Revenue-starved banks are more aggressively seeking simple ways to cut costs from operations, delivery channels and other areas of their budgets.
by Karen Epper Hoffman
Faced with a slow-growth economy and shrinking revenues, bank managers are pulling the only lever they have left: expense control. Rather than looking to massive across-the-board cuts to boost returns, most financial companies are seeking to trim expenses selectively with an eye to keeping employees content, customers well-served and avoiding harm to client retention and sales growth. “Banks have to be cautious about unnecessarily making radical changes; they need to be able to remain agile and fluid,” says David Albertazzi, senior analyst for Boston-based Aite Group.
San Francisco-based Wells Fargo & Co. and Bank of America Corp. in Charlotte both announced major cost-cutting initiatives this past spring (in March and April respectively) and others have followed in recent weeks. Here are some common tactics that banks, large and small, are utilizing in their efforts to improve operating efficiency:
Realigning branch staff. Employee compensation accounts for about 44% of U.S. banks’ operating cost, according to the Federal Deposit Insurance Corp. While layoffs are typically seen as the most direct way to reduce this cost and some banks such as BofA have announced branch-closure plans, most institutions try to avoid this if possible due to the risk of alienating customers. Instead, banks are being careful about worker hiring, training and deployment. Many are holding off on filling open positions (sometimes for months) as a way to free up some short-term expenditures without impacting morale, according to Paul Tomasofsky, president of Two Sparrows Consulting of Montvale, N.J. In addition, some banks are opting to hire part-time employees instead of full-time in order to gain more flexibility in staffing models and to save on employee benefit costs.
Bob Meara, senior analyst for Boston’s Celent, part of the Oliver Wyman Group, says that more banks are using teller management software to help them staff their branches more effectively, based on when customers are most likely to come in and what they need at various times. UMB Bank of Kansas City, Mo., for example, expects to reduce its branch staffing expenses by $1.9 million over three years by utilizing such a system to coordinate branch staffing, planning and forecasting, according to Meara.
Reviewing vendor contracts. With so much of their money flowing out to vendors, it’s not surprising that many banks are looking to review or renegotiate outsourcing contracts. Tomasofsky says that banks are asking for better terms and pricing on these contracts “even if they’re not up for renewal.” One tactic is to offer to extend the contract terms in order to sweeten the deal for the vendor. “We may renegotiate to add more years in order to push for a better price,” says Michael Lindsey, senior vice president for BancorpSouth of Tupelo, Miss.
Refining and consolidating back office systems. Even as they shy away from major core system replacements and other massive overhauls, savings can be found in the simplification or selective replacement of back office technology. BancorpSouth, for example, has “virtualized” many of its servers, Lindsey says, meaning that instead of using dedicated hardware, the company deploys generic shared hardware to more efficiently run specific areas of its operations. This cuts Information Technology as well as support costs, he says. BancorpSouth has just begun to test virtualization at the desktop for its retail staff, which Lindsey hopes will not only reduce hardware and support costs, but also extend the life of the systems.
Wells Fargo, as part of its Project Compass initiative, is consolidating disparate systems onto a single platform, such as with its customer information database, according to Scott Dillon, head of the bank’s technology infrastructure services. “In other scenarios, we may consolidate on fewer systems to increase efficiency and consistency,” Dillon adds. He estimates that these efforts will reduce existing costs by between 10% and 15% per year.
Replacing (some) employee travel with video conferencing. With increasing airfare and hotel costs, banks are “hunkering down and taking a closer look at travel expenses,” says Jim Neckopulos, Dallas-based senior vice president and leader of the financial practice at Hitachi Consulting. One way to avoid out-of-town travel is to utilize video- or audio-conferencing. Randy Burchfield, who manages marketing for BancorpSouth, says that he uses video-conferencing every week for his regular meetings with the bank’s lead ad agency, which is based a five-hour drive away in Little Rock, Ark. “I haven’t traveled to Little Rock in two months,” he says.
Reducing internal use of paper and electricity. Eliminating unnecessary document printing and electricity usage can save even a smaller bank thousands of dollars annually and can also help boost the bank’s reputation as environmentally friendly. In some cases, a paperless initiative in the back office can lead to reducing the use of paper through delivery channels as well, Meara says. He points out that Extraco Banks, a Waco, Tex.-based community bank, was able to save $8,000 in paper costs last year, due to multiple initiatives such as imaging deposits at the teller line.
Moving to less expensive marketing channels. While some banks have slashed their existing marketing budgets across the board, others are looking to re-engineer their marketing with an eye toward lower-cost, electronic channels such as online, email and SMS. While BancorpSouth still uses television to build its brand, Burchfield says he has moved virtually all of the remainder of the bank’s marketing efforts from traditional print media to Internet channels such as banner ads and micro-sites within other popular sites, which also offer banks the ability to track their marketing returns more accurately.
BancorpSouth has also reduced the number of its in-branch marketing materials, from more than 25 to about half a dozen. “The racks in our branches used to look like those racks at a beach or mountain vacation spot, with all these brochures stuffed in there,” Lindsey says. Tellers will print out 8.5x11 sheets with current product listings and rates at a customer’s request, so they are assured the information is up-to-date and there’s no waste of paper, he adds.
Ms. Hoffman, a freelance writer based in Lawton, Okla, writes for BAI Banking Strategies.