As we begin to emerge from the worst of the COVID-19 pandemic, banks are confronted by a landscape that looks and feels very different from before. There is a real risk of global or national recessions, even depression and an ultra-low interest rate environment means that net interest margins are wafer thin.
In short, banks’ top line revenue is looking challenged. This makes it more imperative than ever to bring costs down. Our analysis of cost programs at financial institutions indicates an appreciable uplift for the average retail/commercial bank in the short run driven by the myriad effects of COVID-19 on security, usage patterns and other factors.
COVID-19 may drive costs up
However, the changed dynamics that COVID-19 has dramatically ushered in will, unfortunately, drive banks’ cost bases up rather than down, especially in the retail business. Our analysis indicates an appreciable uplift for the average retail/commercial bank.
The factors behind this increase include: a likely higher level of arrears and collections requiring additional staff; increased on-shoring and multi-sourcing of suppliers to bolster operational resilience; lower staff productivity through reduced demand for traditional accounts and products; higher insurance and telecoms costs with more staff working from home; and higher fraud costs.
If banks are fleet of foot, they may be able to offset some of these increases through savings from lower product demand, reduced property running costs, increased digitization and automation, reduced paper costs, and lower cash and ATM usage. But these savings may not be sufficient to cover the cost increases elsewhere – there will still be a net increase for many.
The combination of this rise with the challenges around top line growth and anemic NIMIS could make for a painful double whammy that will simply have to be addressed.
The search for double digit savings
Significant strides had already been made by many financial institutions with cost optimization before COVID-19 – but the pandemic has now shifted the game and significantly raised the requirement.
Nevertheless, the pandemic has shifted some factors in a positive direction – the customer migration to digital, lower branch usage, lower cash handling. These gains must be retained, locked in, and then the window of opportunity used to push further. The resilience, agility and digital transformation adopted through the initial COVID-19 response must be harnessed to achieve sustainable cost optimization and reinvent operating models.
Everything on the table
This means that everything should be on the table. Property, people, technology, external services – all will come under review. Corporate real estate will likely be downsized, branch networks trimmed. Workforce sizes are likely to move on a downward trend, while people roles will shift and become ever more focused on adding value to the customer experience. The technology agenda will assume massive importance – with more digitized customer journeys and greater levels of self-service, backed by robotics and AI hosted in the cloud. Banks have developed numerous AI proof of concepts already – we can expect these now to be scaled and industrialized. These will reach beyond customer-facing interactions to also penetrate new areas such as lending, risk and operations.
However, in some areas banks may need to increase their costs. Offshore service centers, for example, were severely disrupted during the crisis. Some sites in India fell to only a fraction of capacity during the worst of lockdown. There will be a shift in priority from ‘cost’ to ‘cost plus resilience’. Offshore centers may be replaced by near-shore centers instead, while there will be a multi-sourcing approach for the offshore operations that are retained – some of the extreme consolidation that we have seen will be unwound.
But for all the unprecedented nature of COVID-19, in many senses banks have been here before. They already spend a significant amount of their cost base on transformation and change delivery (c. 20-30%)1 and there will have been numerous cost optimization programs at almost every bank in the past.
Ingredients for success
So what can make the difference this time? How can banks make transformation stick? KPMG firms’ experience indicates that these initiatives often fail because there is too much management ‘fog’ to allow ruthless cost management. Without rigorous clarity and simplicity, many banks have ambitious executives each re-interpreting the overall vision into their own individual implementation strategies.
Our message is therefore to focus firstly on clarity. Clear governance, accountability and transparency around cost management, transformation execution and decision making is essential. There is often a significant difference in cost reduction results between banks with real clarity and cost management discipline and those without it.
Instil this clarity and book the quick wins it brings. Then move on to matters of ‘design’ (business model, operating model) and ‘engineering’ (core systems, digital, cloud).
It requires stamina – sustainable cost re-engineering cannot happen overnight. It also requires strong leadership direction to drive and embed a culture of cost consciousness across the organization.
The path ahead looks challenging for much of the financial sector. But those institutions that truly grasp the opportunity can reinvent themselves for the new reality and become the banks of tomorrow.
1 KPMG analysis of financial institutions cost programs, KPMG in the UK
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