Efficiency View Industry: Interview Philipp Perego


Interview 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.

Targeted, honest cooperation

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.

Standard software a blessing

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.

Organization. Conception. Implementation

The automotive industry is often cited as a role model for the banking industry. Does that make sense?
In principle, yes, but then banks still have a long way to go. Tesla is currently demonstrating how to conquer a premium segment with highly standardized processes and products - the example also shows what disruptive approaches, such as the switch to electricity, mean and that investments must first be made in order to perhaps reap rewards.

And the fear of the much-cited loss of know-how?
Let's stay with the automotive industry: premium manufacturers sometimes cover less than twenty percent of value creation themselves, so the vast majority is handled via sourcing. Would anyone think of accusing these manufacturers of a lack of expertise in car manufacturing? That's just a question of organization, very focused design and consistent implementation of core competencies.

IT is a major cost block. Do you see potential for cost savings?
The cost of IT is not a problem if this operating resource is used efficiently, thereby increasing the cost efficiency of the entire organization and generating additional revenue thanks to IT. On the other hand, I see a lot of potential for cost reductions. Today, there is no reason to use and operate core banking solutions differently in terms of technology and organization. One explanation is that the structures have grown historically, the pressure to suffer is too small to establish standards, and many potential economies of scale can be realized.

What characterizes a digital bank?
It is the openness to try something new; to venture investments without a secure business case; to enter into cooperations and alliances; to put customers at the center of customer processes, not bank processes. Banks are still too often fixated on channels. Whether counter, mobile or e-banking: the customer will choose those channels that optimally cover his needs and thus generate benefits.

Is digitization the panacea for increasing efficiency?
No. Digitization makes business more complex and initially more expensive. But banks have no choice, because digitization will play an increasingly important role. Nor is it a matter of digitizing what can be digitized. What's more: digitizing processes end-to-end is not efficient if decision-making structures and control mechanisms remain complex - the processes must also be optimized. The virtue of the hour is to focus and use the available resources in a targeted manner. It is a matter of skillfully shaping the path to its digitization - that is a central strategic task.

*(This interview is part of our Finstar Space magazine).

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