The vast majority of European banks need a fully efficient product portfolio to improve cost income-ratios
Few European banks exceed or even meet their earnings and cost reduction targets. As BearingPoint's Banking KPI Study 2020: Banking Efficiency – simplify for the future revealed that out of more than 100 benchmarked European banks, only a small proportion managed to sustain a strong cost income-ratio of less than 55%. The majority were laggards, with cost-income ratios greater than 55%.
The top banks had one thing in common: efficiency. And it starts with an efficient product portfolio.
Figure 1: Cost-income ratios of European banks. Source: Banking KPI Study 2020: Banking Efficiency – simplify for the future
BearingPoint's in-depth analysis revealed that an efficient product portfolio is vital for a healthy cost-income ratio. Only a small share of products is responsible for a large percentage of revenues. Complex products often do not contribute that much other than high costs.
Learning organizations with smart people management and people transformation are crucial success factors that banks often neglect during efficiency transformations. BearingPoint has analyzed many efficiency initiatives and found that the best performing banks not only simplified their product portfolio and used more automation, but they also put a greater focus on people management and people transformation. Successful banks have also invested more in IT, as the following figure shows:
Product portfolios are often too large, complex and hinder efficient operations. To avoid expensive and extensive transformations, a new approach to banking efficiency must be scalable, agile, and low risk and still deliver excellent return rates.
The first step for an efficiency transformation is a business model assessment, where banks focus on their strategic positioning and the delivery model and product portfolio. Following the analysis, banks can classify their products into core and non-core products, where core products are responsible for the lion's share of overall revenues.
Products classified as core products will undoubtedly be part of the target product portfolio. With the start smart approach, banks immediately focus on core product continuation. That would include automating manual tasks, eliminating unnecessary and redundant tasks, and increasing client autonomy through self-services, to name a few. Banks will realize immediate efficiency gains through the optimization of product processes and IT architecture.
Going further, banks need to analyze non-core products to determine if they become a part of the target product portfolio or if they discontinue them. The scale smart approach considers revenues, costs, and potential revenue increases and reduced costs. The processes and corresponding IT architecture of continued products are optimized. Banks also need a discontinuation strategy that incorporates the possibilities of outsourcing, decommissioning, carve-outs, and close-outs.
During the efficiency transformation, banks incorporate people transformation into three pillars: train – enable – adapt. For BearingPoint, this has proven to be a crucial success factor for sustainable and successful efficiency transformation. We give high priority to employees' involvement and commitment during an efficiency transformation to initiate change management and foster adoption at an early stage.
An efficient product portfolio improves a bank's cost-income ratio, frees up budgets, puts focus on sustainability, customers, and growth, and makes a bank competitive nationally and internationally.
This white paper provides detailed central clearing statistics, highlights reasons for and against central clearing, and discusses why voluntary or direct central clearing could generate efficiency gains.