How banks can boost productivity through simplification at scale

Productivity, efficiency, and costs are never too far from bank executives’ minds. In previous waves of efficiency drives, banks have succeeded in reducing costs, though the extent of these achievements has varied—from about 3 to 5 percent at most banks to as much as 10 percent for the most successful ones. However, most of these gains are short lived as other priorities and demands erode progress, leading costs to creep up again. Given macroeconomic and geopolitical uncertainties, it behooves banks to keep a close eye on efficiency to achieve ROE of 10.0 percent or more and ROA of 1.5 percent or higher. Boosting efficiency has the additional benefit of creating surplus cash to invest in building capabilities in gen AI, tech modernization, data, cybersecurity, and more.

Two trends are complicating the picture:

• Recent improvements in banks’ performance have been driven by rising interest rates, and as rates come down again, efficiency challenges will become more prominent.
• Banks’ operational costs have climbed over the past decade and a half due to factors such as heightened risk management, increased regulatory compliance requirements, and technology upgrades.

For a bank, improving productivity means reducing the unit quantity of work required. This measurement and the related costs for banking products have increased for the past decade or so because of increased complexity and process inefficiencies. For example, the average cost to originate a mortgage has risen 8 percent a year, from about $5,100 in 2012 to about $11,600 in 2023.¹Yana Davidovich, Elizabeth Moesle-Walton, and Sudamys Alfonso, 2024 Cost to originate study: How technology impacts savings, cycle time and revenue, Freddie Mac, May 2024. Beyond inflationary effects, this steady rise was driven by the increasing work that needs to go into a mortgage, including risk and compliance factors. Streamlining and simplifying the process will not only reduce costs for banks but also boost customer satisfaction by minimizing errors and accelerating processing times. Interestingly, the most efficient mortgage originators made mortgages at a cost of roughly $6,900 in 2023, about 60 percent of the average cost.

In this article, we first explore the challenges that have hindered banks from drastically improving productivity. Then, we dive into what needs to change for banks to achieve lasting productivity growth, which can also help enhance the customer experience.

Productivity challenges

Banks are acutely aware of their stubborn costs but often struggle to effectively mitigate them due to myriad challenges, including complex operating models, competing risk management initiatives, and patchworks of legacy systems and processes inherited from M&A deals. These competing priorities have forced banks to focus largely on near-term efficiency solutions, which don’t address the core issues. Not surprisingly, banks find themselves perpetually treating symptoms rather than curing the underlying problems. Banks recognize that cost efficiency is critical, launching efficiency programs every two to three years, on average. However, these efforts typically fall short of transformative impact, often focusing on quick adjustments rather than on fundamentally reducing demand or simplifying the operating model.

The following are challenges to productivity and efficiency that banks face:

• Rising risk and compliance requirements have led banks to increase spending, with global banking risk and compliance budgets projected to grow 5 percent a year through 2028, according to McKinsey analysis. The recent trend toward less regulation in the United States could temper the projected spending increases, however.²Gina Heeb, “Trump advisers seek to shrink or eliminate bank regulators,” Wall Street Journal, December 12, 2024.
• Technology spending has been a low-ROI proposition for many banks. Furthermore, over the past few years, global technology spending in banking has risen 9 percent a year, on average, compared with revenue growth of 4 percent. Tech spending is up due to heightened data requirements related to gen AI and cloud migration, among other factors. Yet financial-services companies are spending less on AI than businesses in sectors including healthcare, technology, and media and telecom (Exhibit 1). Smart, targeted spending on technology including gen AI can move the needle on productivity improvements.

• Customer expectations for seamless, personalized experiences continue to rise, meaning banks need to take steps to meet those expectations. Those steps can include redesigning critical processes and digital experiences, which may involve spending more on technology.
• Intensified competition for talent in areas such as technology, risk and compliance, and analytics has led banks to boost salaries to better compete with fintechs and other tech businesses.

What needs to change for lasting productivity growth

Since 2010, productivity at US banks has been falling 0.3 percent a year, on average, bucking productivity gains in most other sectors (Exhibit 2).

Improving productivity in banking is akin to climbing a mountain whose slope sharply steepens as one scales. The initial stages are gentle slopes, and classic cost-reduction approaches—such as optimizing the procurement process, managing travel and entertainment costs, and cutting spending on certain projects—can deliver results. But above a certain altitude, the challenges become more complex. The next stages warrant an integrative, multidomain approach that engages various tactical and strategic levers in tandem. This approach, which we call simplification at scale, results in higher productivity coupled with a better experience for clients and employees.

The kernel of the approach is rethinking the bank’s operating model to drive down the unit cost of delivery. For each process or activity, the bank adopts an ROI mindset that considers the output produced per each unit of work completed. A key component is reducing or even eliminating customer demand that generates little profit or adds unnecessary operational complexity. Minimizing or eliminating demand at a granular level results in a substantive effect at the aggregate level, fundamentally and sustainably bending the cost curve.

In our experience, banks that take this comprehensive approach can achieve lasting productivity gains of up to 15 percent in two years, resulting in an ROE increase of 1.0 to 1.5 percentage points.

Next, we explore the twin components of the approach we’ve outlined, simplification and scale, in greater detail. Then, we break down the impact on productivity and experience.

Simplification

This is the moment to ruthlessly apply Occam’s razor, the principle that the simplest solution tends to be the best. To simplify, banks can scrutinize their business the way an investor would, calculating the ROI for various functions, processes, and segments. Simplification can involve the following themes:

• Streamlining operations. Banks have successfully streamlined their portfolios by divesting themselves of assets, subsidiaries, or businesses that don’t meet ROI thresholds and don’t align with the overall strategic vision. Identifying these businesses involves assessing how core they are, how much it costs to run them, and how much risk they bring. Several regional banks have recently reduced their exposure to commercial real estate and shifted focus and investments toward digitalization and wealth management. And many banks have pulled back from trade finance and supply chain financing because these activities require a higher amount of regulatory capital.

  For example, Citigroup streamlined its retail banking operations in recent years to focus on more lucrative areas such as wealth management, selling or winding down its retail banking and credit card businesses in countries including China, India, Indonesia, Malaysia, the Philippines, Russia, South Korea, Thailand, and Vietnam.³Dave Sebastian and Jing Yang, “Citigroup exits more Asian consumer-banking operations with $3.7 billion deal,” Wall Street Journal, January 14, 2022. Citi delivered major improvements in 2024 compared with 2023, including revenue increases of 20 percent in wealth management and 15 percent in institutional services.⁴Jesse Pound, “Citigroup swings to fourth-quarter profit, tops estimates on investment banking strength,” CNBC, January 15, 2025.

  As another example, HSBC is refocusing on its core regions, the United Kingdom and Hong Kong, and on wealthier clients across various markets.⁵Ortenca Aliaj and Kaye Wiggins, “HSBC reviews retail banking outside UK and Hong Kong,” Financial Times, December 13, 2024. To do so, it has sold its consumer businesses in Canada, France, and the United States, and it is considering scaling back retail operations elsewhere. These moves are part of a strategic pullback from an earlier global expansion push.

• Improving the operating model. Over time, complexity can creep into a bank’s operations, making them slow, clogged, and opaque. Employees spend time and effort on tasks that not only fail to improve outcomes and outputs but, in many ways, hinder performance. For instance, our targeted calendar analysis of the banking sector found that 60 to 70 percent of employees’ time (at the N-3 to N-7 levels, or three to seven levels below the top executive) was spent on internal discussions and updates, while just 30 to 40 percent was spent on client-facing or output-linked activities. This is very different from fintech and tech companies, where more than 80 percent of employees’ time is spent on clear client-facing output. This dysfunction has crept into many departments within banks.

  Banks can address a dysfunctional operating model through the following actions:

  
  
  • Simplifying decision-making. The number of stakeholders and layers involved in decision-making can be reduced, with the first step being to ascertain the ratio of doers to overseers. In many situations, we have observed this ratio to be 1:2, 1:3, or 1:4. This is surely too high. After streamlining, it is important to monitor whether decision-making has improved, not just gotten faster.
  • Embedding agile across the enterprise and accelerating time to market. By increasing output velocity, whether in design, pilot phases, or minimal viable products, banks can respond more quickly to market changes and customer needs. The key is to adopt a rapid cycle of design, testing, and refinement, followed by scaling, rather than relying on long, drawn-out development cycles that can result in products or capabilities becoming outdated before they are even released, particularly in technology.
  
  

  We have found that these types of changes can help banks improve productivity by 20 to 30 percent, without hiring more employees. But it is imperative to pursue a transformation that’s comprehensive and brings lasting results. Less than a third of organizational transformations ended up improving performance and sustaining those improvements over time, according to a 2021 McKinsey survey.

• Rethinking the branches and operations footprint. Banks can come up with the right footprint of branches and offices by asking where they can achieve significant success and differentiate themselves from the competition. The approach involves a structured assessment of the requirements for front-, middle-, and back-office operations, considering factors such as quality, cost to serve, talent pool, scalability, compliance, and client experience. For example, American Express and Goldman Sachs have established large operations and technology centers in India, primarily to tap the country’s talent pool, rather than just to reduce costs. And many banks have reduced their branch footprints by 30 percent or more while improving quality, risk controls, and customer experience.
• Taking a cleansheet approach to support functions. Over time, functions such as finance, IT, legal, operations, and risk and compliance have become increasingly complex due to additional demands from investors, management boards, and regulators. To cut through the complexity, banks can identify the essential outcomes required, such as reporting, self-assessments, and internal reviews, and then design and simplify the processes to achieve these more efficiently. We believe there is a significant opportunity to streamline efforts across functions—for example, by using common data in risk reports and finance reports.

To get started on the simplification effort, banks can consider a checklist of steps to help them make the most of the process (see sidebar, “A primer for simplification in banking.”)

Scale

Achieving the right scale is essential, especially in the challenging business environment banks face. To remain competitive, a bank must be strong as well as nimble, agile, and adaptive. Over time, regulatory requirements, compliance, technology, and risk management have added significant burdens. To handle these, institutions may choose to increase their scale to sustain the additional load.

While both simplification and scale are critical to success, the combination of the two creates a compounding effect that can deliver outsize impact. When these are aligned, bank executives have a clearer picture of where to focus resources, build capabilities, and double down on strengths, as well as where to pare back.

Banks can use metrics to evaluate performance at scale, such as the costs of originating and servicing loans. While ROA and ROE are good high-level metrics, banks also need a more granular view of these costs, along with drivers such as operational expenses, operations, technology, and risk at the subprocess level within the value chain.

The following are examples of how to achieve scale while keeping simplification in mind:

• Gen AI. Banks are ramping up new capabilities such as gen AI models to revamp their operations. At-scale use of gen AI and other technologies can significantly boost productivity, for instance in call-center operations, credit memo writing, fraud and dispute management, research and analytics, and tech development and testing (Exhibit 3). One bank improved productivity by up to 30 percent and customer experience by up to 20 percent thanks to its use of AI tools.

• The technology function. Technology is a crucial but costly area for banks. To successfully modernize their technology, banks should adopt a more agile and disciplined approach, avoid overcustomization, clearly define the problems they need to solve, and ensure direct ownership and accountability for projects. This approach can help mitigate the common issues of low ROI, high costs, and extended timelines.
• Operations and support functions. Some areas, including mortgage originations and servicing, custody, asset management, and call centers, need to reach a certain minimum efficiency scale to be profitable and meet the required return threshold. Banks should review and determine how to manage these functions—whether globally, regionally, or locally—to reduce operational costs and streamline processes.

Productivity

Entropy increases over time, with systems naturally drifting toward chaos unless corrected. How, then, has it been possible for US businesses in general to boost productivity while the banking sector has stagnated in this respect?

Improving productivity comes down to factors including technological advancements, globalization, skill enhancement, economic policies, broader consumption patterns, and process enhancements. The banking sector has benefited from these factors. Why, then, does the full potential of banking productivity remain elusive?

A large, complex system doesn’t organically and naturally reinvent itself. Achieving reinvention requires deep, careful examination and preparation to simplify and reshape the system by first breaking it down into small components, then reassembling it in a more logical way and amplifying the impact of the transformation.

One inspirational example of this method is the transformation of British Cycling from underdogs to world champions through a simple but effective strategy championed by Dave Brailsford, the team’s performance director until 2014: the aggregation of marginal gains.⁶Matt Slater, “Brailsford’s story, part one: The rise of Mr Marginal Gains and the road to Manchester United,” New York Times, February 26, 2024. The strategy involves breaking down everything that goes into cycling into small bits, improving each of those bits by 1 percent, and gaining an outsize compound effect in performance. Big funding increases also helped.

Banks are large, complex ecosystems. Like Brailsford and his cyclists, banks can break down everything they do into tiny pieces to truly understand the unit quantity of work required to produce a given output, such as onboarding a client, issuing a mortgage or commercial loan, or servicing syndicated loans. This approach involves questioning, eliminating, and substituting inefficient processes to fundamentally reduce overall costs. Banks need to ask whether each unit of work across their operations is necessary and whether it can be simplified or eliminated. Then, they can remove unnecessary steps, replace inefficient processes with more efficient ones, and implement new processes or technologies that can improve efficiency.

For example, a payments business transformed its front and middle office by reviewing and revamping operations, removing friction, and building new and innovative capabilities, resulting in a $300 million revenue improvement and a 30 to 35 percent boost in productivity. A multinational bank, meanwhile, embarked on a focused transformation to redesign its payments operations to reduce errors and increase automation. Errors declined by 85 percent, while the bank’s straight-through processing rate⁷The share of transactions processed automatically with no manual intervention. increased to 97 percent.

Banks can achieve significant simplification and cost reduction by harnessing technology, automation, data analytics, and streamlining of processes and policies. Changing mindsets, training, and upskilling can help bring employees on board, an integral piece of the simplification puzzle.

For example, encouraging customers to use self-service tools can lower volumes of calls and messages to contact centers, allowing banks to optimize footprints. Our experience shows that 70 to 80 percent of calls can be handled by automated systems, without being routed to human agents. Similarly, 60 to 70 percent of disputes between customers and merchants can be resolved without human interaction.

A bank’s technology function is one of the hardest to simplify, as tech functions often suffer from cost overruns, time delays, and underdelivery on capabilities such as platform revamp and cloud migration. Bringing technology into the simplification fold involves adopting extremely tight scoping to clearly define project boundaries, implementing agile methodologies for testing and coding, and ensuring business integration to create a cohesive operation. In our experience, adopting these principles can lead to a 15 to 20 percent improvement in productivity.

Experience

Globally, banking is the single largest profit-generating sector, and banks play an integral part in keeping businesses and economies functioning smoothly. Despite the sector’s centrality and impact, banks could do a lot more to improve the experience of their customers and employees. For example, a survey of residential mortgage customers found that banks lagged 20 to 30 percent behind nonbanks in overall satisfaction with the mortgage process.

Putting customers first can significantly move the needle, as many fintechs and select banks have shown. An excellent customer experience includes the following components, among others:

• Customer centrality. Bank operations should be designed to address customer needs, versus requiring customers to yield to a bank’s processes. Putting customers first can also help improve the employee experience, as workers no longer have to spend as much time explaining cumbersome processes to customers.
• Trust. Transparent and clear communications—for example, on fee structures and conditions for loan approval—can help banks win customer trust. Customers also need to be able to trust banks to safeguard their data and offer strong cybersecurity protections.
• Omnichannel experience. Customers need access when they want and how they want it, such as 24/7 online self-service and a superior experience through channels including apps, branches, call centers, and websites. For example, a bank strengthened the integration between its branches, remote services, and digital platforms, allowing customers to move seamlessly between channels without experiencing disruptions. This led to double-digit increases in customer experience and sales growth, and reduced costs for the bank. More customers also decided to make the bank their primary financial institution.
• Personalization. Tailoring offers to meet customers’ needs and preferences can ensure that the offers feel relevant and valuable. Analytics can pinpoint major life events, such as buying a house or having a child, that can help banks better serve customers and offer them relevant products and services.

Given the banking system’s complexity, banks will need to embrace tools and techniques to radically simplify and scale the resulting impact. We recognize, however, that simplification at scale is no panacea and the transformation must be tailored to each bank; otherwise, it’s unlikely to work.

Context matters. For instance, a bank could choose to pursue simplification at scale to address a near-term target, to get ready for an M&A deal, or to work through an existing one that hasn’t delivered the expected impact. The situation will inform whether the bank conducts an enterprise-wide refresh or something more targeted. No matter the context, the core principles of simplification remain the same: getting down to the unit quantity of work required and eliminating unnecessary tasks and processes.

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.