Why is UK retail banking blind to significant cost savings?

As consumers, we are more than happy to find the best mortgage deal, the best utility (now more than ever), and the most competitive auto insurance policy. Thanks to price comparison sites, we are able to compare prices and services with ease and earn far more rewards than they need to run.

So why are retail banks here in the UK lagging behind their global competitors in troubled economic times, given the tough economic times we are facing together after the pandemic, when they go through the process of periodically reviewing and renegotiating the contracts they are with have, take over? Third-party providers – not least in the payment and technology sectors? In fact, IT costs for core processing, payment providers, automation and digital platforms alone have increased by a staggering 80% since 2015, and the rise of digital banking over the past 18 months has only compounded that.

With budgeting season in full swing for many UK retail banks and building societies, it is all too easy to simply carry over multiannual provider costs from one year to the next, assuming these costs are set in advance and set in stone. This happens without hesitation and causes excessive costs year after year.

Reduced headcount and branch exhaustion remain the means of choice to offset the books for too many of our well-known bank names, and only recently it was reported that an additional 267 bank branches were permanently closed between April and June. This is equivalent to a 5% reduction in the overall store network and leaves far too many of the UK population without access to a nearby store, but it doesn’t have to be.

Elsewhere in the world, the process of contract optimization has resulted in customers realizing billions of dollars in savings. However, it is an immature UK business practice and a large-scale missed opportunity that could add up to a staggering £ 6 billion in savings for the entire UK retail sector.

Back to the cost of technology contracts, changes in behavior due to the pandemic mean that countless volume-based commercial agreements with contract caps and performance criteria now deviate significantly from their original parameters. This will lead to significant price increases and contract anomalies – simply because they have not been properly reviewed, assessed and renegotiated.

The reality is that too often procurement and business management teams simply incorporate historical supplier costs into their annual budgets and projections without challenging or scrutinizing the market until a contract renewal is due. This leads to a gross knowledge imbalance between providers and banks and building societies. In fact, third party vendors typically have dedicated teams that focus solely on negotiating and renegotiating their contracts with banks in order to maximize revenue. Conversely, UK banks rarely review their contracts and when they do it takes as little as 6-12 months to expire with no time to make credible changes, nor comparative data to negotiate better deals.

However, if retail banks and building societies here in the UK asked only five key questions during the budget cycle, they would be embarking on a path that would be more likely to periodically review and renegotiate those contracts and, consequently, reap the benefits. These five questions are:

1. Are we getting the best vendor offers on the market? A contract that is competitive at the time of signing is no longer absolutely necessary as market prices and conditions as well as an institution’s own needs have changed.

2. Can we renegotiate existing contracts? It is often believed that a long term contract is set in stone by its renewal date, but it just isn’t and many vendors will renegotiate early on to retain customers longer term.

3. Which contracts will expire in the next 12-36 months? Switching providers can be time consuming, and they know it. To be in the best negotiating position, renegotiations should start two or more years in advance.

4. Do we have a reliable overview of the market price? Do you know what price other organizations are charged for a comparable product or service? Banks do not know what price their competitors and peers have been given and often only consider long-term contracts every five years or more. Both dimensions lead to a clear lack of comparative data.

5. When was the last time our invoices were checked? Complex invoices and invoices are often not properly understood or questioned by the bank and, coupled with errors, there are no major savings and service optimizations.

These are five simple questions, but they will serve as a first step in helping UK retail banks and building societies identify obsolete contracts that can be renegotiated for significant savings and efficiencies – this is an opportunity to do this not to be missed!

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