As Economic Uncertainty Looms, Control What You Can Control

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With an economic downturn taking shape on the horizon, financial institutions must look inward to maintain margins and the health of their banks. In doing so, they will be able to serve customers better.

Astute executives I meet with realize the intrinsic value of “controlling what they can control.”
Banks can help customers optimize their cash and working capital. But to be able to serve customers with the best services at the most competitive prices, banks must first focus on the efficiency of their own organizations.

Invest in RPA, ITM Automation
Prudent investments in high-return technology can offer immediate benefits to bank efficiency. One such high-impact technology is robotic process automation, or RPA. RPA has evolved from a futuristic discussion at trade shows to a robust, enabling technology that can lower operating expenses raise productivity and reduce errors.

Automating labor-intensive processes enables banks to save time, leverage scarce resources and focus on creating unique customer experiences, while eliminating redundant work and tedious tasks. Getting started in RPA has become easier. A technical partner should offer pre-bots that are pre-designed, pre-built and developed from common industry-driven use cases. Pre-bots offer financial institutions an immediate, low-risk entry into RPA. These ready-to-run bots can offer a bridgehead and potential early success into RPA, along with providing an easier avenue toward more comprehensive automation.

Another high- and immediate-impact technology progressive banks are taking advantage of is integrated teller machines, or ITMs. ITMs provide an in-branch banking experience without customers ever having to leave their car. Consumers can interact with tellers via live video to make deposits, cash checks, make loan and credit card payments, withdraw funds and transfer funds. Exact change is available for check cashing.

Video teller technology gives customers the ability to interact with a live video teller from a centralized location, extending the reach of a bank’s most capable client-facing staff. This can help banks efficiently expand into new, alternative markets.

Determine, Execute Your Strategy
Highly efficient banks identify their strategy and then execute the supporting tactics with a single-minded purpose. Smart bankers don’t try to be all things to all customers; instead, their focus is on one or two overriding objectives, such as becoming a low-cost provider, an exceptional service organization or a leader in innovation. While these goals are not mutually exclusive, in practice, few banks can progress them all in parallel.

The best bank leaders, choose their primary objectives wisely, then seek outside expertise in areas that help them accelerate strategic objectives and plans. They actively network with peers in industry events and conferences, they learn from best-in-class partners and they seek the advice of experienced banking experts. They never stop the learning process and apply a wide range of experiences to their own plans.

Continuously Improve Business Processes
Well defined, repeatable business processes provide the foundation for how work gets done within a financial institution. This allows for tasks, technology and tools supporting a process to be redefined or implement an entirely new process based on automation.

Business process improvement (BPI) actions, undertaken by subject matter experts, deliver the insight required to execute more efficiently, create value for customers or enhance revenue for the institution — or provide all three. Tactics for growing bonds that crossover business lines with BPI include:

• Establish cross-functional teams to participate in collaborative facilitated sessions to identify and help institute process changes.
• Have leaders “walk- he walk” by inviting peers from other business units to participate regularly in staff meetings.
• Distribute regular internal communications as widely as possible within an organization.
• Create centers of excellence for sharing and knowledge transfer.
• Reward collaborative efforts that produce tangible results.

BPI helps financial institutions uncover opportunities to eliminate non-value manual tasks while digitizing and removing paper from manual processes.

Align Skills With Strategy, Needs
The culture and people of today’s banks are critical in executing an organization’s strategy and tactics. As automation replaces mundane tasks, bankers must become universal relationship managers and problem solvers. Continuous training, like continuous process improvement, is the norm for well-functioning financial institutions.

Technology partners with robust training methodologies — which are also familiar with the newest business processes — can help bank personnel ensure they’re using procedures, workflows and technology that best meet their clients’ needs with the greatest efficiency.

Even in uncertain economic times, savvy bankers who invest in automation, determine and execute a well-defined strategy, continuously improve their business processes and ensure their staff have the correct skills will develop the framework that characterizes high-efficiency financial institutions. Those efficiencies will, in turn, empower banks to serve customers better and at lower cost.

Year in Review: Big Profits, but Big Regulatory Fines, Too

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1-9-15-Naomi.pngThe banking industry has never seen it so good. Or has it? Bank earnings have returned to record levels, and average return on equity (ROE) is about what is has been historically. At the same time, regulatory fines are huge and banks are contending with increased regulation like never before. Digitization is providing new opportunities for some banks to cut costs and please customers, and yet the surge in technology startup companies poses special challenges for banks. Because of this, management consulting firm McKinsey & Co. concludes in its 2014 annual review that “those banks that have articulated and executed a regulation-savvy, customer-centric strategy are collecting all the surplus value in the industry.”

Improved Profitability
One of the most impressive trends has been the industry’s return to profitability following the financial crisis six years ago. In 2013, U.S. banks above $10 billion in assets made $114 billion in profits, second only to the record year that was 2007, according to McKinsey.Year-end earnings for the largest banks will be released in the next few weeks, but 2014 is shaping up to top $100 billion in earnings again, says Fritz Nauck, senior partner at McKinsey. Improved credit quality and cost cutting were major drivers of the increased profits. Where is this cost cutting coming from? Many banks are cutting branches. Since 2011, U.S. banks have downsized the industry’s branch network by nearly 5 percent. In 2013 alone, that amounted to 1,300 branches, according to McKinsey.“Should that continue, that will drive future earnings and ROE,’’ Nauck says.

Banks now are close to an historical average ROE of 10 percent, calculated since 1980.

U.S. and Canadian banks are doing better than their European counterparts. The ROE for U.S. and Canadian banks went from 8.4 percent in 2012 to 9.3 percent in 2013 and 9.9 percent in the first half of 2014. For comparison’s sake, Western European banks had an ROE in 2013 of only 2 percent. Credit quality is better in the U.S. than in Europe, plus banks trimmed operating expenses and added capital earlier in the financial crisis than European banks, Nauck says.

Increased Regulation
Fines and settlements, however, have put a damper on the banking world’s profitability, both in Europe and North America, with many of those settlements relating to the financial crisis. The top 15 European banks and top 25 U.S. banks paid $60 billion in fines and settlements combined in the first half of 2014, according to McKinsey. From 2010 to 2014, those banks have paid about $165 billion in fines and settlements, and some of that involves regulators stepping up enforcement in areas not relating to the crisis, including money laundering rules, McKinsey says. Without those fines, the banking industry would have been significantly more profitable. In addition, increased regulation is taking more staff time and more hours out of the executive management team. McKinsey estimates that senior executives spend about 20 to 25 percent of their time on regulatory matters.

Driven to Digitization
The trend toward digitization—connecting with customers through apps and websites as well as automation of transactions and personalization of products and services—is transforming banking. McKinsey estimates that there are now more than 12,000 financial technology startups in existence. Fintech companies such as PayPal were first interested in transactions but many of them are now moving into new areas, including lending.

Interestingly, McKinsey sees fintech companies as more of an opportunity than a threat, because banks can set up joint ventures and sometimes acquire them to deepen and broaden their offerings for customers, just like Spanish bank BBVA did when it acquired the innovative online banking startup Simple in 2014.

Banks that have well defined strategies and execute them effectively are outperforming others, McKinsey says. But as the past year has made clear, banks must respond well to enhanced regulation and have a digital strategy in place to be successful.