By: Gabriel Valmonte, Global Marketing
Mitigating costs, maximising investments & accelerating implementation.
Most, if not all, banking institutions across the globe are reeling from the detrimental business effects of the pandemic. Management teams are continuously revisiting business areas that can be streamlined, trimmed down or altogether discontinued in order to try and salvage set revenue targets or to simply stay afloat.
The True Cost of ‘Cutting Costs’
The global Covid-19 pandemic has negatively hit the banking industry on multiple fronts. Clients are defaulting on loan repayments due to diminished or outright loss of income, increasing credit demand from firms that are also experiencing revenue issues, and operational challenges that undermine the bank’s full capacity to effectively service clients.
In their quest to quickly improve margins, banks have set their eyes on slashing expenses on areas they have full control over – the overhead expenses of maintaining branches and corresponding employees.
Closing Down Physical Branches
Closing branches down has been an ongoing trend, especially in Europe, which has been going on for the last decade. From around 237,000 European domestic bank branches in 2008 to 163,000 by the end of 2019, the number has decreased at a steady pace of around 6% each year.
The same trend is evident in other parts of the world; including major markets such as the United States, the United Arab Emirates, Korea, and Hong Kong .
The pandemic accelerated this trend as more branch closures were announced across markets, with some of Europe’s big banks about to discontinue more than 2,500 more . According to S&P Global Market Intelligence data, the US also closed a record 3,324 branches in 2020. In Asia, some of China’s largest banking institutions, China Minsheng Bank and Bank of China also reduced their branch networks by about 7%, followed by the Agricultural Bank of China, which closed just over 2% of its total.
This is something that is seen to further progress as a recent survey of more than 300 banking executives by Temenos & Economist Intelligence Unit found that 65% of these decision-makers believe that branch banking will be dead within 5 years’ time .
Enduring Manpower Layoffs
Another unfortunate casualty of immediate cost-cutting initiatives is the employees. Banks globally have been forced to let go of thousands of employees in a bid to allay overhead expenses in conjunction with the branch closures.
Most big players are looking at this route not just to weather the pandemic but as a short-term strategy to recuperate lost profitability. In the US alone, banks are projected to reduce 200,000 jobs over the next ten years  as they seek to improve profitability, in line with the shifting customer banking behaviours. Global and regional players like HSBC, Commerzbank, and Rabobank are looking at even shorter periods to implement headcount downsizing.
Banking on Digital for Optimization
As banks trim business costs on re-organisation and branch closures, the savings are largely reallocated to digital transformation, which is admittedly the logical route to take. Technology, after all, is widely regarded as the key business solution that can quickly pick up the slack in the wake of employee and branch reductions.
Although banks have steadily launched a few digital channels over the past few years, the pandemic-fueled customer digital shift still caught bank institutions off guard. In response to the rapid shift, more digital banking services were hastily launched. Providing solutions that are functionally sufficient but have inadvertently become devoid of the human element as an effect of the cutbacks. As a result, customer trust in banking institutions to look after their long-term financial well-being has taken a hit. .
Banking institutions did not fully realise that customer adoption of digital channels would not happen at the same rate they cut down on the physical branches. There are customers that would still prefer in-person engagements, but the channels made available are not designed to satisfy this underlying need that has long been one of the foundations of the banking relationship.
Misguided Digital Decisions Can Undermine Potential Gains
A KPMG study shows that 83% of banks are refocusing their cost optimization efforts while 59% of them look at digitisation as a key cost lever. In order to achieve challenging financial goals, banks would find it highly tempting to cut on business areas, including those mentioned above, and hastily deploy systems or technology deemed to remedy the functions or services that will be vacated.
While this approach can be considered tactically sound in the short term, it bears the risk of putting in place systems that can hamper flexibility when faced with further shifts in customer behaviours and demands. Especially when management has the tendency to put priority on addressing the more apparent business areas over the larger systemic segments.
A simple example can be a self-serve chatbot launched in place of previously human-centred customer service after considerable reorganization. A common misstep would be putting a wide range of possible financial service offerings from account creation and management to addressing customer issues in that same channel. As a result, the experience could be overwhelming or downright confusing leading to customer frustration.
From a digital perspective, having a channel that can service customers 24/7 without the need for a warm body to help the process along is indeed a great asset. However, not taking into account the ensuing customer experience could bring about more issues that may prove to be costly down the line.
This scenario can be avoided by adhering to a value-based strategic approach to technology as opposed to tactical executions. A value-based strategy centres around the deeper customer value that the potential solution would address. It allows a better perspective on the customer need which would help define the parameters of the solution including its components, both tech and otherwise. It puts the management in a good position to weigh the technology’s potential business value as compared to the investment costs leading to an informed decision.
Making Sense of Digital Investments
Finding Balance Between Savings & Cost Initiatives
Financial resources gained through cost-saving initiatives are being funnelled to accelerate banking digitalisation. And because there is that internal friction between pursuing savings or cost-generating initiatives, it would be beneficial to zero in on the lifeblood of the business when considering which decision to take. That, of course, is the customer.
Uncovering essential customer values and taking that as the springboard for a value-based strategy will help identify solutions for key business areas that will make an immediate impact. At the same time, this would help the organization avoid making misguided technology executions that may prove to be detrimental in the long run.
Using Customer Values as the Baseline for Strategy
Putting the focus back on the customer and taking the time to understand what they value in the fast-evolving digital banking experience enable banks to make good sense of critical digital initiatives and prioritize accordingly.
Taking the value-based approach into practice, let’s take a look at a couple of highly-rated digital banking aspects that customers are looking for.
Customers have experienced the unprecedented convenience of digital channels from other industries such as retail and food delivery due to the pandemic’s restrictions. As a result, they brought this same level of expectation to their banking institution’s digital channels. This only further emphasized the friction points in digital banking processes such as account opening and customer service, among others.
Another benefit of digital channels that customers appreciate is the personalised experience. Other industries’ digital channels offer relevant and timely product suggestions, thus making the buying process easier and more enjoyable for the users. The same expectation now goes with the banking experience. Customers are looking to their banking provider for relevant and timely financial advice as well as personalised products that fit their financial goals.
Having these customer values and challenges in mind, we can now ideate the potential solutions that can address challenges and deliver brand value.
Crafting Viable Solutions at Minimal Cost
Without compromising the business goal of generating profit, we can take these essential customer values, including the underlying challenges, and design digital solutions that can help satisfy both the business and customer goals.
This can then be guided by the solution discovery process. This process has four steps that aid decision-makers in looking at actionable potential areas of digitisation without being overwhelmed. Instead of looking at a daunting and seemingly extensive digital project to address overarching customer challenges, this helps frame perspectives according to manageable scales.
Let us take our two earlier identified customer values and take them through the discovery process.
Step 1: Problem framing
The first step aims to understand the business problems we’d like to address then envision what the resulting success would look like.
One business problem in this area is that customer account opening in digital channels takes weeks to accomplish due to largely manual back-office verification processes. A solution requirement may be an automation integration that will allow faster KYC account processing that requires less or completely no human intervention.
A business problem in this aspect is the limited availability and capacity of qualified bank relationship personnel to cater to customers looking for financial & transactional advice in service channels. A possible solution is AI & ML-powered customer service channels that can offer self-serve, highly tailored, and timely financial education.
Step 2: Roadmap planning
Next comes the prioritization of which business problems to tackle based on expected business & customer values as well as the complexity of the technology. This step helps rationalize which solution is the best to pursue among what can be a wide selection of digital initiatives.
Coming from our previously defined business problems, it’s an option between providing a better customer experience through a highly efficient account opening process and providing a personalized financial education service using machine learning & AI solutions.
Given this, it may make more business sense to pursue the better customer experience solution path as it directly impacts customer acquisition and immediate channel user satisfaction. At the same time, it will deliver operational efficiency that can streamline overhead costs.
Step 3: Ideation & prototyping
Next is the generation of viable solution ideas from cross-functional leadership teams that leads to prototype development.
Building on the KYC account opening experience challenge, one prototype idea can be the development of a mobile banking app that uses RegTech to expedite identity verification requirements at the onset and supplemented with RPA to automate back-office account transaction procedures.
Step 4: Solution testing
The final step of the process is testing and validating the prototype among target actual users and gathering real data to determine feasibility.
One way to do this is to identify existing and potential digital baking channel users across major demographic groups to get a wide range of feedback on the solution’s usability and perceived benefits.
While we had a fairly simple and straightforward example, actual scenarios may yield several highly viable prototypes. This now begs the question, how do we decide which ones are worth taking further into development?
At this point, we will have to take the prototypes through validation criteria to ensure that we will only focus on initiatives that will deliver the most value. In order to do that, we would have to answer the following questions:
1. Is it usable and what is the perceived value?
We have to validate the technology’s ease of use, whether it effectively addresses the initial problem identified, and more importantly if the customers find value in the solution. This is where the gathered solution testing data will be most valuable.
2. What is the technical feasibility?
Given the organisation’s available resources and technical capabilities, we have to evaluate if we can develop the solution according to the required standards and within the desired time frame.
3. What is the commercial viability?
Evaluate the impact of the technology solution once deployed. Will it be able to bring the company closer to set business and financial goals?
Balancing Investment & Risk
After going through the final validation process, only initiatives that are proven to be viable can now be taken to full development. It is worth noting that even at this late stage in the process, only the minimal required investment should have so far been allocated as we are still working on prototypes with minimum key features meant to address identified customer challenges. This effectively mitigates the risk of major financial setbacks in case of failed technology initiatives, which are exactly what banks are avoiding, given the current financial strains.
This entire process is also known as the Minimum Viable Product (MVP) Approach. Wherein the most relevant challenges are being tackled on a controlled and manageable scale. Allowing for the development of solutions that can have an immediate impact on the organization in direct response to the identified business problems.
Looking at technology as a quick solution to optimize and compensate for business areas affected by cost-cutting efforts may end up having adverse outcomes. When cost-saving initiatives take precedence without considering customer value and experience, there is the risk of deploying technology that undermines financial gain and hurts the brand experience.
But by tackling digitisation from a values-based strategic approach down to the MVP approach, viable solutions are created from clear perspectives on key business challenges without overlooking critical customer values. And most importantly, digital initiatives are undertaken at a manageable scale, with clear ROI objectives, and at the minimal investment required.
This process will take your digital journey further and faster instead of taking on large, organization-wide digital transformation efforts, which can be intimidating and, ultimately, crippling.
Meet our Experts
Anders Skjøt Kongsbak | Banking & Finance Digital Strategy
Anders’ core interest is the early stage of company conceptualisation, finding new ways of bringing value to end consumers through the strategic targeted use of technology in services and products. A specialist in Financial Services technology, he actively investigates new opportunities for innovation, leveraging emerging technology through regulatory frameworks and industry trends. As a Strategy Consultant, Anders’ work covers several areas of business startup and growth, from technology choices and business processes to operations, GTM and Platform strategy.
Luke Gallimore | Solution Discovery & Product Strategy
Since joining Monstarlab, Luke has driven success with a range of global brands across verticals, supporting their journey to becoming digital-first and disruptive businesses. He has expertise in leading companies in the discovery, design, and development of critical technology that can impact business growth.
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 The Asian Banker, Branch decline continues across markets in the Middle East, Asia Pacific and Africa, 2019
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 BCG, Can Banks Find the Cost Savings Hiding in Plain Sight?, 2021
 The Banker, Is this the beginning of the end for bank branches?, 2021
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 KPMG, New cost imperatives in banking. Gaining greater efficiency, 2021
[A] Number of Domestic Branches, European Banking Federation, Banking in Europe: EBF Facts & Figures. 2020, 2020
[B] Manpower Layoff Chart
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BBC, HSBC to press on with 35,000 job cuts, 2020
Forbes, After Vowing Not To Make Job Cuts In 2020 Amid Covid-19, Citigroup Announces Layoffs, 2020
Bloomberg, Santander Plans 4,000 Job Losses, Adding to Wave of Cuts, 2020
NL Times, Rabobank to cut 5,000 jobs, 2021
El País, Spain’s CaixaBank planning over 8,000 job cuts in banking’s biggest staff reduction, 2021
CNBC, Commerzbank CEO strikes deal with workers for 10,000 job cuts, 2021
Nasdaq, UK’s Provident Financial to close troubled doorstep-lending arm, 2021
Forbes, Report: Spain’s Second Largest Bank BBVA Plans To Cut 3,000 Jobs, 2021
Bloomberg, Deutsche Bank Plans About Half of 18,000 Job Cuts in Germany, 2019
Reuters, Banks eye layoffs as short-term crisis ends, long-term costs emerge, 2020