It makes sense that banks are focused on costs right now. What doesn't make sense is the way they are going about cutting them. While 65 percent of banks' costs typically reside within distribution, such as the branch network and contact centers, most cost-cutting initiatives are focused on functions incurring the other 35 percent- for example, human resources and information technology.
It isn't too late for banks to get their priorities straight. Despite the dramatic cost cuts implemented to date, Accenture Banking Distribution & Marketing Services research finds that most banks' expenses remain 20 percent to 40 percent too high, suggesting there are more cuts to come. The question is whether the next round of reductions will finally address the unsustainable economics of large branch networks, the proliferation of poorly integrated channels and other hazards of a one-size-fits-all distribution model-or whether banks will keep hacking away frenetically, at the expense of growth.
Banks need to focus on normalizing the cost to serve, with an approach that doesn't sacrifice any more long-term shareholder value than has already been lost.
Europe, for all its woes, provides several examples for rethinking distribution. Some banks there are piloting a hub-and-spoke model in which a full-service branch offering the complete array of services-including cash management and small business loans, for instance-is surrounded by smaller satellite branches with fewer offerings. Other European banks are experimenting with "clustering," in which branches split the cost of a roving manager who oversees multiple sites. Some banks also are taking costs out by having one product expert-such as a mortgage or investment specialist-serve an entire cluster through video conferencing.
Perhaps one or more firms will be inspired to start a full-service direct bank similar to the model HSBC embraced when it rolled out First Direct in the United Kingdom in the 1990s. This Internet direct bank focuses primarily on the mass affluent and runs a lean operation as evidenced by its competitive cost-income ratio, with staffing of about 2,700. HSBC's strong results for the first half of 2011 were boosted by First Direct's mortgage book growth and its 15 percent rise in profit over the previous year.
The direct model should appeal to institutions that are looking to expand their footprint without incurring the overhead of new branches. Other institutions may (or should) be looking at how to end internal quarrels over who "owns" a given customer. There are two major North American banks worth watching in that regard. Both are implementing technology to create a virtualized customer contact operation across call centers, branches and even, potentially, to staffers who telecommute.
USAA centralized operations by establishing a "member experience" team that manages all channels and provides distribution services for all products. This approach enables a full view of customers and provides a consistent response.
A similar model is being rolled out at another North American institution, which unlike USAA has a robust branch network. The bank, which has not yet publicly divulged its plans, is shifting from a traditional model (i.e. little coordination among channels) to a converged approach, with one organization responsible for all interactions regardless of entry point-branch, online, mobile or call center. This requires significant changes to front-line staff training as well as innovative performance incentives and scheduling tools, but offers the prize of far more efficient operations given the different patterns of customer contacts.
Actions that optimize expenditures and enhance the capacity to respond to market changes will shape banks' ability to survive, if not thrive, in the future. While tactical cost-cutting may be good enough for the short term, beating the competition and restoring the potential for profit over the long haul requires deeper structural change.
Smith is a managing director and head of Accenture Banking Distribution & Marketing Services in North America. Gardiner is an executive director in Accenture's North America Financial Services Group.
