The key to driving cost efficiencies in Asian banks

With the outlook of slow growth in the coming years, banks across Asia need to aim for significant structural changes to their cost base. This can be a challenge, however there are lessons from the experiences of other industries such as the European postal industry for example.

In the face of deregulation and contraction in their traditional mail business, European postal players managed to transform their business operations and in particular their cost structure. Lessons learnt from this experience can be applied to banks in Asia as they look to transform their own businesses and cost structures in the face of slow growth.

EU Postal Industry
The European postal industry was marked for deregulation since the start of the EU Postal Reform in 1997, with the implementation of full open market set to start in 2010.

Besides the deregulation, the business was also facing a distressing global trend: Mail volumes had fallen since 2001/2, mostly due to digital substitution and the financial crisis. In the last 3-4 years, volume drop had accelerated more rapidly.

In response to this, High Performing EU postal players have responded by:

• Driving focused cost re-structuring efforts of its native postal operations,
• Sharing their assets capabilities and package them as utility services to 3rd parties both within and outside of the postal industry
• Diversify into neighbouring industry and geographic domains

Cost transformation in EU Postal Industry
Specific to the cost transformation initiatives, there are several approaches postal players have applied that Asian banks can learn from:

• Drive Cost Re-Structuring of native postal industry
• Drive operational efficiency and leverage new technology, change behaviour and develop new capabilities
• Restructure retail distribution to improve retail efficiency and to variabilise distribution costs:
• Restructure Workforce cost profile rove Cost Structure by sharing assets and capabilities
• Diversify into neighbouring industry and geographic domains

As a result, the EU Postal industry has managed to drive growth in revenue despite a declining traditional mail market. As an industry, they have turned losing businesses into more profitable ones and driven their cost to income ratio to low 90% from 100% or above.

Many of the players managed to restructure ownership of their retail distribution, by promoting the use of 3rd party postal outlets from roughly 1 in every 3 outlets in 1998, to roughly 1 in every 2 outlets in 2008. The industry also restructured their workforce cost profile, reducing the percentage of labour cost to total cost from above 60% to low 50%, resulting in significantly improved employee productivity as measured by employee spread.

Cost transformation in Banking
Reflecting on the philosophies from the EU Postal industry and aligning it with the reality faced by Asian banks, Accenture believes there are several critical themes that Asian banks can pursue:

Philosophy 1: Speed up banking supply chain to reduce total costs
The main catalyst to speeding up the banking supply chain is to move to real-time banking, and remove batch processing and manual intervention, which are often left-over from legacy system. Today, real-time banking is necessitated by customer demand for real‐time information and channel proliferation, but banks should also see this as an opportunity to remove operational inefficiency and reduce costs.

Another approach to achieve faster supply chain and reduce costs is to remove processes completely from operations by achieving “once and done” functionality at the front-office (branch, call centre, online) significantly reducing the need for manual completion in operations. Banks can then focus to automate and streamline processes that do flow into the back-office, through workflow and data pre-population.

Philosophy 2: Restructure distribution to balance customer service and costs

• An Accenture study indicated that the costs of running physical branches can take 50-60% of overall operating costs. With global trends of reduced branch traffic#, improvements in branch productivity, as measured by Income per Branch and Loan / Deposit Volume per Branch, have been overshadowed by the increasing costs of running physical branches (Graph 8).
• Accenture believes that Asian banks need to radically transform their physical branch network and balance customer service and costs, through at least two key principles:

                    - Shift from transaction-oriented model to a sales/advice-oriented one
                    - Redefine the role(s) of physical distribution channels (branches) 

• Shifting to a sales/advice-oriented branch model means that banks need to reduce non value-add traffics going through the branches, through education and pricing signals. Potential unwanted branch traffic include transactions using physical payment medium (e.g. cheque and cash deposits), and problem resolutions. While capabilities for ATM deposits have been around for a while, banks still see some significant traffic of this transaction going through the branch. Banks need to give stronger price signals to encourage their customer to really use the capability whilst incentivising their employees to educate customers. The same applies to problem resolutions that can be directed to call centres. 
• Second, with the shift to sales/advise-oriented branch model, banks should start to rethink the role of the branches and drive for efficient distribution through smaller branch size, mobile sales force, automation and integrated multi-channel distribution. In the process they will not only reduce costs, and variabilise them, but also develop closer customer relations where it matters most.

Philosophy 3: Push fixed costs to a third party to variabilise costs

• Major banks should learn from different industries who have adopted similar strategies in the past, eg. mobile telecommunication who outsource most of their distribution. In these industries, the franchise model has been shown to not only transform the cost structure of the franchisor, it could help drive revenue growth, customer service and retail reach and opening times using an almost zero outlay.
• Accenture sees opportunities for the bank to use the branch network transformation program to variabilise the costs of running bank branches through franchise / 3rd party ownership model, especially for the newer branch format (e.g. sales kiosk).

Philosophy 4: Labour is expensive, aim to achieve lowest costs per unit of labour

• Banks need to review their workforce against their strategic capability model, and identify areas where they do not intend to build differentiation and, thus, ripe for labour costs reduction.
• One possible approach is off-shoring. Accenture sees the needs for Asian banks to gradually extend their usage of off-shoring options, to include wider-scope back-office processes (e.g. origination and servicing processes, lending operations and credit card processing), F&A (e.g. HR and payroll), risk management and analytics

Philosophy 5: Share infrastructure and assets as a way to reduce costs

• One area that see banks have done to leverage their capabilities and sell them as services to their customers is in the area of cash management and transaction services, mostly to large corporations and institutions. These offerings help banks to not only create revenue using existing assets, but also to build closer relationship with their customers and to create opportunities to cross-sell more products. We believe that by leveraging new technologies to support scale, there are opportunities to expand these offerings and share more of the banks assets with the customers, and bring them to the smaller commercial customers.

Philosophy 6: View diversification as way to refresh operating model and cost structure

• Diversification are often viewed more as a way to create new stream of revenues and growth. However, a diversification that leverages existing assets and capabilities can also help restructure the operating model in a way that will improve overall cost efficiency of the business.
• Take for example transaction services which are often seen as services to complement core banking services for corporate and institutional customers. Banks seldom see this as a bigger diversification opportunity that leverage its existing assets, including its distribution network, industry knowledge and technology base. Citigroup Global Transaction Service(GTS) has shown that with the right strategy and focus, these services can help the bank to diversify into very profitable revenue sources with a much lower cost structure than its traditional banking business due to its low capital usage.

Looking Forward: “Lean banking for leaner future business environment”
In Accenture's view, high performing banks will have to operate in real-time and be able to process works and information immediately, utilising new technologies to automate and to drive straight-through processing and minimise manual interventions. Real-time processing will help reduce costs in its own right, through reduced personnel, reduced work volumes, and reduced processing time. But more strategically, it will be a key enabler to harvest the full value of cost opportunities in the banks’ end-to-end supply chain from their front office and distribution network, to back-office processing, and enterprise functions.

Banks can leverage real-time capability to further drive for efficient and fully functional multi-channel distribution, drive further adoption of self-service channels and to test different retail models for their physical branches, including the use of franchised retail outlets.

Other significant cost efficiencies will come from consolidations of capabilities and infrastructure across different business units and brands within the same banking group. This opportunity is evident from the different efficiency level of similar business units within the same group. This can be complemented further with the transfer of non-value-add processes offshore to achieve lower unit cost of labour.

Lastly, banks should also look for opportunities to share their capabilities with external parties. While this is often seen as a distraction due to its different business nature, we have shown how certain players in postal and banking industries have been able to really use this not only to transform their cost structure but also to drive new revenue streams.

Andrew Pitcher, Asia Pacific Banking Managing Director, Accenture