Imagine that two people are in a footrace, dashing 100 yards to win a prize. One is wearing shorts, a t-shirt, socks, and running shoes: standard athletic apparel for a runner. The other is wearing a ballgown, high-heeled hiking boots, a tiara, and sweatpants; she is also enveloped in windings of yarn from head to foot. Which runner do you think will win?On the surface, it may not seem like it, but financial institutions may have more in common with the ballgown-wearing runner than the one in running gear. Many community financial institutions (CFIs) are still disentangling themselves from decades of accumulated complexity as they strive to make good on digital transformation initiatives. Even still, outdated systems, inefficient processes, and the cost of complying with new regulations layered on top of each other have made the process of moving forward much more difficult for CFIs than their newcomer fintech competitors. As a result, CFIs might have tighter budgets and see less return on investment (ROI) than they might otherwise have. For many CFIs, that complexity shows up in ways big and small — from disconnected systems that don’t talk to each other to internal workflows that take weeks for what should be a two-day turnaround.How Complexity HurtsSome level of complexity is unavoidable in running a financial institution, but for many CFIs, the complexity level is far higher than it needs to be. The problem is typically a tangle of leftover parts from legacy systems and processes: things staff have added onto as needed, but lacked the time or capability to phase out for streamlining. The result is often a system of workarounds and redundancies that costs time and money, and that will cost more as competition heats up. Productivity at US financial institutions has fallen by an average of 0.3% per year since 2010, despite productivity gains in other industries. We can see this in the cost of lending. In 2023, it cost an average of $11,600 to originate a mortgage, up from $5,100 in 2012. Inflation helped drive the 8% annual increase, and so did the rising amount of work that goes into writing that loan, such as additional compliance requirements. The most efficient banks, however, spent about $6,900 to originate a mortgage in 2023, or 60% of the average expense.Streamlining Improves Productivity and Lowers CostsTo increase productivity, CFIs need to look beyond the obvious one-off changes of cost control for small projects and eliminating incidental expenses. While helpful at the moment, those changes don’t have much impact on long-term efficiency and won’t be the key to streamlining CFI operations. Simplification isn’t a one-time effort. One-time efforts are what created inefficient piles of compliance, technology, and product offerings. Instead, look at simplification as an ongoing, structured process.
- Begin with quick wins by looking for and fixing redundancies. Maybe there’s a monthly process your CFI has that can be decreased to quarterly, freeing up staff time. Are you relying on multiple systems to complete a single process? Discuss whether the capabilities of one system can be expanded to cover your needs or if there’s an API that could be used to automate certain steps.
- Use internal data to spot inefficient processes. CFIs generate lots of data, and they can use that information to locate areas that are particularly slow or unnecessarily expensive within their operations. Look for a department that sticks out from the rest — one that continually struggles to meet desired output or disproportionately requests budget increases. These are often signs that they’re being bogged down by inefficient systems and are continually seeking one-off solutions to help them get by for lack of time and budget to find something more comprehensive and impactful.
- Offload or discontinue unprofitable business lines and subsidiaries. Consider your CFI’s assets, subsidiaries, and businesses. Do they align with your overall strategy and offer a substantial return on your investment? Consider dropping or realigning those that aren’t core or carry too much risk or expense. For instance, McKinsey notes that some banks have stepped away from trade finance and supply chain financing, because both businesses require higher amounts of regulatory capital.
- Streamline approval and oversight. McKinsey found that mid-level bank employees spend as much as 70% of their time on internal discussions and updates, and as little as 30% of their time interacting with clients or performing income-generating tasks. At fintechs, similarly situated staff spend up to 80% of their time on client-facing output. Try reducing the number of stakeholders making decisions for a project and see if output or speed increases.
Fixing redundancies, using data to find inefficiencies, aligning business with overall strategy, and creating a culture of simplification can all help CFIs improve speed and lower expenses. Recognizing efficiency as a long-term pursuit rather than a one-time effort and encouraging simplification at every level of the business is the first step to achieving a more efficient CFI.
