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Lean Banking: Application of lean concepts and tools to the banking industry

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 The 2016 International Conference on Systematic Innovation
July 20-22, 2016, Lisbon, Portugal

Lean Banking: Application of lean concepts and tools to the

banking industry
Jéssica Xavier dos Santos, Maria do Rosário Cabrita

UNIDEMI, Department of Mechanical and Industrial Engineering, Faculty of Science and

Technology, FCT, Universidade Nova de Lisboa, Lisboa, Portugal

jmx.santos@gmail.pt, m.cabrita@fct.unl.pt

Abstract

In recent years and especially in the wake of the worldwide economic recession banks
have been subject to growing external pressures which combined to its internal constraints led
to structural changes and aroused several challenges with a negative impact on their activity.
To thrive in the new business environment and ensure sustainable profitability in medium and
long term, these firms are focusing on the persecution of new management strategies that
provide more efficient and cost effective services without jeopardizing quality from the
customer perspective.

Cited as a holistic approach that aims to achieve operational excellence and create more
value with fewer resources, lean management has been increasingly seen by banking services
executives as a suitable solution to enhance competitive advantage and improve banking
businesses performance. But in spite of its acclaimed success, especially when applied to
manufacturing companies from where it stem from, the deployment of lean in a service
enterprise still poses new challenges and obstacles that may even compromise its feasibility.

The purpose of this paper is to discuss the application of lean principles to banking services,
including its challenges, potential benefits and critical success factors. The methodology used
was a case study research, in which is described and analyzed a lean approach in a real banking
environment. The findings of this study shows the great potential of lean management as a mean
to maximize banking processes’. However, and as stated in previous studies, in order to achieve
a sustainable and lasting success, lean practices must be adjusted and become intrinsic to the
firms’ culture.

Keywords: Banking Industry, Lean Banking, Lean Management, Performance

 The 2016 International Conference on Systematic Innovation
July 20-22, 2016, Lisbon, Portugal

Introduction

In recent years the influence of external forces and internal constraints have fostered a
paradigm shift in the banking industry. The global financial crisis affected the macroeconomic
environment and as a consequence has impacted negatively companies’ results and financial
situations (Dimitras, et al., 2015), raised strict governmental regulations and spread a global
climate of uncertainty and distrust towards banks. (Leyer & Moormann, 2014). At the same
time there’s a need to juggle the prospects of development of the customer relationship model,
to enable the meeting of modern costumer’s needs, and face increasing competitive pressures,
especially with the emergence of new players and disruptive solutions in the financial market
(Staikouras & Koutsomanoli-Fikipaki, 2006). This new environment has triggered a resurgence
in the importance in uplifting banks core business performance to reduce operational costs but
still retain a sustainable competitive advantage.

Most banks are endowed with slow and prone to error processes which contribute to the
lack of flexibility, efficiency, effectiveness and responsiveness to cope with these challenges
(Mathews & Muguntharajan, 2012). Accordingly they are led to pursue new strategies and
alternative management models that enable value creation, risk mitigation and reduction of
resources consumption, without jeopardizing quality from the customer perspective, in order to
ensure a sustainable profitability and enhance their competitive position (Moyano-Fuentes &
Macarena, 2012).

As a practice that focus on greater operational efficiency through waste elimination and
continuous improvement lean management has increasingly been perceived as an effective
methodology that contributes companies to improve their businesses performances and prosper
in this challenging environment. This production ideology first became known during the 1950s
after being developed and successfully implemented at Toyota Motor Company. While adopting
this new system, at the time known as Toyota Production System (TPS), the company was able
to object the seemingly western supremacy and became the largest and most successful
automobile manufacturer. Ever since, it has been continuously developed, enhanced and has
become one of the most prominent and acclaimed management practices across the world
(Leyer & Moormann, 2014; Alsmadi, et al., 2012).

Lean is behold as a paradigm with potential to create more value for customers using less
resources. By incorporating a collection of principles, concepts and tools into business
processes it aims to minimize waste along value streams to provide products with greater quality
and variety at lower costs and shorter lead times (Arfmann & Topolansky, 2014; Čiarnienė &
Vienažindienė, 2012). Although there’s not a unanimous universal definition of this paradigm
there’s a consensual perception of its value as a holistic and sustainable approach for
 The 2016 International Conference on Systematic Innovation
July 20-22, 2016, Lisbon, Portugal
management processes of an organization (Arfmann & Topolansky, 2014; Văduva, 2011). It
aspires to optimize costs, boost products or services quality and improving productivity
(Alsmadi, et al., 2012; Văduva, 2011), thus increasing companies’ agility, flexibility and
competitive advantage (Wang & Chen, 2010).
Although the origins of lean stem from manufacturing companies it has been widely adopted
in non-manufacturing areas (Vlachos, 2015). However and in spite of its widely acclaimed
success, its application in business environments that differ so substantially from manufacturing
still arises multiple challenges that may even compromise its feasibility. Upon its application in
banks, for example, huge enterprise wide benefits are expected. But, in order to achieve those
goals, all efforts should be made to adjust lean principles in to the context of banking services
working environment and address its major particularities (Leyer & Moormann, 2014).

Several researches and studies have been carried out to further understand, analyze and
evaluate the deployment of lean principles to the service industry. But very few have addressed
specifically the nature and distinctive characteristics of banking services. The aim of this paper
is therefore to analyze the lean banking concept and its feasibility as a mean to maximize
banking processes’ performance. To achieve this main goal a case study was conducted to
enable the exploration of a lean approach to a real banking environment.

The paper is structured as follows. Section 2 provides an overview of the dissemination of

lean paradigm to the services sector. Section 3 focuses on lean banking and its key
characteristics. Section 4 describes and justifies the selection of the research methodology.
Section 5 gives a presentation of the case study conducted and reports its main findings. In
section 6 there a draw of conclusions and presentation of the research limitations.

Lean Services

As stated by Alsmadi et al (2012), Lean has been primarily used to improve manufacturing
processes but it is increasingly being applied to a wide range of service operations.

The outstanding importance of focusing on the service industry is reflected in the increase
of its share in the gross domestic product (GDP) of countries across the whole world, with
especial prominence in the world’s largest economies (Portioli-Staudacher, 2010). Moreover,
there’s also a sense of greater opportunities for improvement in the tertiary sector (Alsmadi, et
al., 2012; Laureani, 2012). In comparison to the manufacturing area the level of productivity in
services has been underwhelming (Suárez-Barraza, et al., 2012). And while manufacturing
industries are considered to be progressive and efficient, service industries are perceived as
primitive and inefficient (Canel, et al., 200).
 The 2016 International Conference on Systematic Innovation
July 20-22, 2016, Lisbon, Portugal
With growing external pressures, especially due to the current economic context,
increasing, the increasing competitiveness on global markets and the evolving customer
expectations, services companies are challenged to increase flexibility, improve quality and
become as efficient and cost effective as possible (Suárez-Barraza, et al., 2012). Hence the
increasing efforts to find profitable solutions that allow organizations to achieve long-term
enterprise wide improvements.

Womack and Jones were among the first authors to propose the deployment of lean
principles to the tertiary sector (Poksinska, 2010). Researchers Bowen and Youngdahl are also
cited as pioneers in this scope, as they conducted the first set of lean services case studies and
published their respective results. Ever since the paradigm has been evolving and has been
spread to different types of services such as healthcare (Machado & Leitner, 2010; Kim, et al.,
2006), financial services (Mathews & Muguntharajan, 2012; Văduva, 2011) and public services
(Suárez-Barraza, et al., 2009), among others.

The service industry is endowed by its own particular characteristics, which differentiate
it from manufacturing. Accordingly, the application of lean principles, which stem from a
manufacturing background, to services companies encompasses new limitations and raises new
challenges. The key distinguishing characteristics of services can be summarized in (Canel, et
al., 200; Arfmann & Topolansky, 2014):
1. Inseparability. Since most services require simultaneous production and consumption
and consequently the costumer participates actively in the production process.
2. Intangibility. An attribute that refers to the impossibility of apprehending a service in
the same manner in which goods can be sensed.
3. Perishability. Defines the inability to store services which leads to greater caution to
fluctuation in demand.
4. Variability. This defines the singularity underlying each event and resulting lack of
consistency when providing a service. As mentioned by Canel et. al (2000) “the quality of a
service can vary from provider to provider, from customer to customer, and from day to day”.

Therefore to achieve a successful lean transformation in a service environment these

distinctive characteristics and potential theoretical inconsistencies raised must be taken into
account. As expressed by authors Arfmann and Topolansky (2014), it is a fallacy to assume that
a model fully developed for the manufacturing sector can be applied and work in services, an
adjustment in required.

In manufacturing the lean paradigm is already a well-established and highly acclaimed

management practice. But in regards to its expansion to new elusive areas such as services,
researches and successful applications that provide specific, practicable and integrated
 The 2016 International Conference on Systematic Innovation
July 20-22, 2016, Lisbon, Portugal
frameworks that address properly its attributes are still scarce (Leite & Viera, 2015; Suárez-
Barraza, et al., 2009). While some service companies’ experience successful lean
transformations others exhibit fragmented efforts and consequently fail to achieve the expected
results. Which suggests that the key factors for success in this area reside in the strategic
approach adopted within a specific scenario.

Lean Banking

In banking such as in other areas the main business focus is to achieve profitable operations
and meet costumers’ expectations while providing efficient, reliable and affordable services.
These last few years, this industry have been notorious for the successive amendments driven
by multiple forces of change. The main drivers to this change are interrelated and can be
summarized as:
1. Globalization. Which refers to the increasing integration of international financial
markets and consequent need of banks to expand their operations, physical branches and
subsidiaries to foreign countries (Cetorelli & Goldberg, 2012).
2. Deregulation. The gradual process of reducing regulation that has effects in banking
activity and economic performance.
3. Universalization. In respect of economic liberalization, globalization and financial
deregulation, competitiveness in the financial sector has increased significantly (Zafar, 2012).
As a consequence banks are increasingly expanding their range of financial services offered in
order to sustain their competitive position and market share (Zafar, 2012).
4. Innovation. To meet evolving customer expectations, consolidate their competitive
advantage and avail opportunities created by technological improvements and innovations,
banks have been conducting constant efforts to innovate their products and services (Akhisar,
et al., 2015).
5. Concentration. In many countries, during the last years, there’s been an increase in
concentration within the banking industry that has implications in its activities (Santillán-
Salgado, 2011).

In addition, the economic recession experienced across the world since 2008 impacted this
industry and raised new changes and challenges, such as the lack of customers’ confidence and
spawn of new regulatory actions

With regard to the changing environment banks increasingly devote to shaping their
business and pursue new strategies to cope with the new challenges aroused. As a practice
known to promote operational excellence and provide great benefits without incurring high
investments the lean methodology has increasingly been perceived as a suitable solution to meet
 The 2016 International Conference on Systematic Innovation
July 20-22, 2016, Lisbon, Portugal
banks’ needs. The deployment of lean tools and concepts to the banking environment gave place
to the term lean banking.

As cited by Hatzakis et al. (2010) “services represent a large category that encompasses
firms as diverse as retail establishments, transportation firms, (…) real estate and healthcare”.
This wide variety compels a customized approach to meet the needs of each type of services
firms. For example, banks such as others financial services companies primarily deal with
originating and facilitating financial transactions (Hatzakis, et al., 2010), but even among them
there are particularities that must be properly addressed. Banking services are broadly
distinguished by its high volume and heterogeneity of customers, long-term contractual
relationships between customers and firms (Hatzakis, et al., 2010), silo mentality,
decentralization of activities in front and back office and high degree of employees’
independence in decision making.

These distinctive banking characteristics along with the shared services nature mentioned
in section 2, may impose new challenges in lean implementation.

The organization silos, for example, when combined with decentralized activities and the
number of specialists required for certain banking operations contributes to an increasing
complexity in coordinating processes activities and thus disrupts the achievement of the
continuous flow a lean enterprise should have. Silo mentality also inhibits a perception of an
organization as a whole. Each department or function focus exclusively in minimizing waste
directly related with the outputs they produce, underrating the true dimension of waste in
customers’ perspective. In regards to their nature, banks are also known for their lack of
standardisation (Alsmadi, et al., 2012), a key tool in lean management (Machado & Leitner,
2010).

Another pivotal goal of this methodology is eliminating waste, non-value added activities
in Japanese also called muda. Possible mudas identified in these type of services can be caused
by the lack of standardized procedures, providing customers more options than the valued,
having multiple and unnecessary points of approval, information systems downtime and time
spent waiting for an information or approval, among others. Services intangibility affects the
perception, mensuration and thus the reduction of these inefficiencies.

Toyota developed a model, named House of TPS, depicting graphically the combination
of lean concepts to achieve a truly lean system. The representation has intrinsic that as a house
a lean system is only as strong as its weakest part (Liker & Morgan, 2006), which reinforces
the importance of each element and attaining a synergetic effect between them for a successful
lean implementation. Failing to acknowledge this fact and insisting in a limited vision or
 The 2016 International Conference on Systematic Innovation
July 20-22, 2016, Lisbon, Portugal
understanding of lean management is one of the main causes for unsuccessful efforts (Losonci,
et al., 2011).

The dissimilarities when compared to manufacturing mean there’s a significant complexity

while trying to transpose these concepts and tools to a banking environment. Willing to
replicate the success experienced in manufacturing multiple researchers have been trying to
understand the value or purpose behind each lean concept or tool in services. According to a
research conducted by Leite et al. (2015) the four most commonly used tools adapted and
applied to lean service are: value stream mapping (VSM), production balancing (heijunka),
just in time (JIT) and 5S standardization. VSM is a visual tool that supports waste
identification by enhancing workflow understanding, heijunka enables the suppression of
workload variation and thus promotes a greater stability, JIT is a philosophy that seeks to
eliminate waste and finally 5S standardization is a workplace organization method.
Multiple international banks such as BNP Paribas and Bank of America have applied lean
concepts and tools to their operations. A literature review highlighted the following benefits
from these type of lean implementations (Văduva, 2011; Lasater Institute, 2008; Accenture,
2010):
 Lead time reductions;
 Increased quality of services;
 Increased productivity;
 Cost reduction;
 Gain of competitive advantage;
 Increased customer satisfaction.

The authors Womack and Jones (1996) described five lean principles: specifying value
from customers’ perspective, understanding the value stream, improving the flow, producing
based on customers’ pull and striving for perfection. Taking into account those principles,
banks characteristics and reflections from multiple research studies (Losonci, et al., 2011;
Leyer & Moormann, 2014; Christodoulou, 2008; Vyas, et al., 2015), the critical success
factors for a holistic lean banking implementation can be summarized as the following:
 Customer segmentation and focus;
 Identification of value drivers;
 Diagnostic and analysis of the companies’ current state;
 Definition of a shared vision and goals;
 Raise consciousness and awareness;
 The 2016 International Conference on Systematic Innovation
July 20-22, 2016, Lisbon, Portugal
 Employees empowerment and training;
 Top management commitment;
 Gradual implementation;
 Measuring success and sharing the results;
 Creating a lean culture.

Methodology

In addition to the literature review the present paper was developed based on a case study,
a research method with growing prominence in the education and social science field. As cited
by Ying (2009), this methodology “allows an investigation to retain holistic and meaningful
characteristics of real-life events” as it attempts to understand, explore or describe them. An
explanatory study inquires a greater knowledge on a particular phenomenon to support a theory,
an exploratory study aims to identify casual links between factors that contribute to the
occurrence of certain events and finally a descriptive study provides an accurate representation
of the phenomenon being studied (Meirinhos & Osório, 2010) .

The case study conducted within the development of this paper was both descriptive and
exploratory. Considering the lack of practical examples and scarce knowledge of lean banking
it’s important to not only provide a description that can serve as basis for other lean banking
implementations but also conduct a critical analysis to help develop and strengthen the theory.

Case Study

The case study in this research is a practical project to simplify and improve the
operational performance of a front office banking process. The case company is one of the
largest Portuguese banks, which has more than 2 million customers.
While offering a wide range of banking and financial products and services the bank has
not only consolidated its position in Portugal but it’s also a reference institution in other
countries. For many years the bank remained profitable and revealed a positive growth trend
in markets in which it operates. However the outbreak of the global financial crisis raised
new adversities such as the loss of customers’ confidence and the reduction of profit margins.
As a result the bank had to be recapitalized and in counterpart was coerced in a strict
restructuring plan. More than ever, the institution was pressed to revise its operating model
in order to streamline its processes and achieve an effective cost reduction without
compromising its competitive advantage. Against this scenario lean was perceived as one of
the management strategies able to help the bank prosper.
The 2016 International Conference on Systematic Innovation
July 20-22, 2016, Lisbon, Portugal
The steps that the project team took prior the lean implementation were the following:
1. Processes prioritization;
2. Selection of agents of change (bank’s employees);
3. Preliminary process analysis (through a gemba walk and documentary research).

After these steps there was an identification of improvement opportunities and the
proposal of suitable solutions. Lastly there was a final selection of the solutions to
implement, handled by the top management. Throughout the whole approach there was an
active participation of the bank’s employees from different departments and the support of
the top management.
Targeting to improve a process that would provide a positive and significant impact on
the bank, the processes prioritization was based on the results from a survey that inquired
front office employees on the most critical processes. These employees had to choose up to
three processes that in their perspective had greater opportunities for further enhancements.
As shown in figure 1, two processes clearly stood out, the processes for account’s opening
and maintenance. Nonetheless, in the present study the focus will remain on the latter.

Insurance 14%
Personal Credit 14%
Investiments 16%
Process

Credit for businesses 20%

Mortage loans 21%
Others 29%
Account Opening 66%
Account Maintenance 77%
% of selection
Top 1 Top 2 Top 3
Figure 1 - Survey results

Customer’s account maintenance is one of the banking operations that further fosters the
establishment of a long term bank-customer relationship. It encompasses any changes that a
customer may wish or is obliged to perform in order to manage their bank account to their
will. The process requires coordination between employees from front and back office and
it’s usually performed through a software application. Its operations mainly include
customer’s documents collection, scan and indexation, printing of documents such as terms
and conditions and forms’ filling. To minimize operational risk and ensure the validity of
operations there are multiple points of validation and approval throughout the process.
The 2016 International Conference on Systematic Innovation
July 20-22, 2016, Lisbon, Portugal
While analyzing the process the project team identified that it had a return rate of 28%.
As presented in figure 2, a further investigation revealed that the main causes were the entry
of incomplete or incorrect data and errors detected in document scanning or indexing.

14%
Incorrect or incomplete data
31%
Errors in scanning or indexing documents
14%
Invalid documents
Documents expired or missing
17%
24% Others

Figure 2 - Causes for account maintenance process return

For an accurate diagnosis of the current state of the process the project team also
analyzed in more detail the survey conducted and performed a value stream mapping
involving directly the employees.
Besides supporting the selection of process with greater room for improvement from
employees’ perspective, the survey conducted also enabled the identification of its main
inefficiency factors, since each employee was also asked to justify their selection. The
arguments raised were analyzed in detail and classified in five main categories. Figure 3
illustrates the percentage each factor was mentioned of all responses.

5% 4%
6% Low degree of automation
7% Bureaucracy
Others
54% Scanning
24% Returns
Service level

Figure 3- Inefficiency factors highlighted by employees

For the value stream mapping the process was divided in two sub processes,
maintenance of customer’s data and maintenance of customer’s account details. In figure 4
and 5 the simplified value stream maps obtained for each sub process are presented.
 The 2016 International Conference on Systematic Innovation
July 20-22, 2016, Lisbon, Portugal

Issues

Figure 4 - Simplified value stream mapping of sub process “maintenance of customer’s data”

Issues

Figure 5 - Simplified value stream mapping of sub process “maintenance of customer’s account details”

These detailed representations enabled the identification of several opportunities of

improvement. Considering these and other opportunities identified throughout the different
stages of diagnosis and analysis an Ishikawa diagram was created, as shown in figure 6.
 The 2016 International Conference on Systematic Innovation
July 20-22, 2016, Lisbon, Portugal

Figure 6 – Ishikawa diagram of the opportunities of improvement identified

The opportunities of improvement were systematized in five categories and for each there were
defined multiple solutions summarized below:

1. Working methods. To face the lack of consistent and standardized working methods
there were proposed multiple templates, checklists and establishment of the best practices to
follow.
2. Technology. To carry out certain operation the process showed lack of adequate
technological support. As a result it was much slower and prone to errors than it could
potentially be. The proposed solutions in this regard was to adapt relevant technologies already
used in other processes and develop the software application used, aiming to add new
functionalities that enable a better process monitoring, automate certain form filling tasks and
minimize errors.
3. Bureaucracy. In regard to the bureaucracy detected in this process it’s important to
distinguish the formalities used in excess and the ones that are essential, in order to minimize
operational risk for example. After a thorough analysis there was a proposal to eliminate all
points of validation and approval seen as dispensable and keep to a minimum all administrative
procedures.
4. Innovation. Considering the increasing market competitiveness and emergence of
innovative solutions it’s critical to keep up with the new trends and find new ways to do business
while continuing to meet the evolving customer’s needs and desires, in order to preserve
competitive advantage. In this scenario the proposed solution was a greater use of online
 The 2016 International Conference on Systematic Innovation
July 20-22, 2016, Lisbon, Portugal
channels to perform great part of the process. It was also proposed the incorporation of modern
devices to capture images and thus enable the elimination of scanning tasks.
5. Quality. Regarding the promotion of greater quality in all operations and consequent
reduction of the return rate several solutions previously mentioned can be applied, especially
the establishment of the best working methods and the recurrence to technology to minimize
errors.

With these implementation of the proposed solutions the process lead time and return rate
are expected to decrease and the efficiency should increase significantly. In figure 7 the
maximum potential estimated, in terms of FTE’s (full-time equivalent) reduction, with this lean
based approach in presented.

Figure 7 – Lean results estimated in reduction of FTE’s allocated to the process

Currently after implementing exclusively quick wins, which represent 30% of all
solutions proposed, the bank has already achieved a reduction of 25% of the lean results
estimated.

Conclusions

The present paper has been developed to discuss the application of a lean concepts and tools
to a real banking environment. The case study conducted included the design of a lean approach
adjusted and suited to the reality of one of the largest Portuguese banks. The approach designed
was based on multiple critical success factors identified in the literature review, such as the
diagnosis of the current state, employees’ empowerment, top management commitment and
gradual implementation, but it didn’t fully contemplate others.
The main lean concepts that guided the approach were the minimization of waste, work
standardization, team work and continuous flow. As for the lean tools employed the value
stream mapping, gemba walk and brainstorming should be highlighted.
 The 2016 International Conference on Systematic Innovation
July 20-22, 2016, Lisbon, Portugal
The findings of the study conducted revealed that a lean based approach has potential to
promote a greater operational efficiency of a banking process, however it’s not enough to
achieve a true lean enterprise. Currently, after a partial implementation of the solutions
proposed within the lean project conducted, the bank has experienced several benefits in the
process analysed and improved. However the approach used was not a holistic one, which
means a lean culture was not created in the bank and other areas remained exactly the same. By
continuing to disseminate lean practices throughout the bank the results experienced gain
further impetus and more value can be created to customers.

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The 2016 International Conference on Systematic Innovation
July 20-22, 2016, Lisbon, Portugal
 The 2016 International Conference on Systematic Innovation
July 20-22, 2016, Lisbon, Portugal
Corresponding author(s):
Name: Santos, Jéssica Xavier
Position: Student Affiliation: FCT/UNL
Postal Address (line 1): UNIDEMI, Department of Mechanical and Industrial Engineering, Faculty of
Science and Technology, FCT, Universidade Nova de Lisboa
City, State, Zip (line 2): 2829-516 Caparica
Country: Portugal
Phone: +351 911838966
Email: jmx.santos@gmail.com
Second Author/Correspondence: Cabrita, Maria do Rosário
Cabrita, Maria do Rosário / m.cabrita@fct.unl.pt
Topical area(s): Lean management, lean banking, operations improvement

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