Executives all agree that improving bank productivity is a top priority, but a new survey shows where new technology falls short in creating an optimal efficiency ratio.
The adoption of financial technology solutions and the shift to digitized operating models have upended traditional banks’ business and operating models, paving the way for more nimble, efficient organizations. But mid-market banks have a long way to go before they capture the productivity gains those technologies can deliver, according to a new survey of bank executives.
In 2019, West Monroe Partners surveyed more than 150 executives at banks with $1 billion to $250 billion in assets to gauge the priority they place on boosting productivity. While respondents agreed that improving productivity is a top priority, the survey revealed surprising insights about how banks perceive their efforts to increase productivity: what’s working, where they are falling short and how effectively implemented technologies can accelerate productivity and change the way banks think about an optimal efficiency ratio.
The Consensus Around Efficiency Ratios, Technology — But Lagging Gains
The efficiency ratio is one of the most important indicators of how well an institution is run. It sends a clear signal of the bank’s ability to achieve profitable growth and attractive shareholder returns.
The survey revealed that the efficiency ratio was among the most important performance indicators for mid-market executives: 98% of respondents say that improving efficiency is their No. 1 strategic priority.
Until recently, the unwritten rule in the industry was that the optimal standard for an efficiency ratio was 50%. The reality today is that successfully implementing new technologies can deliver efficiency ratios much lower than that.
The survey also showed widespread consensus when it comes to investing in technology: 61% of the executives said they are making investments in digital technology specifically to boost productivity.
And yet, the gains have not happened as quickly as they should. While nearly 80% of our survey respondents perceived that they have been extremely or very successful in improving efficiency or productivity at their banks in the past year, only 34% have an efficiency ratio at or below 50%.
The lackluster gains in productivity match the perceived effectiveness of new technologies: 43% said they don’t believe they are getting the full value from their investments.
This landscape provides fertile ground for mid-market institutions to make substantial productivity gains heading into 2020. Banks are aligned around the strategic need to boost productivity, and executives understand that new technologies are the way to get there.
Implementing New Technology: People + Process
Technology, by itself, is not a silver bullet. In our experience, when new technology is not fully aligned with an organization’s goals, strategy, people and even available skillsets, the results will always lag.
Coupled with the focus on digitizing operations, banks must adopt a considered, strategic approach to how technology will be implemented and utilized by the people working with and alongside it
Just 34% of surveyed executives said they always redesign a business process before implementing a new technology to improve it; the vast majority of respondents acknowledged they “only sometimes” or “never take this step.” However, our experience increasingly demonstrates the need to wed process improvement and tech implementation. When investing in new technology, the implementation and process improvement should go hand-in-hand.
Once a bank has a strategic plan to implement new automated processes, executives’ focus should turn to the people in the organization. Automation shifts jobs that are normally performed by humans to a machine, leaving a pool of workers who can be redirected to higher-value tasks. A bank’s human capital remain a vitally important part of the equation, one that should take into account team formation, roles, diverse talent, and training. Banks will find their largest efficiency gains come from people and technology operating together seamlessly.
Prioritizing productivity via technology is the right investment for mid-market banks, but technology alone will not be a silver bullet. Banks that optimize technology investments can unlock previously hampered efforts to lower efficiency ratios and boost their productivity.
Our results revealed an alignment of the mid-market around digital-enabled productivity so strong, we posit that an industry where digital technologies enable more end-to-end online transactions and fewer branch locations, and where automated processes speed up and streamline operations—the mid-market could rewrite the formula around the optimal, achievable efficiency ratio.