Comparative efficiency analysis of Portuguese bank branches

The advent of Internet banking and phone banking is changing the role of bank branches from a predominantly transaction-based one to a sales-oriented role. This paper reports on an assessment of the branches of a Portuguese bank in terms of their performance in their new roles in three different areas: Their efficiency in fostering the use of new transaction channels, their efficiency in increasing sales and their customer base, and their efficiency in generating profits. Service quality is also a major issue in service organisations like bank branches, and therefore we analyse the way this dimension of performance has been accounted for in the literature and take it into account in our empirical application. We have used data envelopment analysis (DEA) for the different performance assessments, but we depart from traditional DEA models in some cases. Performance comparisons on each dimension allowed us to identify benchmark bank branches and also problematic bank branches. In addition, we found positive links between operational and profit efficiency and also between transactional and operational efficiency. Service quality is positively related with operational and profit efficiency. The emergence of new forms of banking presents a challenge to the predominance of bank branches as the main avenue of providing financial services. These alternative ways of banking include, phone banking, internet banking and automatic banking Introduction (through automatic teller machines – ATMs). The increasing use of alternative banking channels (ECB, 1999a) is clearly changing the traditional way of understanding and undertaking banking activities. * Corresponding author. Tel.: +351 22 6196200; fax: +351 22 6196291. E-mail addresses: [email protected] (M.C.A.S. Portela) [email protected] (E. Thanassoulis). At the bank branch level the emergence of new distribution channels might only partly be able to reduce the importance of bank branches as distribution means of financial services, especially due to the increase in personal-advice intensive banking activities that is being undertaken (ECB, 1999b). Bank branches have been shifting from operating services to consulting (ECB, 1999b), i.e., they are placing less importance on the delivery of transactional services and more importance on exploiting the potential of branch networks as selling outlets for financial services (e.g. Drake and Howcroft, 1995; Howcroft and Beckett, 1993; Howcroft, 1992). In this sense, new distribution channels can be regarded as advantageous to bank branches, since they can place more emphasis on value-added activities (sales related) leaving basic transactions to be performed on other means of distribution. For the bank as a whole this represents a cost advantage, since general operations performed on alternative means of distribution are cheaper than when performed by bank branches’ personnel. The existing studies on bank branches efficiency do not in general account for the changing role of bank branches. Most of these studies analyse efficiency of bank branches from a production perspective (in contrast with a intermediation perspective (see e.g. Colwell and Davis, 1992)), where bank branches are seen as production units using a set of resources (mostly staff, space, computers and supply costs) to produce a number of services (mostly measured through the number of transactions at a bank branch and/or the number of various accounts). Albeit important, a production perspective fails to reflect other important dimensions of bank branches. In order to try to circumvent this problem some authors have used together various perspectives of bank branches activities (see e.g. Athanassopoulos, 1997; Athanassopoulos et al., 2000; Berger et al., 1997, etc.). Most of these studies do not account, however, for the new role of bank branches toward selling nor link this new role with the growth of alternative/competitive ways of providing banking services like the internet, phone banking and ATMs. In addition, the role of sales as the most important operational output of bank branches has not been acknowledged in older studies, but only recently by Cook et al. (2000) and Cook and Hababou (2001), who take explicitly into account the new role of bank branches by distinguishing two types of activities that happen in bank branches: transactions (or service) and sales. The purpose of the present study is to specify suitable efficiency measures that take into account 1 See e.g. Sherman and Gold (1985), Parkan (1987), Vassiloglou and Giokas (1990), Giokas (1991), Tulkens (1993), Drake and Howcroft (1994), Sherman and Ladino (1995), Athanassopoulos (1997), Schaffnit et al. (1997), Camanho and Dyson (1999), Zenios et al. (1999), Soteriou and Zenios (1999), Golany and Storbeck (1999), Avkiran (1999), Athanassopoulos et al. (2000), Athanassopoulos and Giokas (2000) and Hartman et al. (2001). sales activities of bank branches, and transactional activities that should be performed on alternative distribution channels. Apart from these two dimensions of bank branches activities we also consider bank branches profit. Bank branches are for-profit organisations and therefore an analysis of their performance should also account for this dimension. The use of profit efficiency measures may also be seen as a way of incorporating a service quality dimension into the analysis, since accounting both for costs and revenues may avoid classifying a higher quality bank or bank branch as cost inefficient just because it produced higher quality (and therefore generated more revenues) at the expense of higher costs (Berger et al., 1993). Service quality is of utmost importance in analysing the performance of bank branches, since their survival depends on the service quality levels they provide. We consider this performance dimension a posteriori for reasons that will be outlined afterwards. The paper is structured as follows. In the next section a set of efficiency measures that we developed to analyse the overall performance of bank branches is put forth. In Section 3 these measures are applied to a sample of Portuguese bank branches and results are cross-compared. In Section 4 our results are compared with prior views of managers of the bank under analysis, and Section 5 concludes this paper. Many managers believe that the growing use of new distribution channels does not constitute a threat to the survival of bank branches, at least not in the short run. This fact is, instead, taken as an opportunity to move non-value-added transactions to these new channels, leaving branches with more time to devote to value-added activities. Seeing new means of distribution as an opportunity for increasing profits, the bank under analysis charged their branches with the responsibility for motivating customers to use alternative channels. As a consequence, the main objectives that bank managers ask their branches to pursue are: • to foster an effective use of new distribution channels so that branch personnel can use their time in value-added activities; • to increase sales and the customer base of the branch, while serving the clients that visit the branch with high service quality levels; Measuring the performance of bank branches