Productivity in the banking sector has stagnated, prompting the need for effective tools and techniques to drive lasting change. Historically, banks have achieved cost reductions of 3% to 10%, but these gains often diminish over time as other priorities emerge. Given current macroeconomic uncertainties, maintaining efficiency is crucial for achieving a return on equity (ROE) of 10% or more.
Two complicating trends are evident: improvements in bank performance due to rising interest rates may reverse, and operational costs have escalated over the past 15 years due to increased regulatory demands and technology upgrades. For instance, the cost to originate a mortgage has surged from about $5,100 in 2012 to around $11,600 in 2023, primarily driven by compliance factors.
Challenges to Productivity
Banks face multiple challenges that hinder productivity, including:
- Rising Compliance Costs: Global banking risk and compliance budgets are projected to grow 5% annually through 2028.
- Technology Spending: Despite increased tech investments averaging 9% growth per year, banks have seen low returns on these expenditures compared to revenue growth.
- Customer Expectations: Growing demands for seamless, personalized experiences require banks to redesign critical processes.
- Talent Competition: Increased competition for skilled talent in areas like technology and compliance drives up salaries.
Path to Lasting Productivity Growth
Since 2010, U.S. bank productivity has declined by 0.3% annually, contrasting with gains in other sectors. To reverse this trend, banks should adopt a comprehensive approach termed “simplification at scale.” This strategy involves rethinking the operating model to reduce the unit cost of delivery and eliminating low-profit customer demands that add complexity.
By implementing simplification, banks can achieve productivity gains of up to 15% in two years and improve customer experiences.
Key Components of Simplification
- Streamlining Operations: Banks can divest unprofitable assets and focus on more lucrative areas, as seen with Citigroup’s shift toward wealth management and HSBC’s refocus on core regions.
- Improving Operating Models: Many employees spend excessive time on internal discussions rather than client-facing activities. Streamlining decision-making and adopting agile practices can enhance productivity significantly.
- Rethinking Branch Footprints: Banks should assess their operational requirements to create an optimal footprint, potentially reducing branch locations while enhancing customer experience.
Achieving Scale
To thrive in a challenging environment, banks must increase their scale while maintaining agility. This involves leveraging technologies like generative AI to enhance productivity across various operations, ensuring projects are executed with clear accountability, and assessing how to manage key functions efficiently.
By combining simplification with scale, banks can align resources effectively and create a lasting impact on productivity and customer experience.
In conclusion, banks must embrace simplification at scale to drive meaningful change, improve productivity, and enhance customer and employee experiences in an increasingly complex landscape. Click here to read more: https://www.mckinsey.com/industries/financial-services/our-insights/how-banks-can-boost-productivity-through-simplification-at-scale
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