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Strategies for Improving Banks’ Operating Efficiency

Jiby Jacob
Senior Project Manager

Banks occupy a place of pride because of its structure of undivided attention and contemporary functions. They have come an extended way from merely performing the services of lending, recovery and accepting deposits to supporting maturity transformations and unified payment systems. In the recent past, the recurring banking failures and its effects have been handled with resolute measures by the Central Banks. The solvency and sustenance of banks not only concern the depositors but also equally to other stakeholders viz., employees, customers, shareholders, Regulators and the nation as a whole.

The operational efficiency is defined as the skills or techniques of making the most out of the available resources. The combination of men, material, machine and capital employed to yield the highest output is often referred to as Operational Efficiency. It is widely accepted that the efficiency of banks plays a pivotal role in the productivity of the economy. The opulent and easy going features of banks have made it all the more important for it to be sound and smooth, vigilant and alert, responsible and duty-bound.

Why Efficiency Matters for the Banking Operations

 Now a days, the banking industry faces a new combination of circumstances that are giving special impetus to the need for efficiency.

Changes in customer needs, competition, and new technology requirements are transforming the nature of banking.

The business of banking is leading towards a digital and technology-based model while retaining important aspects of the traditional person-to-person business model.

To remain competitive, banks got to invest in technology, marketing, automation, and self-service capabilities, and must optimize their legacy investments in branches and traditional systems.

These elements put pressure on banks’ budgets and generate an understandable appetite among executives for strategies to reduce expenditures in some areas in order to afford the necessary expenditures in technology, marketing, and new capabilities to stay competitive. Becoming more efficient in everything they do is an important strategic objective for banks, and most banks already put forth significant efforts for improvement.

Industry experience suggests that a concentrated and punctiliously executed efficiency initiative should be ready to achieve significant savings.

The outcomes aren’t always realized through direct cost reductions. Ideally, improved efficiency means processes are scalable which support a faster pace of growth for the bank’s revenue stream and asset base than for its overhead costs.

Strategies for Improving Efficiency of Banking Operations

Across-the-board budget cuts inevitably are a recipe for disaster and such cuts typically are more than is needed in areas that already are productive and are not enough for the most inefficient areas. The most successful efficiency initiatives follow a more analytic approach that reflects the specific circumstances facing each line of business and support functions. Following are the strategic areas where today’s industry leaders are focusing their efforts.

  • Business Realignment

The basics of business realignment is to exit business lines that have low margins and move instead into lines that are inherently more cost-effective and increase bank profitability. In many instances, this means that traditional banks might choose to move into non-traditional businesses, such as specialty financing and payment processing, etc.; of course, their analysis reveals they can compete effectively and efficiently. Counterintuitively, these strategic transitions might require the bank to extend its investment and costs within the short term so as to understand improved margins and efficiency within the future.

  • Channel Optimization 

The goal of channel optimization is to assess the varied ways customers interact with a bank so as to make an economical combination that’s adapted to every bank’s specific customer base. The process of optimization requires all its branch offices to be fairly opened/closed/amalgamated/relocated to adjust their geographic presence. Banks need to adopt the other channels like, Internet Banking, Mobile Banking, Kiosks, Customer Service Points, etc, to attract the present generation and to provide enhances service to the existing clients. Also reconfigure roles, duties, and staffing within their branches/offices for analysing the performance and value.

  • Reduce Process Costs & Redesign the Process

The recommendation to improve the process costs often is partially unappreciated in banks because it involves taking a more manufacturing view of business processes. The goal is to enhance the bank’s efficiency ratio by reducing the unit cost-to-value ratio of every activity. Banks have the improved efficiency have adopted the following five steps to improve their processes:

  1. Pinpoint where costs are today: Build a forensic view of operations costs and key demand drivers. For example, a bank mapped about 50 end-to-end processes and the resulting transparency made clear that 15 of these processes accounted for roughly 80 percent of the overall cost base, with a “long tail” of smaller, more fragmented activity.

 

  1. Identify an integrated set of levers: Build a comprehensive lever improvement toolkit that applies across all target processes as given below.

Improve Bank's operating Efficiency

  1. Reimagine the selected processes: Take a fresh look at processes from the ground up and imagine how they can better meet current customer needs. The main purpose is to redesign processes from scratch without being constrained by legacy considerations.

 

  1. Estimate the transformation’s full potential: Based on current process costs and the ability to apply the toolkit systematically to those reimagined processes, determine how to transform each process and estimate results.

 

  1. Tailor the delivery approach: At most banks more than half of the transformation potential comes from the top 10 to 20 end-to-end processes, most of which are typically customer-facing. In these cases, banks should aim to digitize and automate the entire customer journey, paying particular attention to the customer experience and to resolve front-end pain points. To improve the remaining long tail of smaller processes that are usually functional in nature, banks should take a more tactical approach, applying only the most relevant technology levers to deliver cost-efficient benefits.
  • Staff productivity

In addition to reducing process costs, automation tools can help improve staff productivity, enabling banks to handle more transactions and greater volumes of activity with the same number of personnel. Some of the foremost significant opportunities involve using established performance management techniques, like clearly defined expectations and scorecards, improved motivation and rewards systems, and better training and supervision. Many institutions also find success in redefining job roles, using more flexible work arrangements, providing mobility for off-site work, and outsourcing more specialized activities, etc.

  • Technology and automation

The role of technology in banking has been mentioned several times already, but because of its broad, enterprise-wide impact, the use of technology and automation also merits individual attention as part of the overall efficiency improvement effort. The overarching goal is threefold:

  • to possess applications that allow customers to form transactions or obtain information on a self-service basis without requiring employee efforts
  • to use technology to scale back the time employees spend on finding information
  • to use automated business rules and decision models to maneuver work more quickly and efficiently through processes.

 

Conclusion

Banks play an un-denying relentless role in the financial system of modern India. It is not only commendable but also adorable. The efficiency of the banks is crucial for the existence of smooth flow of trade locally and internationally.

Looking beyond the strategies for improving efficiency discussed above, it is also important to recognize that long-term efficiency is impossible to achieve without a corporate culture that supports and values it. This requires a visible commitment from top management to balance value and cost, reduce unnecessary expenditures, and implement metrics and accountability that encourage individual attention to efficiency improvement and profitability.

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