Three Ways Banks Can Boost Their Efficiency Ratio

The anticipated relaxation of regulatory pressure on non-core considerations returns everyone’s attention to bank performance. Key indicators for bank performance are profit, profitability and the efficiency ratio.

This ratio tells us that to increase performance, for every dollar of expense, a bank must maximize the revenue created. This is not a dark art — it’s the basic operating principle of every business.

For well over a decade, regulator-related expenses have obscured the importance of efficiency ratios. For instance, Bank Secrecy Act and anti-money laundering (BSA/AML) protocols can be a heavy expense that many feel has distorted the efficiency ratio. That’s because this expense can seem like a dead weight and doesn’t contribute to creating revenues in the same way that sales, marketing, human resources, buildings and the like do.

The tragedy is that every dollar spent on BSA/AML, fraud or reputation management should have also been used to increase revenue. Equally seriously, there has been substantial duplication of effort in the credit and risk management departments, leading not only to a lack of revenue creation but also to waste through duplication.

Before exploring three proven paths to improving the efficiency ratio, it is essential to start with the right framing for success. This starts with assets. Focusing on the business (commercial/corporate) borrower as the building block, it’s important to hold the overarching view that the borrower is the bank’s key asset, not the loan. The greater the value of the whole borrower, the more money the bank makes as a result.

Therefore, the bank is incentivized to help the borrower be more successful. That way the bank not only increases deposits and reduces the possibility of loan loss, but by prompting internal and external products and services, is actively increasing its non-interest and interest income.

With borrowers as the asset and the foundation for potential improvement, here are three ways to immediately improve the efficiency ratio and set your bank up for increased profit and growth:

1. Ensure every piece of data is valuable and contributes to a central picture of the customer. The source of the data is less important than what the data contributes to the bank. The data could prompt the relationship manager to either increase the stickiness of the relationship, manage a threat or seize an opportunity.

2. Adopt a centralized, fusion-focused approach to gathering data, and manage the process to ensure that all internal stakeholders get what they need to make decisions in a timely manner. Increasing data collection with a centralized approach can mitigate the risk of issues falling through cracks, and it immediately cuts the cost of multiple departments duplicating gathering efforts.

3. Take a proactive approach to monitoring customers and prompting action. This transforms expenses into investments in revenue, shifting a bank’s emphasis from providing what a customer needs to anticipating their needs and prompting them to action.

As the industry anticipates an eased regulatory environment with increased market-competition, a return to focusing on bank performance encourages us all to treat the bank like a business. This means clinically examining each step in every expense, questioning its value and whether it could be helping to drive revenues. Implementing these three steps can translate to wins for the bank and its borrowers — all of which improve the bank’s efficiency ratio.