Ben Bernanke is on record as saying that the Federal Reserve will keep rates low until mid-2013, and there is speculation from large money managers that it will likely last until the end of 2014. This will continue to fuel retail mortgage refinancing churn. There is always hope of selling additional products to mortgage borrowers, and the efforts are ongoing—though, in many banks, the strategy for 2012 and 2013 is to reduce cost.

A focus on cost reduction at the end of a recession is nothing new. This time, however, it is coupled with little hope of relief from fee income which is under pressure from regulators and consumers alike. It leaves fewer options to provide positive income trends. You can review the many headlines in 2011 to better understand the approach to regain momentum: “Citigroup Eliminating 4,500 Jobs in Its Latest Effort to Cut Costs”; “JPMorgan Chase Consolidates Trading Platforms to Reduce Costs”;  “B of A Tells New York of Plans to Reduce 324 Jobs in Manhattan”; and “Wells Fargo's Next Stage: Cost Cuts.”  

The question is: how will banks achieve their cost reduction objectives? We believe there will be two primary trends in 2012. First, major process redesign initiatives will focus on integration and better use of electronic forms, imaging, workflow, and process automation. Second, bank acquisitions will be undertaken with the intent to reduce administrative and extraneous costs; this will largely depend on the market opportunities that exist. These two strategies are not mutually exclusive and, in fact, we have assisted many organizations capture post-acquisition/merger benefits, as well as establish process designs that make it easier to assimilate future acquisitions.  

The shift in customer behaviors in retail banking is dramatic enough that rethinking the delivery channels and redesigning the supporting processes will be necessary to stay profitable in any event. Today, banks are cutting back on marginally profitable branches that were allowed to carry on in years past. The key is to target specific cost-of-delivery goals by making better use of business development staff and greatly reducing administrative burden.

We know that these improvement efforts in 2012 will bring about a downward shift in efficiency ratio that is necessary for the coming shakeup in banking. The cost of delivery will be lower through a variety of forms, and the approach to achieve it will require rethinking the delivery channels.