Cultural change will help banks with their long-lost profitability levels

Radical cost-cutting, branch-closing and job-axing are no longer enough.

In the era of digitalization, low interest margins, strict regulations and brave new-entrant banks will need to find a new approach to regain profitability.

Most banks fail to earn their cost of capital. In Germany, for example, only 6% of banks earn their equity costs. Additionally, it is estimated that 40% of the costs incurred in banks are due to wasteful activities that add no value to the end consumer.

 

LEAN AND SIX SIGMA

The Lean methodology and the Six Sigma approach aim to cut waste from processes. Lean Six Sigma optimization techniques are not new to banking. Financial institutions have successfully used them for over two decades. However, banks are only utilizing 60-70% of their lean potential, according to a study conducted by the Frankfurt School of Finance and Management study.

Understanding a firm’s culture is far more important than understanding Lean’s technical side to achieve sustainable and measurable results. It is the behavioral shifts that make the Lean technical solutions work. 

 

END-TO-END VALUE CHAIN

The Frankfurt School of Finance and Management study also found that a key weakness within banks is the lack of the end-to-end value chain, typically a chain of sub-processes that connects a customer demand with a successful outcome for the customer. It must also reflect the organization’s view of when the customer interaction is complete and a business objective has been met. Finally, the value chain must be measurable and the measures must take into account the views of both the customer and the firm.

What do banks need to strengthen their end-to-end value chains? 

  • Customer-centricity: Closing the gap between customer needs and what the bank can reliably deliver
  • Knowing the value and cost of services: Products must be fully traceable and compatible with an industry-wide taxonomy (similar to bill of material concept in the automotive industry). A functional NPP (new product process) could solve some of the profitability issues by clearing unprofitable products and services as well as establishing the real costs of any product or service, prior to offering it to customers. 
  • Applying strong and relevant KPIs that steer operations for the required timeframe

To sum up, making the bank profitable again requires establishing a new, positive, lean-service orientated culture, backed by efficient technology and processes. It’s refreshing to know that ‘culture’ is finally being taken seriously by banks. Operating models, processes and strategies are only as effective as the culture that binds them.