In the end, some of it is cultural, some of it is organizational, and some of it is just not having the right data that can really drive change.
At KPMG, our experience working with banks in Canada and around the world on their cost optimization programs shows us that when it comes to transformative change, they aren't bound by tradition. While COVID-19 was a shock, we're excited about how Canadian banks are using the crisis as an opportunity to build an even stronger future.
Get in touch with our leaders to discuss cost optimization opportunities at your organization.