The banking sector is facing significant pressure to improve productivity and efficiency amidst ongoing macroeconomic and geopolitical uncertainties. Executives are increasingly aware that maintaining a return on equity (ROE) of 10% or higher and a return on assets (ROA) above 1.5% requires continuous focus on operational efficiency. However, while banks have made strides in reducing costs—around 3% to 10% historically—the gains have often proven to be fleeting.

Current Challenges in Banking Productivity

Despite banks’ awareness of their rising operational costs, several challenges impede their ability to improve efficiency effectively:

• Regulatory Compliance and Risk Management: The global banking landscape has seen a substantial increase in compliance costs, projected to grow by 5% annually through 2028. While some regulatory easing in the U.S. may mitigate future spending, the current burden remains significant.
• Technology Spending: Banks are investing heavily in technology, with expenditures rising 9% a year, outpacing revenue growth of 4%. However, many institutions find the returns on these technology investments lackluster, particularly in areas such as artificial intelligence compared to other sectors.
• Customer Expectations: As consumer demand for seamless and personalized banking experiences increases, banks must invest in redesigning processes and technologies to meet these expectations.
• Talent Competition: The ongoing war for talent in technology and analytics has led to increased salaries as banks compete with fintechs for skilled professionals.

Steps Towards Sustainable Productivity Growth

To reverse the trend of stagnant productivity, banks need to adopt innovative approaches that focus on comprehensive improvements, rather than temporary fixes. We propose a model based on two critical components: simplification and scaling. Together, these elements can generate lasting positive impacts on productivity and customer satisfaction.

Simplification

Simplification involves critically evaluating operations to eliminate inefficiencies. Banks can adopt the following strategies:

• Streamlining Operations: By divesting non-core businesses and focusing on profitable sectors, banks can enhance their efficiency. For example, Citigroup has transitioned its retail banking efforts towards wealth management, resulting in increased revenues.
• Improving Decision-Making Processes: Reducing layers in decision-making hierarchies can enhance responsiveness. Many banks have ratios of managers to employees that are too high, complicating operational agility.
• Optimizing Technology Usage: Implementing agile methodologies in technology projects can cut costs and improve efficiency—moving from traditional development cycles to faster, iterative processes is crucial.
• Rethinking Operational Footprints: Banks must determine their ideal branch and operational presence to maximize service quality while minimizing costs.

Scaling

Scale is essential for banks to navigate the complexities of modern regulation and compliance demands effectively:

• Leveraging Advanced Technologies: Implementing generative AI across various operations, such as customer service, can significantly boost productivity. One bank reported a 30% increase in efficiency after deploying AI tools in its operations.
• Assessing Support Functions: Certain banking functions require specific operational scales to be profitable. Strategic management of these functions can lead to cost reductions while enhancing service delivery.

Transforming Customer Experience

Alongside productivity, banks must prioritize enhancing customer experiences. Focusing on customer-centric operations can lead banks to outperform competitors:

• Centrality of Customer Needs: Adapting processes to prioritize customer needs can streamline interactions, improving satisfaction and trust.
• Omnichannel Integration: Providing accessible services through multiple channels can offer greater convenience and maintain engagement.
• Personalized Services: Leveraging data analytics allows banks to offer tailored products that resonate with individual customer needs, thus fostering loyalty.

Conclusion

In summary, banks must undertake a comprehensive approach to simplify their operations and scale effectively to ensure productivity improvements. By focusing on eliminating inefficiencies and leveraging technology, while also enhancing customer experiences, banks can position themselves for sustainable growth and success in a challenging landscape.