Post COVID-19, everything will be up for debate as banks look for the operating model of the future.

• During the height of the pandemic, banks’ focus was on supporting customers, urgently administering government-backed and other support loans, and protecting their staff. Cost was not a priority during a time of crisis.
• Staff working patterns changed drastically, with increased operational costs to enable mass remote working and considerable servicing costs to administer a flood of new loans. Despite 30-40% of branches being closed, the fixed costs of property remained the same.
• The challenge now is to reimagine the operating model and ‘lock in’ the gains in a difficult environment moving forward: cost and operating efficiency will rarely have been so important.

KPMG analysis finds that, for an average retail/commercial bank, factors including a higher level of arrears and collections requiring additional staff, lower staff productivity through reduced demand for traditional accounts and products, increased on-shoring and multi-sourcing of suppliers, higher insurance and telecoms costs with more staff working from home, and higher fraud costs, will appreciably push banks’ cost bases up.

Banks will be able to realize some savings through lower product demand, reduced property running costs, increased digitization and automation, reduced paper costs, and lower cash and ATM usage – but these will not cover the cost increases that they will see. With a statistical correlation between return on equity and cost/income ratios, the imperative is clear to find additional efficiencies to overturn this rise.

Banks – and customers – learned through COVID-19 that their dependence on branches and physical property was much lower than thought. We will see leaner branch networks and smaller office portfolios. Banks will need to re-think their seats-to-staff ratio in operations and head office functions. Customers for their part will continue to shift to digital and have significantly lower branch-based needs.

COVID-19 powerfully underlined that operational resilience is paramount. But operations – especially in offshore service centers – were badly disrupted during the crisis. 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 as some of the extreme consolidation we have seen is unwound. This will increase costs. Call centers may be able to shift to a more remote basis but nevertheless we expect that many banks will retain physical centers as this creates a more engaging and productive work environment for staff.

There will be an immediate need to re-load the balance between a forecast reduction in demand for traditional accounts and products towards working out collections and debt workout positions. We envisage that this will increase staff costs in total by around 3%. Banks will need to consider how to manage productivity in a work-at-home environment, how to manage culture and teams in a way that maximizes productivity and performance, and assess what changes are required to staff remuneration packages (i.e. insurances; equipment; benefits such as company cars when commutes are removed or reduced). Workforces are likely, overall, to see some reductions in size.

To offset these operational cost increases, we could see renewed efforts among banks to utilize shared service utilities for certain non-differentiating activities. Corporate actions in the capital markets – dividend declarations, stock issues – may be handled by third parties, while some compliance processes around areas such as anti-money laundering may also be increasingly handled by managed service partners. Even core banking platforms could be ‘shared’ – in the US already, multiple banks use the FIS platform.

Banks will focus on keeping customers digital following the significant digital migration during COVID-19. They will ramp down on paper costs (on average, some 2% of a bank’s cost base), keep pushing down cash and ATM costs (down 30% - 60% depending on geography), and manage fraud very tightly.

Banks will look to make savings on external spend across the board, from marketing and sponsorship budgets to travel, entertainment and service supplier costs. They will benefit from some regulatory ‘forbearance’ that has already been announced – postponements to the required implementation date of many large and expensive projects such as Basel III, new anti-money laundering (AML) regulations, Swift standards and IFRS 17. Consultancy contracts will likely see a general trend to outcome-based pricing.

With income set to be squeezed, bad debt provisions rising, and cost bases enlarged, small incremental measures will not be sufficient. COVID-19 has created an opportunity to re-engineer operations and processes – bold thinking is needed.

Effective transformation is about identifying the right costs to reduce – not all or any costs. It is about cutting fat, not muscle. There must be absolute clarity about which activities and functions are essential for resilience. Efforts must create value, not destroy it.

Achieving clarity around cost management, transformation execution, decision-making/ accountability/ governance creates as much value as issues of design and engineering (business & operating model, core systems, digital, cloud). Start by achieving this clarity – it can make perhaps 5-10% of difference. Move on to design and engineering issues afterwards.

Explore how these trends are unfolding in your country using the interactive map below.