European retail banks are evolving in a challenging environment. Operational cost reduction has never been as crucial as it is today. In order to cope with new challenges, banks are trying to aggressively reduce costs, targeting up to 15% of cost reduction.

Over the last 10 years, European retail banks’ profitability has mainly been driven by revenue increases. Revenues have increased more rapidly than costs, driving improvement in the cost/income ratio. However, relying solely on revenue growth for improving the cost/ income ratio is not sustainable in the current market. The severity of the financial crisis has launched a new, more aggressive wave of operational efficiency, with a stronger focus on cost reduction.

In a new report, Reaching the Next Level of Operational Excellence in European Retail Banking, Celent and Oliver Wyman launch an operational excellence benchmarking survey to map the level of operational maturity of the European retail banking industry. The survey’s participants (over 40 European retail banks) were asked to position themselves on six maturity assessment matrices covering different cost components:

• Branch distribution: sales force, relationship managers and tellers, sales management, sales support, and branch real estate management.
• Remote channels: call centres (inbound, outbound, help desks), Internet, and ATMs.
• Marketing: advertising, direct marketing, sponsoring and marketing organization.
• Back offices: account servicing, payments, credit/collection, and investment products/wealth.
• Information technology (IT): support, project delivery, and demand services.
• Support functions: finance, risk, legal, compliance, and human resources.

"The nature of business and the basis of value generation has changed very quickly, very recently, and very dramatically. Market dislocation is forcing institutions to transform fast or reinvent themselves, often as a survival strategy," says Perrine Fiorina, Celent analyst and coauthor of the report.

"Until now, European retail banks have mainly focused on branch distribution improvement. While branch distribution consumes the lion’s share of operational cost within European retail banks, it has also diverted banks from seizing cost saving opportunities in other links of their operational chain," says Axel Pierron, Senior Vice President at Celent and coauthor of the report. "Back offices and support functions, even though they are important cost components, have not received the same level of attention as other components, such as IT."

This report provides a European retail banking market overview by analyzing the maturity level of major banks in terms of efficiency. The report identifies the best practices currently implemented and provides insights into generating sustainable cost savings.