chris skinner 16 x 9

The move to digital has flattened many costs associated with running a bank and now they can source the best digital talent from around the world at a much lower price. So why hasn’t this impacted banks’ cost-to-income ratios and profit margins to a greater extent? 

I’ve been intrigued by how the world has changed in the past quarter century. In the 1990s, I was heading up marketing activities for various companies and spent large amounts on mailers, promotional activities, leaflets, design, graphics, presentations and such like.

It was all industrial activity and, as such, this was reflected in the costs.

For example, if I had created the Financial Services Club (a networking group for senior executives in financial services) in 1995, the estimated costs would have been as follows:

  • Designing brochure: $100,000
  • Mailing brochure: $100,000
  • Telephone staff costs: $250,000
  • Telephone costs: $100,000
  • Sending out updates: $100,000
  • Meetings costs: $100,000

Today, the costs have been flattened because these activities are mostly digital. Who mails brochures anymore? Who telephones anymore? And design and updates cost next to nothing. The only cost is the price of renting a room and providing wine and food for a physical event.

Over the past 25 years, the cost of running a business has shed 80% to 90% of its overheads, particularly around marketing and communication. Most communication costs — email, social media and such like — are negligible. Such opportunities should be leveraged, but we don’t see it in banking. How many banks are blogging or have large followers of their Instagram accounts?

Lacklustre impact

Sure, cost-to-income ratios today are lower than they were 25 years ago, as banks close branches, but the true impact is the end of physical overhead. Unfortunately, that has not been apparent in the same way in banking as in other industries.

If customers are moving towards self-service, branches are becoming less relevant and costs are being flattened by pay-as-you-use internet-based services, then why aren’t we seeing big improvements in ratios and margins? Is it because the bank is passing the profit back to the customer? Or are they giving the profit back to the shareholder or re-investing it in the business? I don’t think so.

Banks are control freaks; they want everything to be in-house and secure

In my personal view, it is because banks won’t use external services.

Banks are control freaks; they want everything to be in-house and secure. Of course, this is necessary for some things, but not for everything. Most shared services could be managed externally, such as human resources and marketing. Banks don’t necessarily need those activities to be done in-house. It’s only the mission-critical customer processes and data that you could claim needs to be in-house and secure. Everything else should be up for outsourcing or offshore services.

Sourcing the best

This came home to me when I was recently asked to design a 16-page brochure with graphics and layouts. I don’t do design, so I posted the job on the internet. The website told me I could get the best designers and graphics people for a fixed price of $100.

I was shocked — “the best” people for $100. Thanks to the power of the internet, the $100,000 I spent on designing a marketing brochure in 1995 is now $100 in 2020.

Highly qualified designers in Sri Lanka, Pakistan, Indonesia and elsewhere can now bid competitively for jobs that would be a huge cost onshore. A great designer sitting in Colombo or Karachi is still a great designer, and for them, $100 may be worth $1000 or even $10,000, comparatively.

This provokes a critical question: what’s a dollar worth?

It’s more expensive to work in Silicon Valley, California than in Birmingham, England; it’s more expensive to work in Birmingham, England than in Birmingham, Alabama; it’s more expensive to work in Birmingham, Alabama than in Brightwater, New Zealand. It’s all relative.

The Big Mac Index, which measures the cost of a Big Mac burger across the world, is a good example of this. The most expensive place to buy a Big Mac is Switzerland at SFr6.50 ($7.20); the cheapest place is South Africa at R31 (or just under $1.97). Yet a Big Mac is a Big Mac, regardless of where you buy it.

This does not mean that I am advocating that all banks should outsource everything offshore. Some activities need to stay within the bank for regulatory compliance or data governance reasons.

However, the bottom line is that a dollar stretches in value, which means banks should be looking at outsourcing some services offshore, effectively everything that does not impact the customer. So offshore all your shared services, internally-focused operations and activities related to cost centres like human resources and marketing — but don’t mess with the customer.

Chris Skinner is an independent financial commentator and chairman of the London-based Financial Services Club.

This article first appeared in the November edition of The Banker magazine. View a digital edition here.


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