Five steps to transforming banking operating models

With the current ultra-low interest rate environment and market volatility having a negative impact on banks’ returns and, ultimately, their capital positions, operating models must quickly adapt and become more cost-efficient to maintain profitability. This drive for cost-efficiency has become more apparent as innovation in technology and ongoing digitalisation have further upended traditional banking systems and cultivated new ways of service delivery from banks and non-banks alike. And while the pandemic’s real impact on banks’ profitability has been suspended by government support that has helped keep businesses and individuals afloat, we are beginning to see signs of distress in real estate delinquencies in some parts of the world.

To manage these challenges, banks can take several steps that focus on transitioning their business to make a positive impact on the balance sheet and drive efficiencies. 

#1 Evaluate systems and automate processes 

Management programmes are heavily commoditised and can often benefit from a fresh start. The pandemic has provided the perfect window to overhaul outdated systems and reduce departmental procedures that are time-consuming, costly and ineffective in the current environment where agility is essential. Legacy systems and applications used without scrutiny and a failure to align with shifting operating models are prime for overhaul. Evaluate whether it is more cost-efficient to outsource certain management programmes and other legacy processes than manage them internally. 

As well as evaluating current processes, focus on improving the controls and risk-governance frameworks by automating manual processes. For example, data from other departments can be integrated into loan origination processes, eliminating excess manual procedures and providing management with a more streamlined review and decision-making process. Automating processes through robotics and artificial intelligence enhances efficiency and reduces the risk of error and fraud, allowing stakeholders to focus on qualitative metrics. These metrics include performance analysis and workforce and customer engagement, which are the primary tools for differentiating the organisation from its competition. 

#2 Maximise and re-skill the workforce 

The pandemic has introduced new behaviours and ways of collaborating in the workplace. A hybrid of pre-pandemic and pandemic work styles will likely remain going forward, with employees working both from home and in the office once it is safe to do so. Bank employees whose workload has been reduced due to fewer customer interactions, including branch personnel, should be kept informed about their job security. 

Banking organisations should find innovative ways to maximise their workforces’ potential and keep employees productive and efficient while improving their well-being. For instance, it is helpful to re-evaluate branch personnel schedules and reshuffle the team so that some members can handle online customer service during certain off-peak branch hours. This may require retraining employees to handle different types of customer support, resulting in an agile workforce that can contribute to a more efficient operation. 

#3 Optimise distribution channels

The industry understands that the banking distribution model of the future has changed. Digital and mobile applications are the clear preference of today’s customer, transforming the expected banking experience. With the number of digital payments continuing to grow, the degree to which banking organisations participate in this digital payment market and create a mobile, online customer experience will significantly impact their future growth prospects. 

The customer preference for doing everything digitally and remotely, which was heightened during the pandemic, is likely to impact banks’ physical footprint significantly. Banks should revamp and optimise how they connect with their customers by ensuring the customer experience is as engaging, cross-functional, fast and as personalised as possible.

#4 Review third-party vendor contracts and solutions

In this highly interconnected world, management should continuously monitor its extended supply chain ecosystem. This includes reviewing contracts with long-standing vendors to explore opportunities to integrate various services or align previously dispersed services and identify cost-saving alternatives. Equally important is ensuring third-party vendors invest in security programs that minimise the risk of business disruption and operational failures.

#5 Exploit changing regulations to explore new opportunities 

Regulators are working with various private sector entities to explore options for licensing new entrants, create accounting rules for new products, such as digital assets and cryptocurrencies, and onboarding new fintech service offerings. We are already seeing regulators issue guidance on using new technologies and allowing the use of stablecoins in payment transactions.

While these new rules and other proposed guidance require management to have strong internal controls to manage risk at all levels, including compliance risk, a tremendous opportunity exists to explore future service offerings. 

Assess and act quickly

Stakeholder expectations are being reshaped, and bank management and those charged with governance must assess the path forward and execute quickly. Taking a fresh look at operating models and implementing strategies that can significantly enhance efficiency across various organisational functions is essential. 

As well as streamlining operations, management must emphasise an ‘understanding customer needs’ culture accountable for connecting with customers and understanding their expectations for digital and remote experiences and, importantly, deliver on those expectations. Similarly, management should revisit assumptions and metrics used in analysing the contributions of various branches to overall profitability and growth plans.

To be well-positioned to embark on short- and long-term goals, banks should bring a strong compliance focus to addressing changes in employee arrangements and customer engagement. The changes witnessed during the pandemic have become part of the new way of doing business. External forces such as customer preferences, third-party risk, and new regulations influence the industry’s norms and affect overall financial stability. How and when banks can achieve sustainable profitability remains to be seen, but banks should take action on transforming business models now.