Cost optimization programs and digital transformation initiatives impact much more than the cost line on the income statement.
KPMG financial services advisory Principal Mark Ricci provides insights into the need for laser-focused strategic leadership to provide clarity and coordination in banking’s most critical challenges: They explain how greater efficiency through targeted investment in digital technologies can simplify processes and serve customers in an agile manner.
While many of today’s banks are operating with an efficiency ratios in the mid 60s or higher, Ricci believes there is a realistic opportunity for the ratios to be more than 15 points lower.
Ricci also share their ideas in this video about efforts to upgrade antiquated IT systems often are short-sighted and uncoordinated, resulting in programs that may be doing more harm than good.
They suggest that banks must modernize their delivery platform, more nimbly utilize cloud technologies, and wisely leverage the vast oceans of data sloshing through the IT systems.
The first problem that banks are facing in efficiency and revenue program is top-down leadership and clarity of goal, and then the role clarity of all the players across the institution. We typically see it occurring within a line of business like a consumer bank, commercial bank, capital markets, or we see it enterprise-wide. Our point of view is, these programs should be enterprise-wide, led by the CFO, CEO from a financial standpoint with clarity of goals around a defined efficiency rate target.
You look into the areas where the cost is the highest and the revenue potential is the highest. In a consumer bank, for example, you look at the branch network and its distribution. You'd look at the shared services, which is the technology and operations areas including procurement, including vendor management, including risk management, and finance, and legal, and HR. Then, you'd look at all the operations and technology areas for sales fulfillment and service around your product. So, your credit card areas, your deposit taking, your lending, commercial lending, mortgage lending, auto lending, student lending, consumer lending areas. They're not taking a holistic program approach, and they're not going where the money is and the potential is, and they're not dedicating goals to get to where they need to be and defining those for the institution.
We believe by the year 2021, they need to be in the high 40s, and many of our clients, large national banks, are in the mid 50s, and the regional banks, large regionals, the smaller regionals are in the high 60s, all the way up to some of them in the low 80s.
The drive of the efficiency ratio and operating leverage into the 40s is really driven by the customer. Our customers are, as we are all customers, our needs, our wants, and our desires of how we transact with our consumer products and financial institutions are changing. What we're finding from research is, what we want as consumers is self-service, on-demand, easy to do business, error-free, and information provided. Anything that is not instantaneous, we have kept in form status, like pizza trackers when we order pizza, or information on flight delays when we're flying.
So, you take those expectations that have changed over time, they continue to evolve, and you have to transform a financial institution to deliver that. That transformed financial institution, through a digital enablement strategy, allows the processes to be redesigned, the infrastructure to be rebundled and reestablished, and then the delivery to the customer with the right information at the right time, at the right place, and a lower cost structure and, hopefully, with products and services that the consumer will therefore buy, and the revenue stream grows from there.