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Deteriorating efficiency ratios indicate that banks today, particularly those in North America, continue to struggle with adapting their operations after the financial crisis. But there are lessons to be learned from global banking leaders about how to make efficiency gains.
While it is necessary to strike a balance between revenue generation and cost reduction, starting on the cost side leads to the biggest immediate improvements. Accenture analyzed a Capital IQ study of 67 banks from 24 countries and found that 82 percent of the banks with superior cost-income ratios within their home countries achieved these results through cost efficiency.
However, to achieve agility and grow their businesses profitably, banks need to do more than simply cut costs—they need to undergo a strategic cost transformation. These initiatives can be complex, but the rewards are sustainable and necessary for banks’ future competitiveness.
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Even today, five years after the financial crisis shook global banking and upended many long established ways of doing business, many North American banks are still struggling to adapt their operations and grow their businesses profitably. Deteriorating efficiency ratios are evidence of this continuing struggle: from 2012 to 2013 the average cost-income ratio rose from 67 to 70 percent—a ratio that is far above the global norm.
When improving an efficiency ratio, there is a necessary balance to strike between revenue generation and cost reduction.
Accenture analyzed a Capital IQ study of 67 banks from 24 countries and found that 82 percent of the banks with superior cost-income ratios within their home countries achieved these results through cost efficiency (23 percent also achieved superior income efficiency). Meanwhile, only 18 percent of the surveyed banks achieved a superior cost-income ratio through income efficiency alone.
To achieve agility, improve efficiency ratios and grow their businesses profitably, banks need to do more than simply cut costs—they need to undergo a strategic cost transformation.
Strategic cost reduction initiatives typically fall into three categories:
Rethinking the business model. This includes transforming distribution by harnessing innovations such as social media and mobile technologies, mutualizing the cost structure through innovations such as teller sharing with other banks and entering new businesses such as non-financial data analytics for small businesses.
Foundational changes to the cost structure. This includes core banking transformation, which may involve a full replacement of the core or a more evolutionary approach, remaking operations through technology modernization and organizational transformation, and transforming processes across the enterprise by creating chief process officers who are responsible for a specific process across the front, middle and back offices.
Technology-driven transformation initiatives. These include implementing disruptive technologies such as core banking in the cloud, adopting digital core banking architecture, which includes supporting new user interfaces and improving technology efficiency by “re-platforming” mainframe systems to open environments, extensive use of open source middleware and advanced fully automated development environments.
Pursuing strategic cost transformation is an admittedly complex undertaking, but the rewards are sustainable and necessary for future competitiveness.
March 14, 2014
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