Banking - fixed and variable costs

Banking costs fixed costs variable costs
New answer on Aug 30, 2022
6 Answers
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Anonymous A asked on Aug 19, 2022

Hi,

does a fixed and variable cost perspective in Banking make sense, i.e., what would be the variable that a bank considers for their “variable” costs (e.g., number of customers, $ deposited)? Or would a direct vs indirect cost perspective make more sense, e.g., costs directly related to a specific service/product?

If a banking expert could shed some light on this, I would really appreciate it:-)

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Lucie
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replied on Aug 20, 2022
10+yrs recruiting & BCG Project leader

Hi there, 

I am not banking expert, but I would guess banking has probably very low variable cost and high fix cost and it declines with scale. I guess most cost can be saved with AI and digitalization, allowing banks to overcome the tradeoff between providing good service and minimizing operating costs.

Lucie

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Anonymous B on Aug 21, 2022

It would highly depend on the nature of banking operations: retail banking, investment banking, corporate banking and so on. While, what you state might be true for digital operations, for an investment bank, the primary costs are going to be staff costs and going by the classic definition of variable costs as that which can be eliminated in the short term, I would classify staff costs as such.

(edited)

Anonymous B on Aug 22, 2022

I just looked up annual report for JP Morgan chase 2021: (all numbers approximated) Compensation expense: $38B Non-compensation expenses: -- Occupancy : $4.5 B -- Technology, communications and expenses: $9.9B -- Professional and outside services: $9.8B -- Marketing : $3.0B -- Other: $5.4B Total expenses (non interest): $71B Clearly, compensation is the single biggest cost item (53%). It is a variable cost

Sidi
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replied on Aug 22, 2022
McKinsey Senior EM & BCG Consultant | Interviewer at McK & BCG for 7 years | Coached 350+ candidates secure MBB offers

Hi! There are many many ways how you can structure costs. You can do it according to business lines (for example interest vs non interest), business processes, functional groups, logical categories (e.g., fixed and variable), or many other. There is no "best" option! You have to just be aware of the fact that there are many possibilities, and that it is your task to find out, which kind of categorization makes most sense given the context and data available. This is done by means of clear communication with the interviewer.

Cheers, Sidi

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Clara
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replied on Aug 21, 2022
McKinsey | Awarded professor at Master in Management @ IE | MBA at MIT |+180 students coached | Integrated FIT Guide aut

Hello!

Both can be right and would be accepted (the criteria here is always, can you justify this well? Then it will go through). 

Usually in cases, when setting up a profitability tree, there is not a single right answer, but many, and what to put in variable vs. fix is a clear example of it. 

Hope it helps!

Cheers, 

Clara

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Ian
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replied on Aug 20, 2022
#1 BCG coach | MBB | Tier 2 | Digital, Tech, Platinion | 100% personal success rate (8/8) | 95% candidate success rate

Hi there,

Variable costs are always related to units.

Here, the units would essentially be customers (or, bank accounts).

So, any costs relating to each additional customer or customer action (transaction cost, server cost, etc.). 

I wouldn't do FC/VC OR Direct/indirect.

Rather, I'd breakdown costs into their main functions/categories (and this would depend on the type of bank)

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Anonymous B on Aug 21, 2022

Direct vs Indirect and Fixed vs Variable are both valid lens to analyze the cost structure. The type of cost is going to be important (going all the way down to cost centers). Typical costs are likely to be : IT, staff , marketing, vendor expenses. These would also differ based on the nature of banking operations. One way to understand these buckets better would be to refer to the annual reports/financial statements of the specific bank. In the end, the salient point is what is your objective in trying to analyze the costs and classify them. w.r.t your point on what would be the right variable, it would depend on the cost type. e.g., postage and mailing costs would have number of customers as the primary drivers for a retail bank. Forex costs (conversion charges etc) are more driven by dollar volume.

(edited)

Pedro
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replied on Aug 30, 2022
Bain | EY-Parthenon | Roland Berger | Market Sizing Expert | 30% discount in Feb & March

You are asking what makes more sense: a fixed vs. variable or a direct vs. indirect.

Here's the deal: you didn't state a goal. Without a goal it is impossible to know which one is better. Also, without a goal and a time period you don't even know what is variable (variable depends…on the specific variable / cost driver you are trying to optimize).

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Anonymous B replied on Aug 19, 2022

The primary variable cost would be staff costs i.e salaries, bonuses etc. fixed costs would depend for e.g. real estate (owned vs leased).

From a Business unit perspective, direct and indirect costs are important as well as cost allocations. For example, if IT is a cost centre, how are the IT costs (indirect costs) allocated to different P&L's of the business units responsible for revenue.

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Lucie gave the best answer

Lucie

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