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Balancing Act: Banks Address Costs and Profits

Alissa Saoutina |

Imagine Nik Wallenda (the first person to tightrope  the Niagara Falls on a high-wire) walking the line, tipping to the right, straightening,  tipping to the left, then straightening. The master of the balancing act traversing the 1,800-foot divide – the widest part of the falls. His balancing pole helped  get him to the security of solid ground.  If he lowered one side of the bar too far, the balancing act would end, with disastrous  consequences.

U.S. banks  face a tough walk to straighten out the cost side of the balance bar. Keeping costs down is difficult at a time when profits are being squeezed by regulation and changing consumer expectations.  Small banks especially  find themselves between a rock and a hard place with costs remaining stubbornly high year after year. The desire to raise profits has forced small banks to invest more in hiring and building branches to reach their audience. The challenges faced by small banks are echoed by big established banks as well—despite their best efforts to show high return on equity, as The Wall Street Journal reported. Banks, while emphasizing good returns on tangible equity (measure of survival), are actually painting a picture rosier than the facts warrant. Return on common equity (measure of growth) in comparison is not robust—and “a bank is destroying, rather than creating value with its efforts”, the paper concludes.

Technology may be of some help among other things to banks working to control costs. Reading about Nik Wallenda’s extraordinary balancing act, I realize that there are three things that helped him achieve his feat.

  1. 1.       Right knowledge. Wallenda studied the conditions at Niagara Falls. For practice he replicated the conditions by having fire trucks spray him with water. Banks’ imperative must be to learn about their environment, know who is using their services and what channels work best. As American Banker reports, representatives of largest U.S. banks present at the FinTech conference held in NYC last week learned about opportunities and disruptors they are facing.
  2. 2.       Right equipment. This is a part of knowledge, but really it’s about how you choose your tools. It is not about the latest technology, cool features and finding the silver bullet . Nik analyzed what kind of rope he needed that will hold him up over 200-foot deep gorge. Banks having the knowledge must consider the end-to-end product journey, from development to delivery, and analyze how different technologies can streamline that process—e.g., what kind of machine configuration allows me to process credit applications faster with lower risk.
  3. 3.       Right strategy. A lot of companies talk about their strategy. More important is a clear vision of who you want to be.  Banks’ core competency is in helping consumers and businesses manage their financial lives. Should banks print their own ads, build their own apps, and process electronic transactions? Nik did not practice and plan on his own—he had his vision, his friends and family. By scouting the right skill set and forming partnerships banks with clear vision can be successful at controlling their costs and expanding their profits.

For example, Chase’s latest mobile app update features Yahoo’s former design guru’s artistic method; while other banks are partnering with peer-to-peer lenders to automate load platforms to cut costs (see details here).

Walking on the wire isn’t easy. It’s a balancing act. The trick is catching yourself leaning too far to one side in time and straightening out before falling.

Topics: Economic Outlook

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