5 Procurement Strategies for Banks to Cut Cost-to-Income Ratios

It’s no secret that banks today are facing tremendous pressure from different sides – rising lending rates, competition from fintech companies and neobanks, stringent regulatory requirements, and shifting consumer demands.

Additionally, lack of involvement of the procurement department in decision making, low coordination between verticals, insufficient resource capacity and ineffective budgetary planning have resulted in banks experiencing high cost-to-income ratios.

However, the right digital procurement tools and strategies can enable banks to beat volatility and inflation, gain a competitive advantage, and better channel costs from unrewarding endeavors to high-value ones.

In this blog, we lay out five key strategies to help banks drive cost efficiency, thereby stabilizing their cost-to-income ratios.

1. Cross-Functional Alignment to Beat Inflation and Volatility

All business functions and procurement need to align on costs. This is because cost understanding differs across sectors.

For instance, business focuses on budgets, finance analyses accrued costs, and procurement scrutinizes supplier spend. Here, cross-functional alignment is necessary with executive sponsorship for cost categories and budget owners to proactively solve disruptions.

2. Segment Categories/Suppliers to Identify Risks And Create Alternatives

Identifying spend areas at risk of inflation and the contractual exposure or protections will support cost-effectiveness. Reviewing indirect costs in relation to revenue isn’t a common practice. However, if it were, it could be an effective way to analyze if the cost is in proportion to the underlying business activity. For example, in sales and marketing campaigns, tracking ROI in the form of cost per sale can help identify and prioritize high ROI campaigns.

3. Leveraging AI

Artificial intelligence can help with both effectiveness and efficiency in banking. Deep learning leverages machine learning in investment banking to seamlessly execute multiple equity transactions every day globally. Moreover, robotic process automation (RPA) runs internal help desks and tracks and prevents manual errors. Several commercial solutions automate and optimize underwriting and expediting mortgage applications. AI helps ATM cash management by optimizing cash in devices, reducing the cost of reloads and scheduling machine maintenance.

4. Introducing Should-Cost Modeling

Increasing market volatility and shifting work practices have caused significant shifts to the business environment and costs. This calls for not relying on traditional budgeting methods. Banks need to leverage a tool with a should-cost modeling feature that can help know the actual price of goods and services at any given point in time. This clarity enables the company to analyze the drivers for budget disruptions like increased costs, pricing non-compliance or process inefficiency.

5. Enabling Easy Compliance Through Technology

Banks can ensure that their P&L and balance sheet benefits are compliantly realized through integrated end-to-end spend management. Invest in guided buying technology and automated buying channels to enable compliance with policy and suppliers without any extra efforts from the procurement team. Through technology, timely transparency of cost commitments to budget and policy compliance is created which helps finance and budget holders to proactively view, intervene and control their spend obligations.

For deeper insights on strategies on how to reduce spend cost in banking, download the GEP whitepaper Breakthrough Strategies for Spend Cost Reduction in Banking.