Squeezing Expenses, Safeguarding Revenue: Making Smart Tradeoffs in Efficiency Management

High bars in compliance, complexity, and customer satisfaction challenge financial institutions’ ability to cut costs, despite the industry’s tenacious push for efficiency and productivity. Running a business model built on trust and safety is expensive, and tradeoffs between belt-tightening and growing revenue don’t always yield the expected outcomes, as banks have learned. 

Instead of separating revenue and cost initiatives, ProSight found, institutions are beginning to integrate their expense management and top-line optimization strategies, rethinking and refining operations with both in mind. Artificial intelligence (AI) is a major example. Institutions are prioritizing profitability and cost-effective scalability in the most promising service areas ahead of slashing for short-term financial benefit. 

“Where they need to start is with their mission, vision, and values, putting the long-term goals of the institution first. A focus there will ensure you’re not cutting things inappropriately,” said Chad Kellar, advisory partner at accounting and consulting firm Crowe LLC. 

Turning those goals into strategy requires a deeper understanding of product and service lines than most banks have. “It’s segmenting and analyzing the total cost of ownership of your products and channels, including activity-based costing, just like we would see in a manufacturing company,” Kellar said. 

Knitting together data that provides a complete picture of service and infrastructure consumption can help with quantifying product profitability, said Graham Tasman, an advisory principal and banking industry lead at Grant Thornton Advisors LLC. “If institutions can get this better end-to-end view, they can optimize the mix of products they’re offering and understand which costs are actually necessary.” 

Newer technologies such as time-dependent, activity-based costing solutions can enable institutions to model how different product uses create varied demands on costs and services, including call centers and delivery technology, he said. 

For banks, costs generally remain the concern; controlling them has been a whole other matter. McKinsey & Co. points out in recent research that bank operating expenses have been rising for 15 years as the industry has focused more on quick fixes and competitive agility than on addressing core operational problems.  

An improving efficiency ratio—defined as noninterest expense divided by net revenue— can mask those expenses for now. In today’s higher interest rate environment, rising net interest margins and revenue offset increases in banks’ cost base, such as higher salaries, employee benefit expenses, and technology spend.  

Indeed, in the third quarter of 2025 (the latest data available), while noninterest expense for FDIC-insured financial institutions rose, higher revenue and net interest income more than outpaced it, leading to a lower (better) aggregate efficiency ratio than in the previous quarter. 

Falling interest rates typically compress net interest margins and magnify higher noninterest expenses in the numerator of the ratio, Kellar pointed out. 

The Cost-Cutting Trap 

When banks attack the numerator, i.e., by lowering expenses, they might improve their efficiency ratio temporarily, but they risk eroding the denominator (revenue) longer term. Cost-cutting sounds like an easy road to success, but too much can undermine customer relationships, create undue risk, and hurt revenue, especially when the reductions affect service, experts say.  

Fewer live agents in call centers, for instance, can lead to longer wait times, agitating customers. Operational failures, too, can appear worse to consumers when resources aren’t available to address them in a timely way. Recent research by Oliver Wyman found that banks that closed more branches than the market average in a particular year saw their cost-to-income ratio worsen the following year more than those that closed fewer branches.  

“If online banking goes down or a customer process fails, it creates strong negative sentiment around your services,” Tasman said. “When trust erodes, it can be hard to recover. It’s a brand killer.”  

When customers leave, banks ultimately pay more to replace them and to rebuild their own ailing reputations—a double whammy to revenue and expense. “Think about all the time and effort it takes then to build up resources, do business development, and acquire new customers. It’s counterintuitive to growth,” said Jessica Pinkston, a senior director at banking consultant Cornerstone Advisors. 

When workforce reductions enter the plan, replacing the effort and experience of staff, too, can be more expensive than banks expect. While layoffs are sure to cut rising labor costs, they can upend key processes and drain critical knowledge from the institution. For an industry carrying a heavy load of technical debt, retaining staff with knowledge of legacy systems, for example, can be critical to system stability and resilience. 

Then there’s the customer relationship. Having the right people in place, Pinkston said, can be a boon for revenue. “By being more intentional about customer engagement and bringing the right people together across the bank to offer holistic solutions, banks have a better opportunity to increase revenue,” she said. “They are able to talk about products and services as value-adds, rather than focusing on low-cost products and fee waivers.” 

They also have options for deploying those people differently, she added. 

As they prepare for growth, institutions are trying to figure out how to do more with the resources they have, Pinkston said. That includes leveraging technology but also aligning functions properly to avoid duplicative effort and to strategically improve productivity. 

Banks, for instance, are experimenting with ways to upscale their workforce, such as broadening the remit of branch staff to perform as universal bankers, capable of meeting a wide range of customer needs, including account servicing, product sales, and  
loan assistance.  

This aligns with branch rationalization strategies for improving site yields and overall efficiency. Some are layering new technology, such as Interactive Teller Machines, into branches to reroute transactional banking to lower-cost service channels while maintaining a positive customer experience. 

Making Hard Choices 

As banks have discovered, there’s no surefire formula for long-term productivity that works for everyone. Institutions are making thoughtful, and hard, choices about where and how to operate and evaluating the consequences along the way. For David Brager, president and CEO of California-based Citizens Business Bank, keeping a tight focus on the bank’s target market and how it delivers its services is essential to running efficiently.  

Citizens’ 44.4% efficiency ratio in the fourth quarter of 2025 is among the best for banks nationwide, well below the 60% to 70% range of community banks and in line with the 40% to 50% ratios achieved by national banks. To achieve this, Citizens—with assets of $15.63 billion—targets small and medium-sized businesses and their owners, serving them mainly through technology while minimizing the bank’s branch footprint. 

Brager said matching customers with the right products and offering a diverse menu of services create opportunities to grow revenue. “There are a number of arrows in our quiver that we use to sell deep into our customer relationships,” he said. That includes tailoring wealth management, insurance, and retirement plans to meet the needs of the bank’s customers and their employees. 

“If we’re providing more services or financial products to that relationship, it just makes that relationship more efficient, more profitable. It also makes our clients more efficient and profitable as well,” Brager said. 

Capturing more noninterest revenue is essential, as competition for deposits and interest-bearing products intensifies among traditional and nontraditional financial services providers. Relationships grow when banks anticipate and fill their customers’ changing needs for services, Grant Thornton’s Tasman said.  

“Over a lifetime of experiences, customers’ financial services needs evolve. Institutions are striving to achieve timeliness and product fit throughout the life journey,” he said. 

In treasury management, institutions can build revenue by better partnering with their business customers, taking an emotional interest in their customers’ success and goals, and explaining how the bank can meet their needs, Pinkston said. 

Deregulatory Rethink 

Improving efficiency and productivity doesn’t happen in isolation. Market, economic, and regulatory factors also heavily influence banks’ priorities and investments. Execution comprises design, planning, tools, and people.  

The more flexible regulatory environment under the current presidential administration, Crowe’s Kellar argued, presents an unusual opportunity to review, through a different risk lens, all these ingredients across the enterprise. With regulatory attention on outcomes and systemic risk rather than process minutiae, banks can reevaluate what resources they really need to deliver the safety and trust markets, regulators, and customers expect.  

“This is the land of opportunity for redesigning operations around the bank,” Kellar said. Institutions have “air cover” under this regulatory regime to streamline operations and remediations without sweating overly fussy reviews and oversight, he added. “Banks could really benefit from redesigning operations where they throw a lot of bodies to solve a problem. It’s about responsible optimization.” 

While Bank Security Act compliance remains a top priority, he pointed out, institutions might consider reviewing the monitoring and response teams they typically flood with people for new ways to achieve the same vigilance. “Banks sometimes find themselves putting in detective controls or human overlays to processes and letting them run, without asking whether they’re still necessary,” Kellar said.  

He also suggested that the opportunities to redesign operations aren’t limited to risk and compliance. Still, risk evaluation and management should be central to every transformation conversation. “What we are saying is that risk needs to be at the table to make sure change happens responsibly and transparently,” Kellar said. 

That includes proactively engaging risk to support growth, not just cost-cutting. In a separate article published in this Executive Report, Mark Midkiff, a former chief risk officer and now special advisor at Ludwig Advisors, explains how a well-calibrated growth risk management strategy not only mitigates downside risk but also enables banks to act swiftly when opportunities arise.  

AI: The X Factor 

Few advancements have captured the imagination of efficiency-minded finance and business leaders like AI, particularly generative and agentic AI. For banks, AI has become a productivity holy grail of sorts, promising meaningful upgrades in worker and process output accompanied by significant savings. 

AI chipmaker and solutions provider Nvidia found that 89% of respondents to its State of AI in Financial Services: 2026 Trends survey were already seeing AI both increase revenue and reduce annual costs at their institutions. 

But the million-dollar (billions, more likely) question for banks now three years into investments is exactly how dramatically AI will transform work and deliver efficiency across the entire enterprise. 

As banks find new ways for AI to improve service delivery and personalize the customer experience, balancing cost and revenue objectives will be the goal. Effective planning for AI isn’t just about focusing on its impact on internal operations. It’s about analyzing what implementation means for customers and revenue—in the spirit of improving efficiency ratios, a way to raise the denominator (revenue), Tasman added.  

AI, for example, can help financial institutions grow revenues more efficiently by bringing new customers through the door and recommending products and services to them as time goes by. AI-generated prompts can help bankers find products that fit a customer’s financial circumstances and suggest products, such as special credit card offers or deposit rates that link to mortgage refinancing offers, to build relationship stickiness, Tasman said. 

“Institutions know intrinsically that by making every customer interaction positive, they have opportunities to introduce new products, increase wallet share, and build customers for life,” he said. “AI can help.” 

Banks are sanguine about potential savings and efficiency boosts from AI in their workforce. In a recent survey from McKinsey & Co., conducted across all industries including financial services, 32% of respondents said they expected the number of employees across the enterprise to decrease in the next year because of AI. 

But they’re also excited about its potential to move their workforce up the value chain with AI’s help. While acknowledging AI’s ability to cut costs, Crowe’s Kellar saw upskilling as the more alluring and potentially meaningful shift AI will bring to banking. “You’re going to see knowledge workers become judgment workers,” Kellar said. “Today it’s loan production, underwriting, and scoring. Tomorrow it’s, ‘Do I understand all the variables and intangibles going into this underwriting?’ That’s where the workforce needs to be.”