Banks Need to Clean Their Attics

The traditional banking approach, which offers clients a large number of complex financial products and services with many variations in price and other conditions, is not optimal in today’s time.

Today, clients are becoming increasingly demanding and insist on greater transparency and simplicity in offerings, while the regulation of the banking system is becoming more dynamic, says Toma Ćukić, a manager at A.T. Kearney for the SEE region.

Consultants from this firm have determined in a global study titled Reducing Complexity in Banking: Simple Always Wins that merely simplifying the portfolio of products and services and better focusing banks on offerings tailored to client needs could result in a reduction of cost share in bank revenues by as much as 25 percent (see Figure 1), which would enhance bank profitability.

A large number of products and services in the offering results in high costs at all levels of the bank’s system, especially in the branch network (front office), where a large number of employees are needed who spend most of their working time merely explaining the products offered to clients. Thus, as much as 75 percent of total processing costs is attributed to work in branches. However, other parts of the system that must deal with maintaining a large number of products (middle and back office) also generate unnecessarily high costs. Such a product mix significantly burdens banking IT systems,” stated Ćukić.

According to him, it is not unusual for a bank to have more than 500 different products and services in its portfolio, two-thirds of which are outdated products and services that are neither sold nor generate new revenues.

– An overly complex portfolio does not only affect costs. It also leads to a reduction in potential revenues from new products and services that the bank introduces. Namely, when a client cannot clearly discern what exactly makes a particular product more expensive than another, banks often resort to the simplest solution to make the new product thrive in the market – offering discounts. Although discounts on new products are often tied to a specific period, after that period expires, banks in most cases, out of fear of losing clients, refrain from raising prices,” adds Ćukić.

Such a way of forming offerings is focused on products, not on clients and their needs, leading to higher costs and loss of revenue, and also results in a loss of client patience as they cannot discern a transparent, clear, and comparable offer as they wish in a complex product offering. Ćukić also warns that a dispersed and uneven offering negatively affects the efficiency of the risk management system.

In A.T. Kearney’s study, banks are recommended to simplify their offerings, which leads to greater profitability in three steps:

1. Banks need to ‘clean their attics’
At A.T. Kearney, an overly complex portfolio of products and services offered by banks is viewed as a cluttered attic of a house that needs to be cleared out. This implies initiating a detailed analysis of all products and services offered in light of the number of users, revenues, and costs they generate. The results of this analysis will show what should remain in the offering and what can simply be deleted. According to A.T. Kearney’s findings, this method can reduce the portfolio of products and services by more than 30 percent.

2. Create banking products modularly like cars
At A.T. Kearney, bankers are advised to adopt a modular product design, common in the automotive industry. Namely, different vehicles are built on the same platform, but with different combinations of parts and levels of equipment, manufacturers satisfy different desires of their customers. As an example of translating such a method of forming products and services into the banking system, A.T. Kearney cites the example of the American bank Union Bank, which has completely left it to its clients to choose the services they want to tie to their checking accounts and which they need to pay for. This approach implies standardizing the basic elements of all products, such as defining pricing algorithms and basic and additional modules offered to clients. Only by standardizing the pricing policy in the product portfolio can banks increase their revenues by 5 to even 15 percent, calculated A.T. Kearney.

3. Tailor banking products to the desires and needs of users
Tailoring products to the desires and needs of users implies creating products from the client’s perspective, and the basic idea is to offer some basic services such as managing checking accounts and credit cards for free, and then charge more for special services tailored to specific client needs such as mortgage loans or financial asset management. At A.T. Kearney, it is believed that bankers in selling more complex products and combinations of different products should look to the practices of Amazon, which excels in predicting the future desires of its clients and targeted offerings of products that might be of interest to clients. A.T. Kearney emphasizes that today clients make decisions about using a particular service significantly before arriving at the branch and talking to their personal banker (see Figure 2), so it is essential to offer products and services that are assessed to be of the most interest to clients individually, through multiple channels. As in the offering of all other products and services, the increasing use of the internet and social networks as sources of information has led to changes in client behavior in the banking business. An individual approach is key here, as different age and social groups of clients have different preferences not only regarding the offering of certain products but also regarding the prices they are willing to pay.