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Eight years after the financial crisis, banks remain under pressure to improve profitability. Mohit Wadan, a partner with Bain’s Financial Services practice, discusses four actions banks can take to raise their odds of success.
Read the Bain Brief: Big, Bold Bank Cost Transformation
Read the transcript below.
MOHIT WADAN: Banks are under pressure to improve profitability. With the low-growth environment that we're seeing in most markets, cost becomes a really important lever. Based on some research that we've done, the top 20 banks need to shave $50 billion, or 9%, of their cost base for ROEs to be 1% greater than the cost of equity.
But the next wave of cost out is going to be hard. And it's going to be hard because banks have traditionally failed to deal with the politics and issues that span across multiple functions and business units. They've failed to really address the root drivers of complexity, whether that be system complexity, or org complexity, or process complexity.
And then lastly, they've been investing in digital without truly addressing the IT complexity that sits in the system. And that just creates another layer of cost. So what should banks do? We recommend four actions.
One, realign the operating model. That is a catalyst to break down silos and get at that cost opportunity that exists in the seams of the organization. Two, change the nature of the work by not only asking how we should do something, but why are we doing it in the first place.
Three, digitize the right processes in order to improve channel migration and reduce bad and avoidable volumes. And then lastly, create a culture where we stop costs from creeping back in. And that's through a mix of creating visibility, creating accountability and setting up the right incentives to drive the right behavior. Banks that take these actions and create the right environment raise the odds of success.
Read the Bain Brief: Big, Bold Bank Cost Transformation