Economic Observer reporter Li Xiaodan KPMG's analysis of global bank performance shows that before the new crown epidemic, banks' cost-to-income ratio (CIR) continued to decline slowly; However, it began to rise between 2019 and 2021, due to the increase in employee costs, technical costs and loan loss provisions due to the pandemic. In addition, the interest rate environment for banks has changed, and how banks manage costs has become particularly important.
On 15 May, KPMG China released a report titled "Beyond "Cost Reduction and Cost Control", how banks can create value through strategic cost optimization. The report points out that on the surface, different banks seem to provide similar services to customers, but in reality the bank's business models and service forms are diverse, and this diversity causes it to fluctuate greatly in the cost of serving a customer. There are a variety of reasons for this volatility, such as the higher cost of engaging more closely with customers, but this interaction creates opportunities for cross-selling and strengthens customer loyalty, making it an important strategic decision for some banks.
"When we combine the value metrics of service cost, production cost, productivity and customer experience, it gets really interesting. The cost of customer service is rising, but the value of the service perceived by customers is decreasing, causing the gap to widen. The direction of customer service cost inputs, as well as the specific measurement of performance and the way in which benefits are realized, are critical to closing these gaps. Sara Forbes, Partner, Transformation Services, KPMG UK, says.
"Pure scale expansion and rapid growth are no longer suitable for the current industry environment." Cheung Cho Tung, Partner, Head of Financial Services, Asia Pacific, KPMG, says that for banks, cost optimisation is not a one-time tactical adjustment, but a comprehensive review and accurate measurement of the actual costs of each link in the entire value chain, and banks should shift to a more comprehensive, balanced and strategic cost optimisation strategy, and compare and analyze the cost-effectiveness of other solutions that may bring similar value growth, so as to avoid simply pursuing cost-cutting strategies, so as to promote continuous innovation and steady development of banks.
Such a shift is also becoming a challenge for bank executives. The report finds that while the drive for cost optimization is gaining traction in the short term, it remains a challenging process for banks to achieve their cost management vision. In the KPMG Cost Transformation Survey for the Banking Industry, respondents across all regions highlighted the current global economic downturn as one of the biggest obstacles to banks' future cost optimization transformation. The survey results also show that the key to successful bank transformation today is not only to demonstrate a commitment to drive change, but also to remain flexible enough to adapt to the external environment and continue to innovate.
Shi Jian, Head of Banking, KPMG China, says that in the face of increasingly stringent regulatory requirements, complex and volatile market environment and personalized needs, banks need to consider many other aspects in addition to the use of technology in the process of promoting cost transformation, such as solving risk and regulatory cost issues, focusing on the progress of cost reduction and efficiency management, and improving the organizational transformation ability of members within the organization.
"Addressing the cost of risk and regulation is an important part of the bank's cost transformation." Shi Jian further explained that on the premise of ensuring the safe operation of the bank, it is necessary to invest in risk management and cost optimization; By integrating risk management strategies, banks can not only respond more effectively to individual risks, but also improve the comprehensiveness and effectiveness of risk management to maintain a competitive edge in a complex and dynamic global environment.
From the perspective of cost management, the operational efficiency and cost control of banks directly affect the quality of financial services and the steady development of the industry. Zhi Baocai, Partner, Head of Strategic Advisory Services, Financial Services, KPMG China, believes that domestic banks should not be limited to cost reduction from a financial perspective, ignoring the enhancement of long-term value and the combination of optimization and innovation.
Proper cost optimization is not just about cost reduction, but about making better strategic decisions about business models, products and services, maximizing capacity by optimizing the entire operating model from front-end to back-end, and striking a balance between creating value and reducing costs, according to Zhibaocai. In addition, in the long run, banks should actively explore how to "open source" while "reducing expenditure", including improving the revenue creation ability of unit capital through active asset structure optimization and capital-light transformation, and creating more professional and integrated service capabilities to improve asset pricing and investment returns.
The report points out that banks should take value creation and cost control as their core goals, solve inefficiencies more effectively by taking cost optimization measures and implementing them in the right order, and combine new technologies, streamlining processes, and introducing innovation to improve efficiency to maximize the level of customer experience and achieve a balance between resource allocation, business development and customer experience.
According to the report, in the pursuit of cost transformation, banks need not only leadership to demonstrate a strong determination to drive change, but also establish a cost culture mindset, fully integrate the concept and practice of strategic cost management into corporate culture and daily operations, and ensure that cost management strategies are effectively executed, so as to drive continuous improvement and value growth across the organization.
In the digital age, technology solutions and new skills requirements have become aspects of cost optimization that cannot be ignored by banks. Globally, banks generally see AI and other automation technologies as one of the most potential levers to cut costs, and they will also play a more important role in their future operating models, according to the report.
Xiaoguang Liu, Partner, Head of CIO Advisory Services, Banking & Asset Management, KPMG China, says banks are shifting to more efficient automated processes, using big data and AI technologies to streamline processes and improve management efficiency. At the same time, in addition to focusing on technology delivery, banks also need to focus on establishing the right operational structures and mechanisms, which are equally important to reduce business costs. AI can not only help banks improve services and enhance customer experience, but also bring revolutionary changes in risk management, customer service and product innovation, which will greatly drive the transformation and growth of banking business, bringing significant economic benefits to banks.
The report emphasizes that digital transformation is not a simple technological upgrade, but also a comprehensive optimization of banks' business models, products and services, and that banks should use cutting-edge technologies such as big data and artificial intelligence to drive cost transformation, promote the automation and intelligence of business processes, reduce costs and improve operational efficiency, and achieve refined cost management.