4 minutes
This is reprinted with permission from the Financial Managers Society.
Many experts claim to know the biggest threats to the future of community financial institutions. Increased competition, improved technology and added regulation are certainly high on that list. Industry specialists also claim to know what the future will be. But does anyone truly know? No one can predict the future, yet we want to ensure each of our financial institutions will still thrive. One thing is certain: Institutions will get and stay profitable if they can efficiently serve their customer needs.
Recent history has proved that financial institutions have had and will have fewer and fewer face-to-face customer transactions. This means every interaction has to be the best possible to “wow” our customers. Furthermore, technology advancements are enabling us to improve efficiency at a faster rate than we could in recent past. With these two key characteristics in mind, how can a financial institution make the most effective changes and keep efficiency in the forefront?
Instill efficiency in the culture of the institution. Sometimes an efficiency review needs to be performed as a separate project to act as a catalyst—to kickstart a culture of efficiency. First, identify an efficiency and effectiveness committee composed of key associates who can represent and/or understand all areas of the credit union.
These people aren’t necessarily the management team or department heads—in fact, sometimes the best members for this committee are not managers, but the employees on the front line conducting day-to-day business. The management team and this newly formed committee should then determine if the efficiency review would be best led internally or by a third-party vendor, weighing costs vs. the external knowledge, expertise and focus.
Still seem like a daunting task? Start by taking a hard look at compliance. Are regulations and the need to over-comply dictating the processes and customer service throughout your financial institution? As observed by Profit Resources Inc. consultant, Judy Gaffney, “It's the job of the employees to delight the customers and satisfy the examiners. But all too often we are delighting the examiners and only satisfying the customers.”
Does this sound familiar? Take a look at all processes related to providing customer service. This should be almost all major processes. Review deposit transactions, new account opening, account maintenance, loan processing, and loan closing.
As the concept matures, guard against some common pitfalls. Oftentimes, a project of this magnitude seems so overwhelming that the management team suggests hiring additional staff to dedicate to project oversight.
We recommend not adding staff to improve efficiency! This goes against the spirit of creating an efficient organization and suggests that the project has or will become too complicated.
Once the project is underway, what is the best way to tell if the processes are becoming efficient and then staying efficient? The key is always measurement and comparing against some key benchmarks. Note the following measurements at the beginning of the project and track progress quarterly. Is the credit union improving? There are three vital measurements that reflect a financial institution’s efficiency:
- Assets per full-time equivalent – For banks under $1 billion in assets, high performers strive to be above $3 million; as banks get to $1 billion in assets, this measurement should be above $4 million and approaching $5 million.
- Efficiency ratio – This measures the cost to generate $1 of revenue, so the lower the better. To calculate the efficiency ratio, use the basic formula: non-interest expense/revenue. Community banks and credit unions should strive to be below 0.65.
- Cost per assets – This measures all operating costs to assets. Community bank high performers are under 2.5 percent. Another way to look at this is to aim to cover non-interest expenses with non-interest income.
By tracking each of these measurements before the efficiency project begins, immediately after the project, and quarterly thereafter, the CFO can get a good sense for how efficient the credit union really is. If those numbers aren’t quite what they should be, it’s time to sharpen the pencil again.
Tim Holt is founder and president of Profit Resources, Inc., Lakeland, Fla. PRI strengthens financial institutions by improving profitability and efficiency, allowing them to best serve their customers/members, employees and shareholders.
