Bankers know in their hearts that a comprehensive efficiency program is preferable to a piecemeal approach focusing solely on the back office. But they still blanch at addressing costs buried in far-flung branches, because of the operational headaches involved in rooting out inefficiencies across complicated chains of command. Not worth the trouble, bankers argue.

Wrong. Our analysis of several European retail banks indicates that for payments-related activities (processing and servicing accounts and handling cash, for instance), branch costs are more than double those typically identified in the back office.¹ Labor associated with such activities is the biggest culprit, but there are also external costs, such as the fees paid to transport money to and from branches. We estimate that by addressing payments processes across the entire organization, a bank can lower its cost base by an additional 10 percentage points over the savings gained from traditional cost-cutting efforts. Bankers should follow their hearts more often.