Banks have faced reducing profits for years.
Ever since the global financial crisis, conditions for growth in this sector have been difficult. Low interest rates, the cost of compliance, and pressure from new entrants have made growth almost impossible.
Banks need to focus on digital banking cost reduction if they are to restore their margins.
Typically, businesses can escape a profit crunch by either boosting revenue or cutting costs. As we have mentioned, boosting revenue is not currently an option. This leaves banks with a logical choice to concentrate on cost reduction.
For this, banks need to apply themselves to creating simpler, more streamlined offerings and digitizing their operations to keep up with consumer requirements.
In this article, we will discuss how banks can go about achieving the cost reductions they need. The article will cover:
- What is driving the cost pressure?
- What banks must do to kick-start cost savings?
- Key ways to achieve cost reduction.
- How can a good banking app reduce costs?
What is driving the cost pressure
Restoring profits is a significant task for banks around the world.
Cost pressure has been coming from many angles. While banks could not grow their way to profitability, their margins have been shrinking because of rising costs. These costs can be attributed to the following factors:
1. High cost of compliance
Since the global financial crisis, regulators in key markets have introduced several new pieces of regulation designed to safeguard consumer interests.
In the European Union, banks must keep up with Know Your Customer (KYC) and Anti Money Laundering (AML) regulation.
These are only two of several pieces of regulation that are currently in force, with more expected in the pipeline. Compliance comes at a cost since banks must satisfy each regulator through time-consuming processes such as transaction monitoring and reporting.
2. The cost of IT
Banking IT systems have been built over time.
Often, there are legacy systems underpinning a bank’s IT infrastructure that it cannot easily escape from because of sunk cost.
Banks are often large institutions with diverse business units, and this leads its IT products to grow at different rates. It is common to find multiple products that are closely related to each other within a bank’s product portfolio.
Each product requires its own maintenance, which is costly.
3. Changing consumer preferences
The modern consumer has expectations that all banking tools must be sleek, user-friendly, and safe.
This leads to fierce competition between banks to launch the newest, most convenient version of their app. Consumers can easily leave a bank if its mobile banking products are not up to scratch.
This means that banks are in a constant battle to understand customer needs in order to develop simpler and better looking products. Banks know that a successful banking product can enhance customer retention and keep market share.
Banks can hardly afford to rest as they need to be making new products all the time. As we know, banking software development is not cheap.
4. New entrants eating up margin
Neobanks and fintech companies have arrived to disrupt the traditional banking space.
Fintechs can find smart ways to solve customer pain points, such as reducing banking charges and fees. Fintechs are so small they can develop products quickly and with less bureaucracy.
These disruptors can offer customers mobile services that truly help them with better convenience and speed in areas such as payments, foreign exchange, savings, and investments.
Emerging customer niches like gig-economy nomads want seamless and intelligent solutions to issues like foreign exchange that big banks often neglect.
As these competitor companies lack high overhead costs, they can be nimble and cost competitive. This is how they have eaten away at the margins that big banks used to enjoy.
Banks have found it difficult to keep up with the agility of Neobanks and fintechs and can no longer use fees to dig themselves out of trouble.
Neobanks and fintechs are here to stay. Regulation will only get more onerous as cyber crime becomes more sophisticated and the much-anticipated internet of things (IOT) age takes form.
Regulation will increase in order to protect the consumer. Also, as consumers realize they can easily switch between banks, they will reward only the most innovative and competitive banks with their business.
What banks must do to kick-start cost savings
The case for cost reduction is clear. This is the only way banks will defy the external trends and pressures that have been keeping their revenues in check.
This is the point where banks need to strategize how they can introduce ever simpler products that rely on new and more cost-effective technologies. This will involve eliminating old products to simplify product portfolios and eradicating the waste that is rampant in big banks.
Consumers hardly ever miss unhelpful products, and banks need to be stronger at ending the life of products that require costly support and maintenance but are not actually doing anything to keep customers.
Banks are all too familiar with this cost complexity. They are often saddled with expensive legacy systems that have a minefield of maintenance requirements.
For this reason, they cannot easily embark on digitization at the speed at which the modern customer demands. But banks must accept that digitization is an inescapable part of their future, and they need to embark on a process of change as soon as possible.
Make operations digital
What is not under question is that banks have to embrace digitization.
The success of Monobank, an online only bank who gained 2.6 million customers from a zero base in 3 years, shows the power of mobile banking.
Fintechs already have a headstart in this area by giving customers a taste of rapid, low-cost, high-fidelity transacting that is founded on ease of use.
To not fall behind in this race, banks must digitize more of their operations. If a bank is just taking that leap now, the early investment might appear high at first, but as processes are automated, the bank can realize the savings that come with it. They will reap the cost savings from doing away with the extensive back office support that artificial intelligence (AI) and robotics can eat up.
The modern customer simply expects to have access to high performing mobile banking applications. They consider performance speed and ease of use as the bare minimum from a banking partner. While traditional banks have to embrace digitization, they must balance this with the need to keep some old style services.
As popular as Neobanks are with younger customers, there are still older customers who prefer to visit branches. Banks need to straddle these two eras of physical services and digital services.
Key ways to achieve cost reduction
Technology-enabled cost reduction is the way for banks to go. They must accept this reality. Here are some important cost reduction strategies for banks to use:
1. Using technology to reduce costs
Technology is a powerful factor in client-side operations such as banking apps, but it is just as helpful in allowing banks to remove much of the traditional inefficiency in their business. Banks can automate processes to improve the consistency and accuracy of their processes.
Many times, banks are saddled with pockets of inefficiencies that have formed in certain departments as the bank has expanded rapidly. Through automation, banks can reduce unnecessary effort in menial tasks like transcription and reconciliation to improve first time compliance.
Bain & Company produced a report that revealed that companies show savings of 20% through embracing automation.
2. Using DevOps to drive costs down
As banks use more third party cloud providers, they need to think about how they can rationalize their IT spend to get the most out of it.
This is where cost management DevOps practices can come in.
By adopting a DevOps-driven strategy of cost containment that reduces wasteful expenditure, banks can manage their costs better and get the most out of their spend on application development, product launch, and maintenance.
Creating banking apps is a complex process that can take a lot of time, but for banks to get a return on their investment, they can enlist help from internal DevOps to prioritize cost optimization.
The DevOps team can play a crucial role in auditing the true requirements of the organization and deciding which third party is the best to engage with under which approach.
This could mean that DevOps could play a role in deciding whether to use private or hybrid private cloud services.
How a good banking app can reduce costs
Another way that banks can save money is to get the best out of their products.
Having a good app can have multiple benefits:
- Reducing the burden on branch services.
- Increasing customer retention so the bank can sell more services.
- Keeping the circling fintech apps at bay.
- Automated data collection for compliance purposes.
Each of the following aspects of a good banking app can contribute to creating a powerful, seamless application that consumers can trust, while also saving the bank money in seen and unseen ways:
1. Account management
This is one of the main reasons customers need an app. Many times, they simply want to know the state of their finances. They want to manage their expenditure, view recent transactions, and transfer funds easily and speedily.
If banks approach this correctly, they can create an account management interface that customers love because it helps them meet their financial goals or helps them budget.
Banks can achieve this by cleverly inserting gamification trends to get customers to act in a way the bank wants.
2. Security and safety
In a world that is increasingly threatened by cyber crime, keeping customer funds and information safe is crucial.
Banks need to make sure their apps have secure log-in functionality. They need to balance the need for security with the customer’s desire for convenience.
By investing in biometrics and multi-factor authentication, banks can show customers they take their finances and their safety seriously.
This is one area where banks cannot rest on their laurels as competitors are always launching smarter and safer log-ins.
US bank Wells Fargo launched an innovative eye-scanning log-in method that allowed customers to log in to their online banking by looking at their smartphone camera.
Canadian bank Tangerine enabled voice activated password sign-ins.
These examples of highly convenient yet secure sign in methods must have gone some way to enhancing the customer experience and ensuring customer retention.
3. Peer to peer payments
Peer-to-peer payments are becoming increasingly popular as individuals carry less cash around. A study by Capgemini revealed that peer-to-peer payments increased by 10.9% in the period 2015-2020.
This is one example of a banking product changing people’s lives. It is so much faster to make cashless payments, leading to customers appreciating the value of a mobile app service that is secure and easy.
4. Regular payments
Paying bills, especially those repetitive bills that need to be settled every month, is a pain point for many customers. Banks can give consumers a much more convenient and user-friendly option by adding push notifications for users to make this payment with a single click. With banks having so much information about their clientele, and with smart application of AI, this could be a helpful feature that customers will value.
5. AI-driven chatbots
In the age of AI, chatbots and voice-enabled services provide excellent customer service and eradicate the need for human intervention, reducing costs for banks. Not only does this save the cost of a human salary, it also provides better customer utility as chatbots can work around the clock and are unfailingly polite.
Chatbots can provide that essential link to the client that forges great customer relationship management even as bank employees sleep. This tool could also tirelessly record customer complaints and provide the data to banks so they can fine-tune their service.
Cost Reduction Techniques In Banks
The fintech sphere is one of the most competitive areas there is. Neobanks, exchanges, peer-to-peer payments, and other payment systems became serious competitors to traditional banks. In order to stay afloat and prosper, banks have to adapt and either change their earning strategies or reduce costs. The first option entails increasing their rates payable by customers, which of course, they can’t do because in this case, neobanks will easily take their place since they don’t need to support similar infrastructure. The other option is using cost reduction techniques.
The most rational way to reduce costs will be employing new technologies that will dictate how banks operate and serve customers. According to Deloitte, the impact of generative AI, embedded finance, open data, digitization of money, digital identity, and cyber fraud will grow in 2024. Such methods can be used to automate routine tasks, improve the decision-making process on all levels, and enhance customer experience, which together can lead to significant cost reduction in banking.
AI and machine learning technologies that are at the base of most digitized solutions have already transformed the day-to-day operations of banks. Here’s how these technologies can be used for various tasks:
- Routine automation. AI helps with time-consuming and repetitive tasks that were previously considered a tedious, monotonous job. It can automate document processing, data entry, and categorization. AI can be used for natural language processing (NLP) and optical character recognition (OCR), which helps quickly transform different types of content like pictures, videos, and audio into readable formats that can later be used for various purposes. Now, instead of spending hours deciphering a call to make notes from it, you just have to download the audio into a special program that will transcribe it in a matter of seconds.
- Customer service optimization. There are various AI-powered chatbots and virtual assistants that allow to enhance customer service and provide 24/7 support. They use natural language understanding (NLU) to read messages and resolve issues clients might experience. They can help with tracking transactions, resolving inquiries, and accepting requests that can be later transferred to human managers. Such assistants add to other cost-saving methods by decreasing the human hours spent on client support, at least at the first few stages of inquiries. By reducing human operators’ time spent on resolving issues, banks can cut more costs and help a larger number of customers, which comes as an additional benefit.
- Enhancing the decision-making process. Artificial intelligence can operate with large amounts of data. It can collect, process, and analyze information about clients, markets, competitors, customer behavior, fintech trends, etc. By analyzing vast amounts of structured and unstructured data, it can enable banks to use these findings and make data-driven decisions. Algorithms can forecast trends, identify potential risks, and modify and improve investment strategies. Using ML, they can be “taught” to assess client’s creditworthiness, detect fraudulent activities, and personalize product recommendations to increase upsell and cross-sell results.
Although data analytics is also powered by AI and ML, it is used for different yet related purposes. This tool is used to examine large datasets to gain insights and determine patterns, trends, and possible shortcomings. It covers techniques like data mining, statistical analysis, and visualization to gather and understand historical data in order to support decision-making.
Data analytics helps identify cost-saving opportunities by studying transactional information, patterns in customer behavior, and operational metrics. It can uncover redundant workflows and processes, which can later be optimized using AI or eliminated altogether. DA is also utilized to optimize resource allocation by predicting demand, managing inventory levels, and planning workforce activities efficiently. Using this knowledge, banks can tailor services to meet growing customer needs or remove unnecessary and unpopular products to save costs.
Cost Reduction in Banking: Successful Cases
While it’s still early to evaluate results from global digitalization strategies, we can already find the success stories of specific banks on a journey to implement cost reduction strategies. Most of these stories involve the use of artificial intelligence, machine learning, and data analytics. They helped reshape banking services, eliminating redundant processes and optimizing day-to-day operations.
A good example of such a bank is the Singapore-based DBS bank. Over 10 years ago, they embarked on a digital journey and adopted a strategy called “Digital to the Core” dedicated to cost saving and driving innovations in the banking sector. In the following years, they were repeatedly announced as the “best bank” globally. The bank representatives name a few things that set them apart from the crowd and helped achieve a new level of digitalization.
The DBS’s approach can be commonly described as cultivating a digital culture. They started from within, by tying the digitalization efforts to the metrics and showing the stakeholders that digital customers can bring twice the value of traditional clients. They were also able to explain the need for digitalization to their employees and together modify the strategy and use more cost-reduction techniques. At the same time, DBS calls itself a human-centered bank and states that a lot of the services were changed to meet the customers’ needs, and that led to a great culture change in the company.
Another great example of cost reduction in banking was set by the Spanish BBVA bank. In 2007, they set off on their transformation journey that since then has brought tangible results. BBVA claims they achieved exponential growth in sales using digital channels while simultaneously improving customer experience. Now they are entering the next stage of their development, trying to improve the level of personalized services supported by data and new technologies.
What was their strategy? First, they moved to servicing their clients digitally by reengineering all processes and introducing cultural and organizational change. The second stage was increasing sales through digital channels by offering innovative digital products and solutions to their customers. This strategy boosted digital sales from 15% to almost 48%. Then, they worked on client acquisition through digital channels to grow their online presence and reach more customers. And the last thing they focused on and continue to pursue now was providing proactive and personalized advice to all their clients. This strategy already showed cost reduction, increased sales, and a growing number of clients — all thanks to new technologies.
These examples prove that technologies like artificial intelligence, machine learning, and data analytics can work both for cost reduction and profit increase. Sometimes, it happens simultaneously and allows banks to boost their growth and stay ahead of the competition in the very competitive fintech field.
The bottom line
Cost reduction is an important matter banks cannot ignore. As the banking space becomes ever more competitive and cost pressures show no sign of going away, banks must turn to technology to help them save money.
There are efficiencies to be gained that a bank can unlock with a clever use of the surrounding technology. Not only will it save them money, but it will provide their customers with up-to-date features and services.
