The Digital Transformation vs. Cost Dilemma Faced by Banks

October 19, 2020

Banks need to adopt a strategic approach to digital transformation, accounting for operating costs as well as innovation. Learn how the balance between catching up with the trend towards online banking and the cost of innovating services has been met by incumbents.

Transformers: The Digital Vs. Cost Dilemma Faced By Banks
There is a commonly held belief that digital and long-term, strategic cost transformations are mutually exclusive, that launching large-scale digital transformation projects cannot be done in tandem with achieving cost efficiencies. However, this isn’t always true. 

When reviewing the European banking sector, we have seen increasing activities on the cost side. Banks are not reopening a significant number of branches as a result of the coronavirus pandemic. Some banks who have had to restructure themselves in this respect include Commerzbank in Germany and Svenska Handelsbanken in Sweden, while others are planning to reduce their operational expenses (OPEX) baseline by reducing headcount. But how can banks drive a cost transformation strategy which incorporates the other goal most incumbent banks are aiming towards, that of the digital transformation of their internal and external processes and experiences? How can these banks avoid cannibalising existing revenue streams by reducing their cost position while simultaneously implementing new revenue streams and services?


Transforming Costs 

Banks must think about cost transformation strategically. Staff and branch reductions cannot, in themselves, solve the capital issues that some banks face. Long-term thinking is needed to ensure an equilibrium between the considered management of capital and the pace of digital transformation. 

Recent studies across the finance industry have identified four main strategies which banks can employ when attempting to ride the wave of digital change all the while maintaining sensible operating and maintenance costs. These are: 

  • Save-to-turnaround, which involves stopping capital loss completely through cutting costs and improving liquidity. This is usually employed as a last resort. 
  • Save-to-fund, in which the main aims are to maintain the bank’s earnings base and to improve its competitive position. Despite this, cuts to resources should be limited to prevent a future reduction in the earnings base.
  • Save-to-grow, which encompasses incumbent banks who want to modernise their products and services. For instance, this can be done through building a simplified, scalable business platform. 
  • Save-to-transform, which includes the radical transformation projects and processes which tend to be the preserve of FinTechs and other digitally native challenger banks. AI, the Internet of Things and machine learning are all usually incorporated into these strategies. 

Of these, the ideal strategic approach for banks in the current climate is undoubtedly to save-to-transform, building cost strategies around the organisational goal of digitally transforming internal and external processes and employing an innovative suite of products and services. The question then becomes, how can banks do this smartly in a way that benefits their customers as well as their bottom lines?  

Strategic Symbiosis

Digital and cost transformation can work hand-in-hand to minimise inefficient costs and increase the number of revenue streams available to them. This has become all the more important as result of customers being driven online by the coronavirus pandemic. Because of the pandemic, banks have opted for save-to-grow or even save-to-transform strategies, in which they have invested in innovative technologies to cater for customers who are shifting rapidly towards remote or online banking, demonstrated by a Lightico banking survey performed in the spring of 2020 in which 82% of respondents were uncomfortable about visiting their local branch and 63% were more willing to try digital applications because of the pandemic.  

Banks like NatWest in the UK have been keen to adopt this approach, launching its Home Agent platform linking first-time buyers with partners providing services such as valuations, utility deals and moving services. Similarly, the Royal Bank of Scotland has developed a digital mortgage product which promises to remove up to 66 pages of the paperwork usually required during this process, having a positive effect on mortgage offer lead times. These products will naturally reduce have an impact on costs incurred by the banks in question, reducing the number of services provided in physical branches for instance. 

This kind of ‘digital’ thinking can also work at a more strategic level, helping banks resolve their medium to long-term costing issues. For example, using AI solutions for client support or as a robot-advisor, banks will see a positive impact in all three major levers on which cost transformation is dependent: operational excellence and compliance, profitability through OPEX and innovation, and service portfolio transformation and customer centricity. AI will in this case help banks to transform their service portfolio, whilst improving their operational processes and optimising the cost structure of the services they provide. 


Partner Up 

The urgency of reducing costs is obvious to many banks, and hence forward-looking cost transformation based on a technological orientation comes with significant potential. 

This is where partner organisations can help, combining domain expertise with the technical transformation knowledge from other, extremely quality driven industries, like space and aerospace but also automotive.

Companies like Critical Software bring significant experience to the table in handling complex business-critical processes. The demand for a proven quality standard, such as CMMI-5 or ISO27001, is also essential in other sectors as well as in financial services. 

Partner organisations can also provide an often needed outside voice when reviewing processes and ensuring the right balance between cost and digital transformation. Banks can, and often do, easily fall into the trap of lacking ambition at an organisational level as well as siloing different functions and processes, the exact opposite of what digitalisation aims to achieve. Seeking the assistance of a partner can help guide the bank to ensure it does not succumb to this temptation, advising them – for instance – where product or service portfolio simplification is needed and the best way to achieve this. This detached, yet involved voice ultimately provides the bank with an opportunity to implement successful digital transformation while also keeping cost transformation goals in sight.  

To discover more about Critical's work with banks to implement customer-centric digital transformation, while contributing to their overall cost strategies by using unique work models like Flexshore, download our white paper through the button below or take a look at our digital transformation offer here.

By Christian Schultz, Business Development Director.