For years, banks could rely on growing income to improve efficiency. This has helped banks such as $8.3 billion 1st Source Corp. become more efficient, according to Andrea Short, CEO of the company’s bank subsidiary in South Bend, Indiana. But she’s also looking to reduce expenses, including seeking out improvements enabled by technology.
For financial institutions, efficiency is most often measured as a function of two variables: net operating income divided by noninterest expense. The lower the ratio, the better the efficiency. Many bank leaders approach this metric from a growth mindset — by earning more revenue while simultaneously keeping a handle on costs, a bank can maintain or even improve efficiency. But with a potential recession cutting into net interest margins and constraining loan growth, more banks could consider how investments in technology could help lower costs, too.
For community banks that often lack in-house resources, leveraging technology and services from external providers can drive innovation and efficiency, notes Jeffery Kendall, CEO of the bank technology provider Nymbus. “Where are the opportunities for scale? What makes sense to bring in-house, and what makes sense to partner on?” He recommends that banks focus on what they do best — building relationships and offering financial services to their clients.
To download the report, sponsored by Nymbus, click here.
The Efficiency Insights report was originally published in the 3rd quarter 2023 issue of Bank Director magazine.