In the age of “smart” everything – from weaponry to phones and even home appliances – it makes perfect sense for banks to also move into “smart business” mode. Smart strategies ensure a business is focused on the most important elements that enable profitability.
Financial Services Institutions (FSIs) and other organizations frequently measure financial efficiency through the use of an Operating Efficiency Ratio (OER). In real terms, OER measures how much it costs an FSI to earn a dollar. When considered in context of how it has trended over the years, OER shows whether an FSI is increasing its expenses faster than it is generating revenue, or if its growth outpaces expenses. Historically, this ratio has lived within the realm of CFOs – and sometimes investors – but, with today’s challenging margin environment, FSIs are finding that OER can be a highly effective measure to help drive improved performance.
OER, in its simplest mathematical expression, is an organization’s expenses divided by its income. For FSIs, a slightly modified calculation is usually used (non-interest expenses minus provision for loan loss, divided by net revenue), but regardless of the equation, OER is like a golf score; the lower the better.
But, let’s face it; FSIs are complex businesses. All banks likely offer checking accounts and loans, but that is not to say that all products contribute the in same way to the net performance of the FSI.
Recently, an FSI looking to fund aggressive grown plans while battling a 10-year decline in financial efficiency used an OER assessment to determine what changes could be made on the revenue side of the equation. By identifying which of its several loan products contributed most to financial performance, the bank was able to concentrate on strengthening the processes that enabled those specific products. The result was a vast – and measurable – improvement in the company’s OER.
Click here to learn more about OER as a smart business tool.