When describing the headwinds facing banks in their quest for revenue, Seamus McMahon, senior advisor with the banking practice at Alvarez & Marsal Holdings, LLC, predicts ominously, "This is not a storm that will pass. Banks must reduce costs by 40% to stay in business."
There are strong words for an industry that has already grappled with more than its fair share of challenges--historically low interest rates, high cost of capital, consumer distrust, increased regulatory burdens, a "great" recession, and economic volatility. But McMahon, and other consultants ABA Banking Journal contacted for this article, are spreading a message of "tough love" to banks, imploring them to reduce expenses and increase efficiencies or face a very rough road ahead.
Indeed, many high-performing banks have already instituted cost-cutting and efficiency measures such as deferring projects, renegotiating vendor contracts, and scaling back branch hours to reduce staffing costs. The low-hanging fruit has been picked, says Brad Smith, president, Abound Resources, a management consulting firm focused on community banks. What's left to tackle is the "hard stuff" like streamlining processes or redesigning the back office. "It's not easy, and those types of projects are not widespread in banks," notes Smith.
Seamus McMahon's colleague Joe Berardino likens today's banking challenges to the challenges low-cost carriers such as Southwest Airlines presented to legacy airlines, and believes banks are equally unprepared. For example, United responded to Southwest's debut with Ted, which Berardino says had all the worst features of a cheaper airline yet retained the expenses such as high gate-rental costs. "Airlines did not fundamentally understand what they needed to do," notes Berardino. "Banks face the same problem as the airlines. Right now, it's hard to see robust opportunities for revenue growth and current bank business models are undifferentiated and too high-cost to maintain."
Making the tough decisions
Improving efficiency is not without pain. Although Smith hears bank CEOs lamenting that they want to make large-scale changes to improve efficiency and eliminate waste, it's easier said than done. "You need a thick skin to unearth all those political and cultural issues and battle pushback from department heads," says Smith. Berardino goes as far as saying that many banks lack the leadership to move to a more efficient and low-cost delivery platform.
"There's a 'deer in the headlights' syndrome," he says. "Banks are not addressing the basic problem that we are overbanked in a sluggish economy and they will not have the advantage of traditional tailwinds for revenue growth."
Strong words--perhaps said for emphasis. Some banks, in fact, have taken steps to adjust their business and operational models, with efficiency in mind. One of these, immediately below, got an early start.
Streamlining, difficult but worthwhile
Back in 2005, prior to the financial crisis, the Bank of Oklahoma, part of $24 billion-asset regional financial services company BOK Financial Corp., took on the "hard stuff." The bank incubated an internal consulting group to work on process-improvement projects throughout the bank's lines of businesses with three main objectives: implement a structured approach to better operational performance, improve the customer experience, and fund the bank's growth strategies. The bank was successful in these endeavors and launched subsidiary BPE Consulting to sell process-improvement services to other banks, explains president Kevin Rubin.
Rather than outlining an expense-reduction goal, Rubin says the Bank of Oklahoma embarked on improvements using methodologies including Six Sigma. "We use a systemic, structured approach to examine all aspects of a business process and then work to make those processes more efficient," says Rubin. …