Banking in the new reality–performance improvement and cost take outs are key to a successful digital transformation program

By Mark Twerdok and Mark Ricci

“Are we moving fast enough?  Are we working and investing on the right areas/levers?”

These are the two questions that keep many banking executives up at night as they navigate a new path to their future.

When it comes to digital transformation, the nation’s largest, midsize and small banks are all facing the same challenges and goals:  Enhance their customer experience and lower their costs by identifying areas where technology can improve efficiencies throughout their operations.

From processing mortgages to taking deposits, banks are looking to drive down costs to compete with new entrants, who can enter the market faster, and at less cost.

How will they accomplish this? 

Today, every conversation we have with clients on digital transformation has an underpinning of performance improvement and cost take-out, which are key parts of the digital transformation story. 

Banking’s trifecta is a better customer experience, deeper penetration of products and services and improved operating efficiency.

Right now, the banking industry is facing significant economic headwinds. Revenues are decreasing, the result of near-zero interest rates. Fees are also decreasing, while capital requirements increase as loan defaults rise during the pandemic.  Expense reductions and improving operating efficiency are two key levers clients are focused on. 

The most important barometer banks look to is their efficiency ratio:  How much does it cost them for every dollar of revenue they earn?  Ideally, that number would be around 45 percent.

For brick and mortar banks with large distribution channels, that efficiency ratio can be as high as 60-70 percent when you include building out their digital platforms.  At that rate, it is difficult to compete with new entrants like the new digitally enabled banks --without large brick and mortar footprints—whose efficiency ratios are in the mid 40 percent range, working their way down to the high 30s.

Overall, digital transformation should lead to lower costs by increasing efficiency and expanding digital offerings. But the changes the banks need to make to their operations are complex and don’t come without large investments.  You are talking $400 million to $1 billion or more—depending on the size of the bank and whether they are starting from scratch or are already along their digital journey.


Financially, the banks need to engineer themselves to be more efficient, carefully analyzing their cost structure and determining where they can make cuts. They should look at their operations, branches, risk areas, procurement costs, the cost of loan originations, third party spending, IT and offshore spending, among other things and compare their efficiency against a set of benchmarks.

The good news is that banking customers are quickly adapting to the digital experience, increasing their on-line transactions and demanding easier access to products and services as they become more comfortable using on-line channels.

In fact, according to the Federal Reserve, commercial bank deposits increased to about $15.9 trillion, up from about $13.2 trillion at the beginning of the year.

Certainly COVID-19 has increased consumers demands for doing their shopping and banking online –but they were already moving in that direction before the pandemic.  Now, they are getting smarter and wiser and looking at what value they are getting for their money. According to KPMG’s Future of Retail Banking report, “value for money” is the key purchase driver for consumers, followed by “ease of buying” and “trust in brand.”

For banks to be successful, they will need to improve their analytics to better understand their customer’s needs and consider new operating models so they can efficiently offer the products and services consumers are demanding and in the way they want them delivered.

Of course, digital transformation doesn’t represent the first major shift in banking.

There have been many innovations in banking over the past few decades, starting in the mid 1980s when ATM machines became popular and led to many efficiencies. They also provided customers with a new and more flexible way to take care of their banking needs.  The global networking of ATM machines provided even more customer convenience and flexibility. 

If we knew then that we could complete these transactions and make deposits using our phone, we could have leap-frogged the ATM era and gone directly to using our phone for transactions.


Among other things, we could have cut maintenance costs, bank teller courier costs to replenish the cash in the machines and at the same decreased human error. 

Today, the banks have a once in a lifetime chance to invest in their future by implementing a great digital experience for their customers, but they must bring down their efficiency ratios to compete in this new reality.

Banking executives and management teams shouldn’t look at digital transformation as just a tactic to take costs out of the business.  What’s most important is that bank leadership teams change their mindset and behavior to focus on “continuous improvement.” Digital transformation cannot be viewed as a one-off project.  It’s up to the management team to make that part of their DNA. 

To help banking executives sleep better, it’s essential for them to create a new culture focused on continuous improvement that will be supported by all levels of management to deliver a compelling proposition to their customers, and also to be prepared for the next big thing to hit the banking industry. 

Mark Twerdok is the Advisory leader for KPMG’s U.S. Banking practice and office managing partner for KPMG’s Pittsburgh office.  Mark Ricci is KPMG’s Consulting Banking Industry Lead

To speak with the authors of this article, please contact Pete Settles.

Media contact

Pete Settles

Pete Settles

Director, Corp. Comm., Financial Services, KPMG US

+1 201-505-6065



Mark Ricci

Mark Ricci

Principal, Advisory, KPMG US

+1 704-371-8083
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