How To Reduce Cost In Banks – Common Bank Interview Question
In today’s world, high prices, weak and sluggish economies and the continuous credit crunch have put a major dampner on the banking industry globally. Many banks and financial institutions have posted huge losses, particularly in North America and Europe. Japan’s major banks have reported weak earnings, which is mainly due to the subprime mortgage meltdown in the United States. The International Monetary Fund estimates that losses related to the credit crisis could approach $1 trillion.
The banks need to do cost cutting and increase efficiency at the same time to overcome the above situation. The call of the day is to strike the right balance between cost and efficiency. The cost-cutting and efficiency policy however will vary among regions and from bank to bank, according to their respective needs.
For institutions most affected by the crisis, particularly those in North America and the United Kingdom, tactical cost reductions should be the immediate solution. On the other hand, many banks in the Asia-Pacific region are pursuing a broader efficiency policy of agenda which should both focus on reducing costs and building resources to support their growth. Some European banks, such as those in Italy and Spain, are also emphasizing efficiency and growth.
The reduction of costs in banks is to be addressed without affecting the revenue generation of the banks. To achieve this back-office and IT operations should be streamlined and simplified and the savings should be utilised in increasing front-office efficiency initiatives to enable more consistent customer services across all divisions, provide tools/support/systems for customer-facing staff for increasing efficiency, and enhance self-service channels.
In general, Banks have identified and demonstrated six key strategies that high-performance banks can use to increase efficiency and reduce costs:
• Simple operational model: Management layers should be minimised to reduce cost. Clearly defined roles should be there to avoid confusion/errors. Extensive use of shared services should be there to eliminate duplication of activities.
• Simplified product portfolio: Product portfolio should be reduced/simplified, rationalized product portfolio with standard components should be introduced to eliminate any duplicates. Reusable product features should be introduced to provide a clear understanding of product profitability.
• Optimising sourcing and procurement: Making using of offshoring and outsourcing to make costs more variable while reducing fixed costs, and controlling of unnecessary external costs and expenditures should be the policy to reduce costs.
• Streamlined processes: Broader use of image and workflow technology should be there to automate manual, paper-based processes; Minimization of process duplication, strong culture of end-to-end process ownership and continuous improvement should be followed to make the processes more streamlined and easy.
• Effective customer service experience: High levels of customer self-service should be there for making sales and services simple; sales and marketing activities should be focused
on most profitable customers, and different services based on customer profitability and future value should be introduced.
• Simplified technical infrastructure: Simplified IT architecture and supporting applications should be introduced to reduce total cost of the application/system and boost responsiveness and flexibility, and IT spending should be aligned closely to business strategy.
The solution to reduce costs in banks thus lies in taking a broad and intelligent view when cutting costs so as to remain competitive both now and in the future.