Reducing Complexity

in Retail Banking:
Simple Wins Every Time
Banks offer a dizzying array of products and services.
Add to the mix new regulations and shifting customer
needs, and the industry becomes even more complex.
One key to success: a streamlined product portfolio.

Reducing Complexity in Retail Banking: Simple Wins Every Time 1

Like houses with attics full of worn-out armchairs and discarded tables hidden above newly
decorated living rooms, most banks have a stockpile of overhauled, outdated products tucked
away behind a few shiny innovations. Many of these products require complex activities but
have nothing to do with new sales. And the glut of products is limiting not only profits but also
the flexibility to react to external pressures.

It is time to clean out the attic and focus on products and features that your customers not only
want but are willing to pay for. Gaining a competitive edge requires tackling the product
complexity challenge (see figure 1).

Figure 1
Simplifying the product portfolio can boost retail bank profits

Impact on cost-to-income ratio

Clean out
Stay lean Meet
customer
High cost-to- needs
income ratio –25%
• New digital
customers
• New regulations
• New transparency
• Product-centric view
• No product life cycle
• Complex product
blueprint

Today’s banking model Tomorrow and beyond

Source: A.T. Kearney analysis

A Complex Portfolio Cuts into Profits

Today’s bank customer wants a variety of products and services. Delivering such variety, however,
often results in an overly complex product portfolio that can cut significantly into profits.
Consider the front office: More products means bank tellers need extra time to explain and
process transactions for a variety of products, features, prices, and discounts. Each transaction
is likely to have a whole new set of relevant products for tellers to juggle, from cash payments
and making deposits to selling investment funds and saving plans and even educating
customers about new interest rates for certificates of deposit. This highly complex front office
not only frustrates customers who expect flawless treatment, it also drives cost-to-serve up
significantly. Our review reveals that 75 percent of processing costs in branch-focused banks
comes from the front office; in addition to the higher cost-to-serve, this front-office-centric
approach reduces the time available to generate revenues.

Even new sales can cut into profits. When customers can’t clearly see why some products
cost more than others, sales advisors often offer discounts as a last resort to meet their
demands. These discounts are usually tied to a trial period, but converting trial period prices
back to standard prices does not always happen for fear of losing customers.

Reducing Complexity in Retail Banking: Simple Wins Every Time 2

 The middle and back offices also feel the weight of complex product portfolios as they are
required to maintain the full portfolio for an undefined period—if a customer with a legacy
saving product inquires about a historical transaction, the back office needs to be able to trace
and document all related calculations.

In addition, IT costs are impacted by an overly complex portfolio. It is not uncommon for
banks to keep certain legacy systems running because they host a large portfolio of legacy
loans or long-term mortgages and prefer not to have to contact clients in the event of system
migration problems.

The Origins of Bank Complexity

Across the board, complex product portfolios push revenues down and costs up. But how did
the banking attic get so cluttered in the first place? Three reasons stand out:

A product-centric view

Traditional banking offerings tend to take a product view rather than a holistic, customer-centric
view of an offering, valuing the success of individual products more than the full revenue potential
of individual customers. Product managers are encouraged to maximize earnings in their product
category without considering the bank’s overall profit and loss. Products that create value and
additional complexity are only viewed in terms of the value created and not the complexity
caused. For example, a new loan product can create new business but make the application
process for other loans more complicated.

No product life cycle

The banking industry is not alone in launching products that sell for a while but then are
replaced by other products to entice new customers. Where banks differ is in not systematically
discontinuing old products when new ones are added (see figure 2). In consumer goods or
software, the idea is to shift customers to the next generation of products while phasing out
the old ones. Customers who resist are charged higher service costs.

Figure 2
As new bank products are unveiled, old ones rarely get phased out

100%
% of cumulative sales

80%
Sales volume

New sales

Grow Establish Move to “attic” 0% 20% Number of products 100%

Blockbuster I Blockbuster II Seasonal launch Recent launch Old product

Source: A.T. Kearney analysis

Reducing Complexity in Retail Banking: Simple Wins Every Time 3

It is not unusual for a bank to maintain portfolios with more than 500 products, two-thirds of
which are legacy products that do not generate new sales or revenues. One of our clients had
more than 15 different savings products, with just three accounting for 90 percent of new product
sales. And specialty products amplify the problem. One bank offered a savings product with
a variable interest rate that depended on lottery results and for a decade after the promotion
ended was still tracking lottery results.

A complex product blueprint

Digging deeper into the core product setup sheds more light on a bank’s complex blueprint.
There are hundreds of product variations, mainly the result of mergers, multiple brands, and
accumulated legacy products. The situation is exacerbated by a thousand or more specifications
in product features, from credit interest rates and preferred payment methods, to technical
parameters required for system implementation, and pricing features that describe the
algorithms of the fee and interest calculation. And different pricing—from standard fees
with special discounts for certain customers or product combinations to negotiated fees
for individual clients—make it yet more complicated.

Dig deep. Portfolios can be cut by

30 percent or more without causing
significant pain.
Now apply those combinations to processes such as product launch, administration, transactions,
and closings, and the complexity becomes even more incalculable. In Brazil, the number of
different risk-scoring models is estimated at well above 250 primarily because of the wide range
of products. In Germany, some product features were used by no more than 200 customers, but
the features still had to be implemented in IT and operations—at a significant cost.

Over time, banks have grown accustomed to these complex product portfolios and the external
factors—digital disruptors, regulatory environment, lack of transparency—that further
compound the situation (see sidebar: Outside Forces Pressuring Banks to Simplify on page 7).

Smart Simplicity
The perfect storm of internal and external factors is pushing the need for less complexity and
simpler product offerings. Our three-step approach can make an immediate impact and help
capture growing advantage in the drive to reduce retail bank complexity.

Clean out the attic

Get rid of the old furniture. Analyze products in light of customers, revenues, and costs to identify
the showcase pieces and the dust collectors. Evaluate the strategic relevance and regulatory
obligation of each product to determine its future need. And then dig deeper: Cleaning out bits
and pieces won’t make much of a difference. A portfolio reduction of less than 30 percent is not
enough. Depending on the starting point, portfolios can be cut by 30 percent or more without
causing significant pain.
Reducing Complexity in Retail Banking: Simple Wins Every Time 4
Build bank products like the automakers build cars

The product portfolio must become lean and stay lean. We believe the best tool for this is
modular product design, a concept that originated when Toyota and other automakers designed
components that can be assembled in a variety of ways to meet individual needs. Vehicles are
built on the same platform but differentiate on the accessories to capture economies of scale and
to meet drivers’ needs (see figure 3). The same principle is being applied to financial products
and services. U.S.-based Union Bank, for example, unbundled the traditional checking account
and launched Banking By Design to let customers create an account that fits their needs,
choosing only the features they want and opting out of those they are not willing to pay for.

Figure 3
Modular products: how to stay lean and capture economies of scale

Product A Product B Product C

Tailored feature Basic element

• Differentiates product • Accounts for about 80 percent of all product features

• Varies by product • Complements the same product group
• Example: value-added service or price point • Example: calculate interest and validity period

Source: A.T. Kearney analysis

A modular product offering requires some reengineering to synchronize core features, price
calculation algorithms, and processes across products. For example, when and how credit interest
rates are calculated must be harmonized across all products. This requires a detailed analysis of
as-is and to-be product designs, but it is worth the effort because modular products can have an
immediate impact on IT and operations and offer more flexible ways to launch new products.

Life-cycle management supports this new lean framework. When a product is launched, its
life cycle is already defined with exit strategies and policies in place via contractual clauses.
Pricing fluctuations must also be addressed: Revenues across all product categories can be
increased by 5 to 15 percent simply by standardizing pricing policies and giving advisors far less
leeway to offer discounts.

When built on the right platform, the portfolio has standard components, a well-defined mix of
basic and optional modules, and some customized products for key customers.

Match products with customer preferences

The last step in streamlining the product portfolio is to match products with customer
preferences—moving from a product-centric view to a customer-centric view. In Germany,
Reducing Complexity in Retail Banking: Simple Wins Every Time 5
independent financial advisors MLP and AWD offer customers comprehensive solutions
rather than single products, and Total Merrill in the United States offers a broad range of
advice about investments, retirement, banking, credit, and lending.

The idea is to take a customer view to generate revenue; this may include free-of-charge
basic items such as checking accounts and credit cards, while heftier charges are reserved
for less competitive but more valued products such as retirement provisions, mortgages,
asset allocation, and other offerings that meet individual customer demands.

While understanding customer preferences is not that difficult—it is often gained through deep
financial background information and data on recurring transactions—the trick is converting this
knowledge into upselling or cross-selling opportunities. Here, it is useful to take a lesson from
retail giants such as Amazon that excel at forecasting the next best product by understanding
and internalizing customer demands and predicting how these demands will develop.

The point in time when customers make a purchase decision is also shifting thanks to the
ubiquity of online information and interactions (see figure 4). The buy decision takes place long
before any face-to-face interaction occurs, so a business model that relies on personal advisory
skills will no longer work. Anticipating customers’ preferences and meeting their needs requires
a streamlined product portfolio across multiple channels with just the right mix of prices and
services. So different products are put at the forefront at different price points for young
customers than for senior citizens. Internally, organizational decision making must also shift from
a single-product perspective to a customer-centric perspective.

Figure 4
Bank customers drive product sales

Customer Lead Consultation Purchase Use

need generation

Past

Determine Interact with Product push: Sign on the Talk to family

product bank advisor consult with dotted line and close friends
preference branch sales (in person) about the bank’s
person performance

Present

Product pull: Perform Interact Close the deal Use social media
determine independent personally or via online or on a to broadcast
product need research, video conference mobile device thoughts about
by discussing comparison shop bank performance
with peers

Moment of purchase decision Interaction

Source: A.T. Kearney analysis

Reducing Complexity in Retail Banking: Simple Wins Every Time 6

Outside Forces Pressuring Banks to Simplify

Three undercurrents are their interest rates: The more Product complexity also drives
complicating retail banking’s Facebook “likes,” the higher the legal risks: If advisors are over-
already complex product interest rate. whelmed with a large product
offering: portfolio and do not fully under-
New regulations. As more stand what they sell, bad advice
New digital customers. Many governments implement new can lead to lawsuits.
industries are struggling to keep regulatory frameworks, such
up with the digital disruptors. In as Basel III and the Markets in New transparency. Financial
telecom, Nokia was the world’s Financial Instruments Directive customers are almost as obsessed
largest vendor of mobile phones (MiFID II), financial institutions will with transparency as regulatory
until Apple and Samsung began need to find new ways to manage bodies. When offers can be
to dominate the market because the associated risks. This will have compared with a simple mouse
customer preferences shifted long-lasting effects on the overall click, there is more price trans-
to smartphones. Banks are also complexity of operations. For parency and simpler, no-frills
feeling the digital shift, especially example, Basel III will require products. Retail banking
at the point of interaction and the banks to evaluate retail credit customers want uncomplicated
point of sale as customers now much more individually than products, from simple overnight
educate themselves through before. The more types of credit money accounts to mortgages and
online aggregators, expert products a bank has, the more investment accounts. The more
forums, and social networks. variations it needs to include in its aggressive players (new entrants
Investors are discussing stock- risk management systems, which such as Simple, an online U.S. bank
market predictions on Sharewise drives up IT costs. The more funds with no physical branches) offer
or using StockTwits to follow their a product portfolio consists of, the products that customers can
favorite companies. Germany’s more training is needed to ensure research, compare, and purchase
Fidor Bank lets customers shape the high quality of sales advice. online without a personal advisor.

Getting Smart about Complexity

Complex product portfolios are having adverse consequences for the retail banking industry, with
new regulations and digital further complicating the situation. A structured and smart approach
to complexity can directly improve product profitability. Now is the time to roll up your sleeves
and get rid of outdated products, build a framework for the future, and align the portfolio to meet
customers’ needs. Reducing complexity will bring both the quick wins and the enduring changes
needed to win the race for profits.

Authors

Torsten Eistert, partner, Stuttgart Mathias Ullrich, consultant, Frankfurt

torsten.eistert@atkearney.com mathias.ullrich@atkearney.com

The authors wish to thank their colleagues Achim Kaucic, Fergus Gordon, Daisuke Yabuki, and Ilnort Rueda for their
valuable contributions to this paper.

Reducing Complexity in Retail Banking: Simple Wins Every Time 7

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