Banks Focus on Cost Alignment
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1 April 2013
We are seeing continued cost alignment from banks both on the retail and commercial side. The trend is nothing new and we keep getting steady news and development to support this focus on cost re-alignment. Most recently on the retail side of the house, there are continued down-sizing on branches. The number of branches keeps going down year-over-year – at least in the US market. According to SNL Financial in Charlottesville, Virginia, 2,267 branches were shut down in 2012 within the US bank market. That places the branch count at about 93,000 according to AlixPartners and expected to reach about 80,000 within the next 10 years. According to banks, branches are too expensive to operate and each shut down saves a bank between $250, 000 to $500,000 annual depending on the source. And before you think it, it’s also the big banks clamouring down on these costs. Bank of America closed over 200 branches last year according to The Wall Street Journal. On the commercial side, it seems as though costs are equally shuffling but appears somewhat more complicated. For instance, some costs are going up due partially to regulatory forces and also to technology. Banks are investing in technology to reach new market segments. Small banks are trying to move up market while large banks are trying to move down market and everyone is trying to protect their base from the bank next door. There is a perception that their market is saturated and the avenue to growth lies in a new market segment. Often the best way to get there (assuming a bank can get there) is via technology. For example, larger banks with more R&D capital are developing more comprehensive small business suites. The use of new technology such as mobile tablets is hot. For the regulatory aspect, new laws and bills such as Basel III and Dodd-Frank are causing banks to invest – yes more cost. But it doesn’t stop there. These new regulations will also cause banks to re-align their lending since more liquid capital will be required to remain compliant. So this will impact margins and arguably cost to revenue ratio. Then there is the resource and technology cost component associated to these regulations. It appears Basel III will require more technology investment than Dodd-Frank based on the reporting requirements. Banks are generally not wired to offer those types of reports today. All of these investments (or costs from the banker’s point of view) are good for the market. It improves the quality of services from banks which will serve them well in the long-term. Banks will continue to see third-party companies drive innovation into the payment (financial) space and their ability to compete in the long-term will ensure their health and potentially survival. On the next blog, I will explore the other side of the equation… revenue. Banks need to offset these expenses with new revenue. They should be paying attention to vendor partners to dig deeper into the corporate client value proposition. There are several ways they can do this. If they don’t, someone else will! More to come on this topic for the next blog – stay tuned.
You are certainly right when reflecting on bank profitability. Banks are having a hard time finding better and more effective ways for aligning costs, specially when regulations like Dodd-Frank, Basel III and the CARD Act only scrutinize more and more the possibilities for a bank to make profits. It is true that the most common approach for re-aligning costs has been branch closure, which most critics consider a mistake, but this is definitely the option that will produce results in a shorter time frame. I recommend that you take a look on some of PwC white papers that touch on bank innovation , it might give you a wider perspective on retail banking and branch strategy.