Banks Must Embrace Simplification for Lasting Productivity Gains

The Declining Productivity Dilemma

The productivity paradox in U.S. banking has persisted over the last decade, with efficiency initiatives providing only short-term relief. Recent studies reveal that productivity has declined at an average annual rate of 0.3% since 2010, in stark contrast to progress in other industries. This decline is attributed to complex operating models, legacy systems, and escalating regulatory requirements that increase operational costs.

Shortcomings of Traditional Approaches

Traditional cost-cutting strategies, while delivering gains between 3-5%, rarely sustain due to shifting priorities and creeping costs. The complexity of operations, exemplified by the surging average cost to originate a mortgage, highlights the need for a strategic overhaul to tackle “simplification at scale.”

Simplification at Scale: A Permanent Solution

McKinsey & Co. suggest a transformative approach through “simplification at scale,” proposing a comprehensive restructuring of banking operations. The objective is to reduce unit costs and unnecessary complexities by adopting an ROI-driven approach for each activity. Simplification can be achieved by:

• Streamlining non-core operations to focus on high-ROI activities.
• Improving the efficiency of internal discussions to enhance client-facing initiatives.
• Conducting thorough evaluations of branch operations, leading to optimized footprints with improved customer experiences.
• Rethinking support functions to optimize essential outcomes and streamline processes.

Scaling for Success

Achieving appropriate scale while maintaining simplicity means leveraging the latest technologies and practices. Generative AI, for instance, holds the potential to boost productivity and enhance the customer experience significantly. Modernizing technology functions through agile developments and avoiding over-customization are crucial in today’s competitive environment.

Enhancing Customer and Employee Experiences

Simplification’s ultimate test is its impact on customer and employee satisfaction. As banks lag by 20-30% in customer satisfaction compared to non-bank lenders, improving experiences is vital. Banks must prioritize:

• Customer-centric designs that cater to needs rather than imposing processes.
• Building trust through transparent communication.
• Providing omnichannel access for seamless interactions.

By achieving simplification at scale, banks can build superior operating models that enhance productivity and foster positive experiences for both customers and employees.

As articulated in McKinsey’s report, “Driving these changes can help banks deliver outsize, lasting impact, resulting in better productivity, a simpler operating model, and a positive customer and employee experience.” According to The Financial Brand.