Despite massive investments in digital technology, productivity at U.S. banks has actually declined over the past 15 years, while most other industries have improved. As financial institutions retool for a challenging environment, that record needs to be reversed, fast. A new report from McKinsey has a suggestion: Simplify.
Executive Summary
Banking productivity has stagnated over the past decade while costs continue to rise, creating an urgent need for sustainable efficiency improvements.
McKinsey’s latest report reveals that traditional cost-cutting measures deliver only short-term gains, with progress typically eroding as priorities shift. McKinsey argues that the solution lies in “simplification at scale” – a comprehensive approach that fundamentally reshapes operating models to reduce unit costs and unnecessary complexity. The consultancy says that banks that successfully implement this strategy can achieve lasting productivity gains of up to 15% over two years, resulting in ROE increases of 1.0-1.5 percentage points.
By combining strategic simplification with properly scaled operations, retail banks can not only bend their cost curves but also significantly enhance customer and employee experiences.
Why we picked this report: As margins compress, growth slows and competitors proliferate, U.S. banks and credit unions need to look hard at their worsening productivity if they are going to control costs.
Key Takeaways
- U.S. banks have experienced declining productivity (-0.3% annually since 2010) while other sectors have improved, largely due to complex operating models, legacy systems, and increasing regulatory requirements.
- Traditional efficiency programs typically yield only short-term gains of 3-5%, with costs eventually creeping back up as other priorities take precedence.
- The “simplification at scale” approach targets the fundamental unit cost of delivery rather than symptoms, enabling sustainable productivity improvements of up to 15%.
- Generative AI represents a significant but underutilized opportunity for banks, with the financial services sector currently spending less on AI than industries like healthcare, technology, and telecom.
- Improving operational efficiency through simplification directly enhances customer experience, addressing a critical competitive gap where traditional banks lag 20 to 30% behind non-bank lenders in customer satisfaction.
Key Data Points
- The average cost to originate a mortgage has risen 8% annually, from $5,100 in 2012 to $11,600 in 2023, highlighting the increasing complexity in banking operations.
- The most efficient mortgage originators operate at approximately $6,900 per mortgage – about 60% of the industry average cost.
- Banking employees at the N-3 to N-7 levels spend 60-70% of their time on internal discussions and updates, with only 30-40% devoted to client-facing or output-linked activities.
- Global banking risk and compliance budgets are projected to grow 5% annually through 2028, continuing to pressure operational costs.
- Technology spending in banking has increased 9% annually in recent years, more than double the 4% average revenue growth rate.
The Productivity Paradox in Banking
Despite multiple efficiency initiatives and significant technology investments, productivity in the banking sector has declined at an average annual rate of 0.3% since 2010. This stands in stark contrast to productivity gains achieved across most other industries. The root causes are multifaceted: complex operating models burdened by compliance requirements, legacy systems from years of M&A activity, and the increasing cost of technological transformation.
Traditional approaches to cost reduction typically deliver modest gains between 3-5%, with the most successful banks reaching 10%. However, these improvements rarely stick as other priorities emerge and costs gradually creep back up. Meanwhile, operational complexity continues to grow, as evidenced by the mortgage origination process, where average costs have more than doubled from $5,100 in 2012 to $11,600 in 2023.
“Improving productivity in banking is akin to climbing a mountain whose slope sharply steepens as one scales,” note the McKinsey authors. While initial cost-cutting measures may succeed on the gentler slopes, achieving transformative change requires a more comprehensive strategy to tackle the steeper challenges ahead.
The Power of Simplification at Scale
The solution proposed by McKinsey is “simplification at scale” – an approach that fundamentally rethinks the bank’s operating model to drive down the unit cost of delivery. This strategy begins with adopting an ROI mindset for each process or activity, calculating the output produced per unit of work. The goal is to minimize or eliminate customer demands that generate little profit or add unnecessary operational complexity.
Simplification can take several forms:
1. Streamlining operations
Divesting non-core assets and businesses that fail to meet ROI thresholds. Several major banks have recently executed this strategy, with Citigroup selling off retail banking operations in multiple countries to focus on wealth management, and HSBC concentrating on its core UK and Hong Kong markets.
2. Improving the operating model
Addressing the dysfunction that has led to banking employees spending 60-70% of their time on internal discussions rather than client-facing activities. This involves simplifying decision-making, reducing the ratio of overseers to doers, and embedding agile methodologies across the enterprise.
3. Rethinking the branch and operations footprint
Conducting structured assessments of requirements for front-, middle-, and back-office operations. Many banks have successfully reduced their branch networks by 30% or more while improving quality and customer experience.
4. Taking a clean sheet approach to support functions
Identifying essential outcomes for departments like finance, IT, legal, and risk compliance, then redesigning processes to achieve them more efficiently.
Achieving Scale While Maintaining Simplicity
Scale is equally crucial in today’s challenging business environment. Banks must be strong yet nimble, particularly as regulatory requirements, compliance, technology, and risk management add significant operational burdens. Key strategies for achieving appropriate scale include:
1. Leveraging generative AI
Implementing AI solutions across call centres, credit memo writing, fraud management, and tech development can boost productivity by up to 30% and improve customer experience by 20%.
2. Modernising technology functions
Adopting more agile approaches to tech development, avoiding overcustomization, and establishing clear ownership and accountability for projects.
3. Optimising operations and support functions
Determining whether functions like mortgage origination, custody, and call centres should be managed globally, regionally, or locally to achieve minimum efficiency scale.
Enhancing Customer and Employee Experience
The ultimate goal of simplification is not just cost reduction but creating superior experiences for both customers and employees. Banks currently lag 20-30% behind non-bank lenders in customer satisfaction, highlighting a critical competitive vulnerability.
Excellent customer experience requires:
Customer centrality – designing operations around customer needs rather than forcing customers to adapt to bank processes
Trust – providing transparent communications about fees and conditions
Omnichannel access – enabling seamless movement between digital platforms, branches, and call centres
Personalisation – using analytics to identify major life events and tailor relevant offerings
By achieving simplification at scale, banks can deliver a fundamentally better operational model that enhances productivity while simultaneously improving both customer and employee experiences.
The McKinsey authors conclude, “Driving these changes can help banks deliver outsize, lasting impact, resulting in better productivity, a simpler operating model, and a positive customer and employee experience.”
Source: THE FINANCIAL BRAND
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