Home Banking Banks Face a Balancing Act Between Cost Cutting and Customer Focus

Banks Face a Balancing Act Between Cost Cutting and Customer Focus

by internationalbanker

By Gavin Neilson, Global Head of Financial Services, and Jason Hill, Head of Banking and Asset Management, PA Consulting

 

 

 

Banks again find themselves at a crucial juncture in the face of a possible recession in the United Kingdom and continuing economic slowdowns globally. With opportunities for top-line growth thin on the ground, most banks are focused on cutting costs to shore up their balance sheets. Barclays, Deutsche Bank and UBS Group are among those that have recently cut jobs, while many other lenders face mounting pressures on their margins. To add additional strain, Big Tech firms are expanding further into financial services via partnerships or are directly competing with banks through their own services and solutions.

Against this challenging backdrop, effective cost management is undoubtedly key. However, banks that can undertake this whilst remaining driven by a genuine desire to service consumer needs properly will emerge as the long-term winners. Taking cost-saving measures may make sense initially, but sticking to your values as a purpose-driven bank is a strategic move that will put you in far better stead in the long run than those narrowly focused on cutting costs.

Banks lack customer trust

It is often said that trust can take a lifetime to build and only a moment to lose. Banks have invested considerable effort in improving customer relationships over the 15 years since the last financial crisis. However, findings from PA Consulting’s recent pulse survey of 1,500 respondents show much work needs to be done to build trust and improve banks’ support provision.

Nearly half of customers (46 percent) surveyed reported feeling more financially stressed than ever; 48 percent said there were too many financial terms they didn’t understand; and 56 percent feared they would be caught with extra charges. Simply put, many consumers still don’t trust their banks. Only one in four (25 percent) said banks did enough to help people like them, and just two-thirds (67 percent) trusted their banks to help look after their money.

This situation calls for anticipation, adaptability, consistency and patience. In recent years, we’ve seen banks grasp green and sustainability agendas, invest in inclusive designs to make their services relevant and useable to more consumer demographics and attempt to pivot their brands to become genuine forces for good in society. This is admirable and purposeful work—and it needs to continue. The current financial uncertainty is not the time for complacency or to divert investments from these aims.

Risk and regulatory imperatives

Firstly, banks cannot avoid facing emerging regulatory requirements. A swift shift to focusing on your cost base would send ripples through your organisation that could impact your risk profile and compliance with new regulations, such as the UK’s Consumer Duty. The FCA (Financial Conduct Authority) has indicated that it expects to see the tone set from the top, with serious implications if that is undermined.

The Consumer Duty is not just a box-ticking exercise but compels financial-services firms to overhaul all their approaches to consumer protection and outcomes, particularly for vulnerable customers. As the FCA’s “Financial Lives” survey highlights, most of us will be vulnerable at some point in our lives, which means this measure doesn’t apply to only a small pool of customers but is far larger in scope. The understanding of financial products is low across various demographics, and the ability to engage in financial products is especially impaired when under stress, such as in today’s cost-of-living crisis.

Making knee-jerk, cost-focused decisions could negatively impact such customers, having a causal effect across the organisation from customer relationship management (CRM) and marketing to product, risk and procurement. This would likely affect a bank’s ability to properly put its customers at the heart of its business, for which the Duty fundamentally calls.

Moreover, the repercussions of quick-fix cost cuts would come just as boards of directors have to produce their first annual Consumer Duty reports in July 2024, sharing evidence of monitoring customer outcomes, making changes to business strategies and achieving tangible progress and improvements. The Consumer Duty is the biggest regulatory shake-up in a decade, and only by truly putting customers front and centre will banks intuitively comply with the new regulations and be able to prove as much.

Improving customer satisfaction 

Yet, beyond complying with regulations, purpose-driven banks also have opportunities to become reliable sources of support for customers facing economic challenges. Prioritising customers’ financial well-being offers reassurance when trust is in short supply. This isn’t just about warm sentiments. Banks that can integrate social responsibility, ethical practices and customer centricity into their core missions resonate with many demographics, including those seeking alignment with their values regardless of economic conditions—a particular priority for up-and-coming Generation Zers (Zoomers). Don’t forget that disruptor banks, such as Monzo and Starling Bank, have done so well with customers because they are user-friendly and value-driven.

The stark reality is that cost-cutting measures often lead to sacrifices in critical services. A bank offering a basic version of its services is hardly a recipe for customer satisfaction when individuals are grappling with economic instability and financial unknowns. And it’s not a good look if banks start watering down their purpose-driven agenda at the first sign of trouble in favour of cost management, deeming it the highest priority.

Banks would, therefore, do well to focus on reducing costs in non-customer-facing areas—for example, removing and replacing legacy technology has long been a significant opportunity, but more often than not, it has been pushed to the back of the queue as it has been regarded as too complex and a problem for another day. Similarly, opportunities to accelerate the introduction of machine learning (ML) and artificial intelligence (AI) solutions exist, but we are only seeing pilots and small use-case experiments so far. Remain mindful of the bigger picture when trimming expenses. Will the short-term savings outweigh the eventual costs of re-acquiring lost customers or rebuilding damaged reputations once we emerge from this economic slowdown?

Our research highlights that customers want more specific support from their banks, including free guidance on budgeting, saving, investing and retirement planning (55 percent of respondents); educational resources with simple explanations and real examples (37 percent); and video tutorials on banks’ websites (35 percent). They broadly see AI’s opportunities to enhance the customer experience and the provision of services they can obtain from banks but are nervous about their current trust and transparency levels. Continuing the theme of trust, they are sceptical about whether the offered services are genuinely being offered to help them, the customer, or fuel the bank’s profitability and revenues. It is, therefore, clear that banks need to continue the digitisation trajectory of the past decade, using technology to provide bespoke and tailored solutions that service actual customer needs.

The battle for talent

And then there’s the human element. Purpose-driven banks are seen as more than just financial institutions and, therefore, become more attractive to talent. By fostering an environment that extends past the bottom line, these banks attract professionals seeking more than just a job but a sense of purpose in their work. This is becoming increasingly important for employees, with a LinkedIn survey finding that 86 percent of young employees were willing to give up ground on remuneration or titles to work at a company that aligned with their values. Research by PA Consulting supports this finding, as nearly three-quarters of UK employees surveyed said working for an organisation that shared their values was important to them.

In the narrative of a potential recession, or more likely, a long and slow recovery to growth, purpose-driven banks could outshine their counterparts by emphasising trust, values and resilient workforces. Meanwhile, cost-cutting banks may grapple with the consequences of diminished services and disengaged workforces, raising questions about the wisdom of short-term gains in times of economic uncertainty. Doubling down on skills training and demonstrating honesty and empathy when navigating troublesome times is a way to gain respect and greater loyalty from workforces.

Banks must remain focused on becoming true forces for good in society in parallel with managing their cost bases. We will come through this extended period of uncertainty, and the most successful banks emerging at the other end will be those that stayed true to their purposes, did not waver in putting their customers’ needs at the core of their decision-making and continued to engage, communicate and support their critical workforces.Today’s economic backdrop throws up many challenges, but now is not the time to regress or reduce our focus on these critical agenda areas.

 

 

ABOUT THE AUTHORS
Gavin Neilson is Global Head of Financial Services at PA Consulting. Gavin has more than 25 years of experience in the financial-services sector, advising clients on digital and agile transformation, financial crime and fraud prevention. Gavin previously held several technology, change and operations director roles, including with Lloyds Banking Group and Standard Life.

Jason Hill is Head of Banking and Asset Management at PA Consulting. He has 30 years of experience in retail banking, working with global banks, challenger banks and fintechs, focusing on strategy and transformation engagements. He also leads PA’s work across sustainable finance in banking, offering expert advice on sustainability strategies and new-product design.

 

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