Cost optimization in Luxembourg’s banking sector

Luxembourg’s banking sector has solid headline financial metrics – but these have been masking a structurally rising cost base: operating costs have increased by approximately 5% per year on average over the past five years, while interest rates have been easing and are not expected to increase in the short to mid-term.

This pressure is structural rather than cyclical. Wage indexation, sustained IT modernization, substance expectations – including additional senior conducting officers, board members, and independent oversight roles – and other cumulative regulatory requirements have permanently lifted the cost base. The phase where rising rates and asset prices comfortably compensated for structural inefficiencies is over. Cost optimization has become a top board priority and means sustainably lowering and managing the cost base, strengthening the operating model, and ensuring that reductions endure. Ultimately, this is about transformation that creates lasting value – for clients, shareholders, and regulators alike.

Despite this, Luxembourg remains attractive for new players: between 2020 and 2025, 18 new credit institutions (banks and branches) entered the market. Even though the number of players in Luxembourg declined overall from 128 to 117, exits reflect consolidation rather than a loss of market attractiveness.

Three banking models, three cost realities

Cost optimization in Luxembourg cannot be approached with one-size-fits-all solutions. The underlying economics differ materially across banking models.

Private banks
Asset servicing banks
Universal banks

Private banks have people‑ and control‑heavy cost structures. High numbers of relationship managers and advisors are needed for client engagement, while substantial compliance teams handle complex cross‑border onboarding and suitability checks. As more complex financial products and structures are utilized (trusts, foreign entities, insurance wrappers), the demands on middle-office, risk and compliance teams are only increasing. Consequently, cost-to-income ratios are becoming structurally challenging for smaller private banks who lack economies of scale yet still offer bespoke features and often rely heavily on execution-only services to attract assets under management (AuM). Increasingly, firms are strengthening the middle office and clarifying front‑to‑middle hand‑offs, shifting routine administration and monitoring away from bankers. The pay-off they are hoping for is time back for high‑value client interaction – advice, portfolio outcomes, and proactive contact – supported by focused technology for advisory and reporting, with operations shaped by bespoke requests and exceptions rather than sheer volume. A further recurring issue is the accumulation of products, legacy tariffs, and ad-hoc fee exceptions, often maintained to attract or retain assets under management. Product and segment profitability is frequently opaque once operational effort and control costs are taken into consideration. This materially dilutes margins and exacerbates cost-to-income pressure, particularly for smaller institutions.

Asset servicing banks’ main focus is operational scale and data quality. Net asset value (NAV) production, corporate actions, reconciliations, and transfer agency (TA) operations require resilient platforms and clean reference data. Control layers across depositary, TA, and custody make exception management and end‑to‑end straight‑through processing (STP) pivotal to cost performance. The cost rationale is industrial, driven by volume: profitability is a direct function of STP rates and reference data consistency across core production processes. Even marginal improvements in STP or data quality quickly translate into tangible savings due to transaction scale and volume. In this model, even modest data fragmentation or unclear control ownership rapidly erodes margin through manual breaks, duplicated checks, and rework.

Universal banks combine multi‑line franchises (spanning deposits, lending, cards, payments, wealth, SME/corporate services, and treasury) within a single operating model. Cost is shaped as much by distribution and servicing (branches, contact centers, digital journeys) and balance sheet management (liquidity and asset liability management) as by platforms. Branches, ATMs, call centers and legacy channels represent substantial fixed costs, while payment operations and lending remain labor intensive. Channel economics need to be actively steered using data on cost-to-serve by interaction type, with routine requests defaulting to digital or assisted-digital channels and human capacity reserved for complex, value-adding interactions. Platform efficiency still matters, but economics are driven by pricing discipline, fee governance, cost of risk in retail and corporate portfolios, and robust risk and conduct obligations across the franchise. On top of this, products and tariffs offered are often varied and opaque, with many exceptions and bespoke processes that drive up cost-to-serve and the cost-to-income (C/I) ratio. In this model, simplification is less about technology alone and more about reducing operational variance created by fragmented pricing, product proliferation, and bespoke servicing.

Where the next euro of efficiency can be found

In private banking, the biggest wins come from streamlining client lifecycle management – risk‑based segmentation, digital identity checks, and tighter workflow orchestration – and from lifting advisor productivity through consolidated tooling and automated proposal generation with embedded suitability. Simplifying products and fees reduces leakage and complexity. The signal is in the metrics: more clients and AuM per relationship manager (RM), more client meetings and contacts per client‑facing full-time equivalent (FTE), and lower attrition. Onboarding, know your customer (KYC) and periodic reviews are both a major cost driver and a key determinant of client experience and RM productivity. A risk-based client lifecycle management (CLM) model – with simplified STP for low-risk clients and targeted enhanced due diligence for higher-risk profiles – can reduce cycle times by 30–40% while improving anti-money laundering (AML) quality. Digitising KYC (pre-filled data, e-signatures, online questionnaires) materially reduces manual effort, rework and onboarding costs, while freeing RM time for client-facing activities.

In parallel, product-level profitability analysis often reveals offerings that are strategically attractive but structurally loss-making. Segmenting products into grow, redesign or exit enables a sharper focus on the core business, reduces ad-hoc exceptions and aligns bespoke services to where they create value. Product complexity has shifted from being a differentiator to a margin drag, as each additional product or exception increases control, reporting and suitability costs.

For asset servicing banks, scale hinges on straight‑through processing. Raising end‑to‑end STP across NAVs, corporate actions, income processing, and reconciliations unlocks capacity. Golden sources and shared definitions across fund accounting, TA, and depositary cut duplication and breaks. Role clarity at control points, clear pricing drivers in requests for proposals (RfPs), and client‑level profitability tracking align service tiers to delivered value. Here, the goal is to move from fighting exceptions to running clean, industrialized processes. By raising STP from a baseline of 70% to closer to 90% in a few key areas, a bank can halve manual breaks and drastically cut FTE allocated to pure processing and data entry work. To achieve this, institutions need to troubleshoot where STP fails and the underlying reasons, then fix structural issues such as interface format and reference data. Only then does automation make sense (through robotics and scripts) for the remaining processes. In parallel, it is also essential to define clear service tiers and link prices to complexity and volume of transactions to ensure that bespoke services are actually paid for instead of eroding profitability/margin.

In universal banks, the next euro of efficiency comes from sharpening economics and simplifying service. It is less about pure STP, more about how the franchise runs day to day:

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Pricing and margin management

Aligning deposit betas, tightening fee architecture and waiver discipline, and applying dynamic pricing in lending with product‑level profitability.

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Channel and servicing productivity

Accelerating digital self‑service, right‑sizing branch footprints, and improving workforce planning and appointment scheduling; raising first‑contact resolution in contact centers while maintaining quality.

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Product simplification and fee clarity

Standardizing bundles, retiring low‑demand variants, and clarifying tariffs to reduce operational exceptions and leakage.

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Collections and cost of risk

Segmenting early arrears, digitizing decision-making, and strengthening arrangements to lower roll rates and non‑performing loans.

The aim is to improve cost-to-serve without eroding revenues. That means ensuring that basic services are available through digital channels, redirecting clients away from high-cost channels for simple interactions. It also means being disciplined about which fee waivers are justified and simplifying tariff grids so that FTEs can apply them more consistently, all while using analytics for collection and lending to reduce the cost of risk.

The few levers that work consistently

There are a number of best practice approaches that, in our experience, work across banking models.

Explicit operating model choices come first: what stays in‑house, where staff augmentation fits, and what to outsource. Build an “intelligent buyer” capability that governs vendors and makes cost transparent considering alignment with substance expectations. Practice portfolio discipline by rebalancing regulatory versus discretionary change and stopping or sequencing low‑ROI initiatives to free capacity. In practice, cost optimization more often fails due to weak transformation portfolio governance than lack of ideas. Overlapping initiatives, duplicated tooling, and unfocused change consume capacity without delivering structural impact and cost improvements.

Another important principle is redesigning before automating: there is little value in speeding up a process that is structurally flawed or should be retired. Think in unit economics as opposed to budget: considering cost per payment, per NAV, per onboarding, trade, call etc. gives more useful information than raw spending per business unit.

Use process analytics to expose bottlenecks and apply automation where full integration is not feasible just yet – especially in high‑volume, high‑error steps like reconciliations, KYC updates, and payment investigations. Digitize front‑to‑back: eliminate hand‑offs, standardize workflows, embed controls by design, and make STP the default. Simplify distribution and align rewards to value delivered, not activity volume. Underpin everything with cost governance – elective zero‑based budgeting, activity‑based costing for shared services, outcome‑based contracts, and unit‑cost KPIs that prevent cost creep. Workforce transformation should prioritize a shift in skill mix rather than pure headcount reduction, moving from manual processing roles towards data, control and automation capabilities. This requires integrated workforce planning, with a focus on targeted upskilling and clear accountability at leadership level.

Leveraging market benchmarks to support your cost optimization

At KPMG Luxembourg, we help clients calibrate ambition by drawing on market benchmarks from KPMG’s Private Banking, Depositary Banking and Custodian Services, and Digital Banking surveys. These proprietary datasets provide a granular and evidence-based view of market performance across cost ratios, productivity metrics, automation maturity, and client experience indicators. Unlike theoretical frameworks, they reflect real operating conditions and are continuously updated to capture changes in the regulatory landscape, client behavior, and technology adoption. We then combine these external insights with each institution’s operational data, including spend patterns, transaction volumes, service levels, and control performance, to establish a tailored performance baseline. This dual-lens approach allows a precise identification of the levers that matter most, those that have a material impact on cost efficiency, operational resilience, and client experience. For example, by benchmarking onboarding cycle times or STP rates against peer medians and overlaying internal data, we can pinpoint where process redesign, automation, or resource optimization will create the highest value. The outcome is a targeted and evidence-driven transformation roadmap that moves beyond generic cost reduction and focuses on structural, measurable, and sustainable performance improvement. Around these principles, we identify five clear outliers: a clear operating model and sourcing strategy; an IT and data infrastructure that reduces run cost and enables automation where applicable; a business with the right amount of layers and wide array of skills; a highly scalable control environment enabled by RegTech; and a simple cost framework to govern these initiatives.

Banks should aim to broaden revenue streams beyond net interest income by monetizing services such as subscriptions, platform access, data-driven offerings and results-linked advisory. At the same time, selectively expanding into adjacent activities that leverage existing capabilities allows institutions to scale without materially increasing complexity or cost: regulation as a catalyst, not a constraint.

Done well, compliance is efficient and adds measurable organizational value. The Digital Operational Resilience Act (DORA) raises the bar on information and communication technology (ICT) risk, incident handling, and third‑party oversight – prime territory for modern monitoring and automated controls that reduce both cost and risk. Embedding the CSSF’s outsourcing expectations early clarifies accountability and documentation, reducing rework. In AML/KYC and suitability, RegTech – from screening to case management and analytics – lowers manual effort while improving control quality.

How to go about the transformation:

An 18‑month plan that sticks

In the first 0–3 months, establish a directional cost baseline and constraints; spotlight the most manual processes and STP bottlenecks; retire unused tools; and fix high‑friction steps that slow throughput.

Over 3–12 months, redesign operating models for CLM, reconciliations, and payments to raise straight‑through rates and reduce hand‑offs. Rationalize products by analyzing revenue and direct costs for the top 10 offerings, simplifying where complexity outpaces value. Implement transparent overhead cost allocation. Rebalance the transformation portfolio – prioritizing regulatory essentials and stopping or sequencing low‑ROI initiatives.

From 12–18 months, industrialize automation and control testing, modernize core integrations for reliability, embed cost governance and unit‑cost KPIs, and optimize sourcing around measurable outcomes. Banks typically achieve sustainable 5–15% reductions in addressable operating costs over 12–18 months, with faster cycle times and stronger controls – depending on baseline and ambition.

Avoid the usual traps

The common pitfalls are familiar: automating broken processes instead of redesigning them; underestimating data lineage and quality; skipping impact sequencing without assessing dependencies, cost to achieve, and change complexity; and weak third‑party governance based on vague service level agreements (SLAs). Each is avoidable with clear design, disciplined sequencing, and contracts tied to outcomes with transparent unit costs.

Measuring what matters

A concise scorecard keeps teams focused. Efficiency metrics – cost‑to‑income, unit cost per transaction or onboarding, straight‑through rates, onboarding time – should sit alongside quality (error and break rates, right‑first‑time, audit findings), resilience (incident response, testing coverage, outsourcing risk assessments, control automation), and client experience (net promoter score (NPS), payment investigation turnaround, time‑to‑advice). Each bank type comes with its own specifics: private banks track clients and AuM per RM, client interactions per client‑facing FTE, and attrition; asset servicers monitor client‑level profitability and pricing drivers applied in RfPs; universal banks focus on deposit and lending margins, fee income per customer, cost per servicing interaction, first‑contact resolution, delinquency roll rates/non-performing loan (NPL) ratio, and time‑to‑decision in key journeys.

What we are seeing across Luxembourg

Private banks that adopt risk‑based CLM with automated KYC updates cut onboarding times by roughly 30-40%, freeing relationship managers for client work – often amounting to about a day per week. Asset servicing banks that automate corporate actions and reconciliations lift STP from around 70% to 90%, halving manual breaks and incidents. Universal banks that rebalance fee governance and waiver discipline, streamline branch networks, and push digital servicing reduce fee leakage, lower servicing cost per contact by double digits, and improve early‑arrears outcomes through modernized collections.

The way forward

Start with high‑impact projects and mobilize your team. In Luxembourg’s competitive market, amid persistent cost inflation and likely pressure on interest margins, continuous rationalization and cost optimization are now core to how successful banks operate. The most resilient institutions treat cost optimization not as a one-off, but as a structural capability and a value creation opportunity. Redesign before you automate, measure unit economics relentlessly, and bring frontline teams into the change early. That is how you lower cost, create value, raise resilience, and sustain client trust.