Cost cutting or cost reduction refers to decreasing the costs related to production or cost activities without affecting the quality of services, products, or activities. The success of any industry significantly relies on how the organisation strategically manages its costs as compared to its competitors. There are many procedures used by the banking industry to ensure effective cost reduction. These include identifying savings, establishing a cost changing techniques and predicting the future savings.
According to Fuller (2016), the banking industry uses different tools and techniques for successful cost cutting. These are standard costing, overheads control, budgetary control, operations, and market research. Moreover, Fuller elaborates that the industry uses automation, planning, and control of funds. Consequently, cost cutting is used to increase the returns or profits, market shares, and helps in setting the competitive service or price for banking firms. Therefore, banking managers continue to develop various strategies and policies to cut cost to increase management efficiency and performance. Over the last three years, banks have adopted effective cost-cutting methods such as terminating over 10000 works, reducing employees’ allowances and salaries, halting new recruitment of the full-time workers, and hiring mostly the contract staffs when recruiting personnel (Lee and Isa, 2015). Perhaps most significantly, economic recessions have forced several banks to defer or cancel various training plans aimed at enhancing consumer services while maximising the operational efficiency.
According to Jeucken and Bouma (2017), the majority of banking expenses (70%) are from the workers and cutting cost would severely affect the employees. The industry sources have revealed that aggressive cost reduction has caused dwindling work safety, stressed out workers and heavier workloads to the employees who become unable to attend to their clients properly. Thus, cost-cutting measures have reduced the workers’ efficiency and morale. In their study, Stankeviciene and Nikonorova (2014) outline that cost cutting in the banking industry has created a hostile working surrounding that has resulted in a spate of resignations in current times with several employees quitting and migrating to more advanced economies such as Canada.
The banking industry is experiencing a high rate of employee resignation to other sectors because of the introduction of new cost-cutting measures that are negatively affecting their lives. As a result, the banking industry has started to fall with the majority of citizens not interested to be employed by the sector. According to a new telegram newspaper, many bankers consider migrating to Canada because of the new visa policy and better working conditions (Chukwunyem., 2018). Australian banks and others across the globe have implemented cost-cutting strategies because of many challenges. These include microeconomic threats, tight regulatory requirements, political interruptions (to raise more revenues during budget stress), and technology risks (Houston et al., 2014). Other challenges include the inability to provide competitive banking surrounding for the consumers and implementing the G20 international control response to the global financial crisis (GFC).
In their study Hong, Cheong and Rizal (2016) elaborate that the banks experience lower interest rates over a long period, severe home price threats, increased underemployment, and stagnating wage growth of 5.9%. For example, the latest news on Malaysia banking industry had attracted the attention of bankers when it experienced a significant reduction in its aggregate demand with negative GDP growth (Chan and Abdul-Aziz, 2017). Based on this, the banking sector has adopted information technology to reduce the operational costs while remaining competitive. Therefore, the industry has chosen to conduct cost-cutting to mitigate these challenges and thus becomes the reason for selecting the topic.
Problem Statement
The main aim for any conglomerate in the world is mainly to maximise profit. In recent unpredictable and fluctuating economy, several corporations such as banking industry experience a shrinking revenue with the adverse net loss. Therefore, a constant and effective cost reduction becomes the inevitable alternative for the banking industry. According to Jeucken and Bouma (2017, p.27), the banking industry has implemented cost-cutting policies due to a decline in productivity, the slowdown in an enterprise, or economic issues. However, saving on various expenses such as operations and recruitment is the key feature of a profit enhancement. Over the past few years, the banking industry has experience many challenges when implementing cost reduction strategies with many firms getting devastating outcomes. Cutting cost overnight is not the efficient strategy as it requires time to establish effective cost-cutting mechanisms on employees.
According to Fuller (2016), banking industry aims at increasing output and profits while reducing losses through cost reduction. The government benefits from more revenue and money to enhance the economy. However, cost reduction is severely affecting the employees in many ways. Cost cutting reduces the flexibility of the workers as they are required to work under heavy workloads with a given period. With the high cost of living, cost reduction creates more stress on the banking employees who are forced to work for many hours with reduced income. As a result, workers resign to seek for other better-paying sectors hence resulting in the decline of the industry. In their study Moradi-Motlagh, Valadkhani and Saleh (2015) assert that there are reduced functionality and customer loyalty among the employees. The positive benefits of cost-cutting include the provision of medical insurance coverage and retirement benefits over a specified period. Additionally, the process helps in boosting the returns to critical shareholders.
In conclusion, cost cutting has become more feasible making cost control very difficult to implement in banks. To effectively cut costs, the banks must add to the profits productivity by cross selling the financial products, reducing payroll loads, reducing the number of employees and manned branches.
References
Chan, T.K. and Abdul-Aziz, A.R., 2017. Financial performance and operating strategies of Malaysian property development companies during the global financial crisis. Journal of Financial Management of Property and Construction, 22(2), pp.174-191.
Chukwunyem, T., 2018. Cost-cutting takes toll on banks’ service delivery. [Online] Available at: https://newtelegraphonline.com/2018/01/cost-cutting-takes-toll-banks-service-delivery/
[Accessed September 28, 2018].
Fuller, G.W., 2016. Introduction. In The Great Debt Transformation (pp. 1-24). Palgrave Macmillan, New York.
Hong, T.L., Cheong, C.B. and Rizal, H.S., 2016. Service Innovation in Malaysian Banking Industry towards Sustainable Competitive Advantage through Environmentally and Socially Practices. Procedia-Social and Behavioral Sciences, 224, pp.52-59
Houston, J.F., Jiang, L., Lin, C. and Ma, Y., 2014. Political connections and the cost of bank loans. Journal of Accounting Research, 52(1), pp.193-243.
Jeucken, M. and Bouma, J.J., 2017. The changing environment of banks. In Sustainable Banking (pp. 24-38). Routledge.
Jeucken, M. and Bouma, J.J., 2017. The changing environment of banks. In Sustainable Banking (pp. 24-38). Routledge.
Lee, S.P. and Isa, M., 2015. Directors’ remuneration, governance and performance: The case of Malaysian banks. Managerial Finance, 41(1), pp.26-44.
Moradi-Motlagh, A., Valadkhani, A. and Saleh, A.S., 2015. Rising efficiency and cost saving in Australian banks: a bootstrap approach. Applied Economics Letters, 22(3), pp.189-194.
Stankeviciene, J. and Nikonorova, M., 2014. Sustainable value creation in commercial banks during the financial crisis. Procedia-Social and Behavioral Sciences, 110, pp.1197-1208.
