Beyond Savings: Cost optimization for the modern bank

As featured on BusinessMirror: Beyond Savings: Cost optimization for the modern bank

Cost management in the banking industry often falls into focusing solely on cost-cutting. However, for cost improvements to be successful, they should be sustainable. This requires a continuous review of spending, optimizing current resources, driving efficiencies and shifting savings to investments that deliver value to the bank and its customers.

In November 2023, KPMG International conducted a survey on banking cost transformation with over 250 banking leaders. The initial analysis of results indicates a consistent decrease in banks cost-to-income ratio (CIR) pre-COVID, followed by an increase during FY19-21 likely due to staff, technology costs, and loan loss provisioning. Recently, improvements in CIR have been observed, largely due to top-line gain from rising interest rates that have boosted profitability.

However, with rising inflation, cost management has become more crucial for banks. Services and people costs tend to increase in line with inflation, and the risk of reduced income is becoming a reality in many countries due to the cost of living or the borrowing crisis.

While CIR and return on equity (ROE) are widely used to gauge bank performance, a deeper focus is needed to measure performance more broadly.

By considering customer metrics such as the cost-to-serve (CTS) and full-time equivalents (FTE) per customer, banks can focus on productivity, efficiency, and profitability. Implementing new technologies, simplifying processes, and introducing efficiency initiatives can increase customer value.

In the KPMG Banking cost transformation survey, 82 percent of respondents identified deep cultural challenges in achieving sustainable cost reductions, despite significant technology investments. Most banks aim to reduce costs, but their cost-reduction objectives often do not align with their broader ambitions, and a cost-culture mindset is not embedded throughout the organization.

Cost transformation in banks does not always permeate the entire organization, even when executives are compensated for meeting cost objectives. Some banks have implemented horizontal and vertical cost structures to align business needs with spending. Executives responsible for a vertical, such as retail banking, are also responsible for its associated costs.

The KPMG Banking cost transformation survey showed that despite recent improvements in CIR, there is a clear need to deliver additional value — and at a greater pace — in the next wave of cost transformation investments. Research suggests that this will be in the region of 10 percent in cost efficiencies over the next 12 months and as high as 20-30 percent over the next three years. Set against an inflationary headwind, these will be significant targets to achieve.

Based on the foundational work that many banks have already put in place, leaders are more confident about where the costs sit. Eighty-six percent of bank executives feel they have strong cost-base mapping in place, with three out of four believing they have the right incentives in place for leaders to achieve their targets.

In KPMG professionals’ experience working with bank executives, many examples point to the impact of these executives’ investments on the operating expenses of contact centers and branches that shift to digital channels, the front-to-back digitization of core value streams such as personal lending and mortgages, and the consolidation of functions to drive scale. However, unanticipated headwinds, changes in customer demands and the challenges of stopping to do certain things means that all too often the gains made are reversed as other costs are added.

As banks look at the next wave of cost transformation investments, the themes are consistent as the strategy begins to extend beyond traditional frontline functions into the FTE base in corporate-headquartered departments and functions such as Finance, Risk and Compliance and Marketing