Efficiency View Industry: Interview Philipp Perego

Mr. Perego, what does efficiency in regional banks mean in your eyes?
Unfortunately, this complex topic is too often reduced to price. For me, efficiency means that the services a retail bank provides to its end customers are of the required quality - consistently and at the most attractive TCO possible, i.e., taking all costs into account.

You have been following the discussion about efficiency for a long time. Your conclusion?
Compared to the past, the cost pressure has intensified and the requirements are broader. But the discussion still focuses on trendy and not on strategic topics.

How should this be understood?
Once regulations are in the foreground, then negative interest rates, then digitization. In parallel, the regional banks are emphasizing their proximity to customers and their traditional business. What I miss here is a deeper and systematic examination of truly new topics. Too often, banks want to have their supposed specialties implemented, even though those are not differentiating in the customer interface. And focusing on price does not bring efficiency and productivity per se.

What is your counter-proposal?
It's about being open to working together on a basis of trust, developing long-term visions and pursuing them consistently. That means abandoning proven paths, trying new ones, investing, and cannibalizing existing businesses if necessary. If you don't have the courage to face real challenges and actively address them, then over time you lose the ability to act.

Why is it not only banks that have such a hard time with this topic?
Entering unknown territory involves certain risks; you can make mistakes.

Should every bank define for itself what efficiency means to it?
In principle, yes. But the question remains whether the differences from retail bank to retail bank can really diverge significantly. I think not, because although geographically different areas are served, the core tasks and challenges are largely identical. Targeted and honest cooperation seems to me to be a promising recipe for defining and also realizing efficiency.

Nevertheless, banks are measured and compared on the basis of their efficiency.
Regional banks do not live on rankings, but on performance towards their customers, who are willing to pay a fair price for it. In my experience, too little focus is placed on customer needs. A bank is successful when it is recommended to others, not because of its position in a statistical analysis.

In your opinion, what does the cost-income ratio say about efficiency?
The CIR is a perfectly sensible ratio, but it must not become a religion. If costs are low because the bank is not investing in the future, the CIR is attractive in the short term, but in the longer term the market pulls away. A somewhat higher CIR in combination with growth is also not a problem.

Nevertheless, banks with a low CIR often differ in many respects . . .
Banks that need to be present in several locations have higher costs. But there are indeed institutions that operate much more efficiently, although they hardly differ from the others in terms of products and services. CIR is not only managed through costs, but also through revenues - a successful bank is active in both directions.

Do banks lack patience when it comes to increasing efficiency?
In my view, it's not so much a lack of patience as a lack of vision of where you want to go and the associated planning and implementation steps.

Does it make sense to express targeted efficiency improvements as a percentage?
Standardization for an objective comparison is demanding. At the same time, the target of improving the CIR by x percent does not go far enough and is too general. And: Who is responsible for implementation within the bank?

How do you think the targets should be defined?
Basically, in my opinion, a profitability analysis is needed - end-to-end and over the life cycle. In addition to the quantitative goals, the qualitative goals must also be on the radar.

Where do you see the advantages and disadvantages of regional banks in terms of increasing efficiency?
The simple business model, short decision-making paths and proximity to customers are among their advantages. At the same time, the banks have to take regional conditions into account. They have little energy to do everything themselves and have little experience in cooperative ventures; in some cases, they also lack IT know-how.

But if banks focus on their core competencies and cooperate skillfully, they definitely have the necessary resources and know-how internally to increase efficiency - then the necessary economies of scale can be achieved even for smaller banks.

How do standard software and bank-specific processes fit together?
Standard software is a blessing if it is used correctly, lives up to this standard and allows flexibility where it is absolutely necessary for market differentiation.

Nevertheless, new software is aligned with established processes . . .
. . . because there is less resistance to adapting the software to the prevailing conditions than to reorganizing the organization. Often, there is simply a lack of imagination.

What does industrialization mean in banking?
Processes must be designed according to industrial criteria. This applies primarily to businesses with a strongly processing character, such as payment transactions, securities and credit processing, to name a few examples.

What about outsourcing?
The opportunities for outsourcing are also underutilized. Today, banks are more like manufactures.

And the focus on core competencies?
The banks know their core competencies, but have not sharpened this enough. In addition, they take care of work and tasks outside the defined core competencies.