How Strategic cost transformation can help your bank thrive
The Swiss banking industry is in transformation. Non-banks and new ecosystems are bypassing banks’ legacy systems with new technology. Banks’ ability to make their business models more efficient has been constrained by limited top-line opportunities and they need to undertake forward-looking save-to-thrive initiatives. Swiss banks’ profitability has decreased by nearly 17 per cent since 2013, because of low or even negative interest rates and a tougher regulatory environment. Traditional value drivers in banking (such as transaction fees or interest margins) are expected to decline, and credit quality is likely to deteriorate after COVID-19, in the view of the SNB, while competition from Neobanks and FinTechs is increasing, piling pressure on cost-income ratios and profitability.
Companies’ response has automation as the top priority
Deloitte surveyed over 1,000 executives to understand the impact of the pandemic as a trigger for transformation and performance improvement in organisations globally. Companies’ response to the crisis can be divided into three stages:
- Respond: moves to respond immediately and ensure business continuity;
- Recover: efforts to stabilise operations under changed conditions;
- Thrive: structural moves within a defined strategy to compete in the `new normal` after the pandemic. Generally, companies in the Thrive stage are more likely to find their way back on to the growth path, even more so in the banking sector.
Companies are intensifying their cost reduction efforts
Established business models have been challenged in the pandemic along the entire value chain from sourcing to sales. Market participants acknowledge the need for more agile organisational structures and cuts to the underlying cost base. The share of companies, which have decided to undertake cost reduction, has grown significantly among survey participants over the past 12 months. More importantly, saving targets have been increased and implementation horizons shortened.
Deloitte’s robust cost management framework distinguishes and addresses foundational, transformational and disruptional levels of impact to change and improve cost structures in the following layers of a bank’s operating model:
- Value creation layer: the value proposition, definition of client services and products, client experience, branding, and value measurement
- Process delivery layer: service delivery and processing, including composition of the value chain and orchestration of vendors, sourcing partners and enhanced automation
- Organisation layer: the structural composition of the business, its governance and resource deployment.
- Infrastructure layer: the geographic footprint, premises, infrastructure, systems and technologies.
With continuing pressures from the economic situation and regulation, banking business models and cost structures require a fundamental overhaul if banks are to stay relevant in the financial markets. They need to prepare for a higher level of banking efficiency.