How COVID-19 is accelerating banks’ cost transformation programs

Many banks in markets around the world are operating with a distributed workforce, with staff working from their living rooms, basements and bedrooms. However, with government restrictions beginning to ease across the worst-affected countries, banking leaders are considering the shape of their workforce in a COVID-19 world. Banks’ real estate footprint is central to these discussions.

Social distancing restrictions – likely to stay in place in many countries for some time – mean that, even if banks decide to gradually bring their staff back to the office, they will need a lot more office space because employee density will be much lower. On top of this, banks with large offices in cities like New York or London not only must consider the feasibility of thousands of employees returning to work, but also issues concerning the use of public transport and potentially longer commute times for employees. With no cure in sight, this raises a host of financial, health, safety, and employee well-being challenges for banks. "CFOs are paying particular attention to employment-related costs during this period. They know they may need to enhance wellness, mental health, and learning and development budgets,” says Jan Bellens, EY Global Banking & Capital Markets Sector Leader.

In addition to returning to the office, banks must also coordinate the reopening of local branches in line with local government guidelines and advice. Safety measures, including face masks, temperature checks, one-way corridors and designated desks, are some of the ways in which banks are expected to ensure employee and customer health and well-being.

At the same time, remote working has been surprisingly effective. As a result, banks are seriously considering ways to reduce their real estate footprint. However, they first must grapple with the feasibility and financial cost of exiting prime office space. Firms with leased premises may find it difficult to break their contracts and exit without substantial payments. And, crucially, banks need to still cater to staff who do not want to work from home or find working from home challenging. Banks that do not focus on these employees could be at a competitive disadvantage when attracting future talent – compared to other, more flexible organizations that may offer a hybrid working approach.

Away from large cities, some banks are beginning to look at establishing a number of cheaper suburban or regional offices that are closer to peoples’ homes. This could result in shorter commute times and a reduction in employees’ carbon footprint. Studies show that in early April, daily global CO2 emissions decreased by 17% compared with mean 2019 levels, with just under half of this total resulting from changes in transport.¹

Should banks pursue this lower-cost option, the question of employee talent pools will also begin to emerge. Banks that historically required workers to live in, or close to, high-cost cities could have an opportunity to allow people to work from places with a lower cost of living, potentially reducing labor costs via lower salary requirements.

The key to success in any future scenario is really understanding the individual needs of each employee and matching those with the needs of the bank.

COVID-19 has radically changed consumer behavior – for both retail and corporate banking clients – and has acted as a catalyst to increase the use of digital banking. In our recent EY Future Consumer Index, 62% of respondents said they will use less cash in the future, and 59% expect to use more contactless payments. Bank branch closures, in particular, have propelled the use of digital products and services – accelerating banks’ digital and technology transformation programs.

Digital adoption rates among small and mid-size enterprises (SMEs) have also increased – for one bank in Singapore, the number of new digital accounts increased 2.4 times in Q1 2020, compared to the same period in 2019. The same bank also saw the number of SME digital loan applications rise 49%, up from 30% in 2019.

At a time when banks’ margins are low, digital tools can unlock cost savings that will prove essential to surviving a period of economic uncertainty. And banks are also focused on digital enablement internally – specifically how to digitize traditional manual processes to match growing demand, which, in turn, enables cost reduction. Intelligent automation and advanced analytics can create efficiencies, but also offer banks much-needed scalability to optimize processes. What cannot be automated should be reengineered and digitized.

COVID-19 has fundamentally inverted the historical assumptions banks use to set up their operating models and organizational structure – placing particular pressure on banks’ back-office functions. The pace of change affecting tax and finance operations means that banks cannot afford to postpone transforming these functions if they want to boost operational resilience and create greater value for their organizations.

However, even before the pandemic, banks’ back-office operations were already in the crosshairs of cost management. Banking executives recognized that there is no real competitive advantage for being the best as a back-office and, as a result, many banks were beginning to manage these costs more vigorously.