Solving the cost conundrum: Saving without compromising service

by Michael Magee Partner

Email +44 (0)20 7804 5204

by Joerg Ruetschi Director, PwC Strategy&

Email +44 (0)20 7393 3597

PwC analysis shows that European banks would typically need to drive down costs by at least 30% to bring them back to economic breakeven (return on equity above cost of equity). Yet, conventional wisdom says that savings on this scale can’t be achieved without harming service and diminishing funds for investment in growth. Is this still the case? Could there now be a win-win solution capable of saving while bolstering service quality and competitive capabilities?

A panellist at PwC’s European Bank Restructuring Conference likened cost control within European banks to the Labours of Sisyphus – an eternity of fruitless toil. While there has been no lack of effort, the cost-income ratio of Europe’s 20 biggest banks has actually gone up since 2010.

 One key reason is that the cost of complying with new regulatory demands can quickly swallow up any savings elsewhere. Banks also have to be careful not to reduce the quality of service through overly drastic cost cutting. For example, moving routine business over to digital channels is clearly much cheaper than a branch or call centre. Yet, customers still want access to personal service when they want it. Many customers might also question whether mobile or online banking is genuinely quicker and more convenient when the ease, speed and intuition of these digital services compares unfavourably to other sectors like online retail. Banks are seeking to address these shortcomings by investing in the technology and innovation needed to meet fast rising customer expectations. But this requires significant additional cost. They’re therefore left with the dilemma of how to save while enhancing service. And the amount they need to save is far greater than has ever been achieved.

Hard wins

The challenges are heightened by the fact that the quick cost wins such as process rationalisation have been largely accomplished, leaving tougher and more strategically far-reaching choices ahead. The ‘hard wins’ include the sale or elimination of inefficient sub-scale operations. They also include the jettisoning of legacy systems and full automation of many core processes.

Yet, while technology can make a difference, it isn’t a panacea. Despite what a panellist described as the competition among banks to show who is spending the most on technology, the pace of implementation and actual returns from robotic process automation (RPA) and other recent systems investments have so far been disappointing.

 Good costs/bad costs

Rather than cutting costs in isolation, a more effective approach is to tie expenditure to return by differentiating the areas that customers value (‘good costs’ targeted for investment) and those that provide limited value (‘bad costs’ targeted for overhaul and elimination). For example, customers could be encouraged to service their own accounts through investment in more user friendly digital channels. This would reduce the cost to serve while freeing up staff to focus on the services and support that customers prize and sustain loyalty. The key is determining what customers really want and what they don’t – a panellist highlighted the risk of “gold-plating” products and services that many customers would be quite happy to see simplified.

Compliance has been one of the fastest rising and hardest to contain areas of cost. The panel discussions highlighted the importance of getting compliance right up front – “correction is always costlier”. The key is a clear focus on and investment in data quality and systems integrity. This could in turn encourage more banks to outsource some areas of compliance to technology providers.


Further instances of this good cost/bad cost approach include new criteria for determining what should be performed in-house and what outsourced. Does app development need be carried out in-house when a dedicated tech partner could do it better for less, for example? Utility functions such as payments processing that provide minimal differentiation can be outsourced to providers with sufficient scale to compete on cost. The cultural considerations include moving from a mind-set of proprietary self-sufficiency to closer partnerships with start-ups, other sectors and even competitors.

Targeted investment and implementation

To make digital investment pay, it’s important to identify and focus on the ‘pain points’ that emerging technologies can address. It’s also important to secure business buy-in through ‘proof of implementation’. For example, once business teams see how RPA can allocate trades to desks more efficiently and autocorrect any data errors, these capabilities can be extended to clearing and settlement.

Replacing legacy systems without breaks in service can of course be difficult. Potential solutions include creating fully modernised capabilities in one go such as a digital bank. Once the capabilities are developed, tested and refined, the clients using previous systems can be moved over to the new platforms.

Deal drivers

The need to take 30% out of the cost base is set to be a key driver for consolidation as banks go in search of synergies and economies of scale. Yet, scale alone isn’t enough, especially as merging two inefficient banks simply creates a larger, but still inefficient group. We’re therefore likely to see more targeted acquisitions of institutions and FinTechs with low cost capabilities into which existing operations can be migrated.

The refocusing of resources on core sources of value will of course increase the momentum for divestment. In addition to financial investors, buyers are likely to include banks focusing on developing scalable manufacturing capabilities in areas such as payments or know your customer verification (KYC).

The key to making the most of M&A as a vehicle for cutting costs and enhancing service is a clear blueprint of how to transform capabilities. This would include the end state, gaps that would need to be bridged to get there and the deal levers – value bridges – that would be needed to achieve this. The value bridges should cover both the pain points and the opportunities to transform service and compete more effectively.

More for less

So, yes, a win-win on cost and service is possible and banks that nail this are going to be in the strongest position to compete. Rather than just relying on technology as a magic solution to all the problems, there would need to be a pinpoint assessment of weaknesses that foster the greatest inefficiencies and how these can be tackled. Closely targeted M&A is set to be a key part of the solution. 

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by Michael Magee Partner

Email +44 (0)20 7804 5204

by Joerg Ruetschi Director, PwC Strategy&

Email +44 (0)20 7393 3597