How Banks Should Change Their KPIs

February 19, 2019 by Stacey Barr

Following recent investigation into the banking sector’s gross misconduct, the traditional KPIs driving their poor behaviour must change.

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It’s easy enough to find a list of recommended KPIs for banks. A quick review of three sources of performance measures recommended for banks
yields the following sample:

WARNING: You’ll get bored and misinformed by reading this list, so jump ahead to here.

  1. Bank Losses per Checking Account
  2. Banking Technology Infrastructure Expense as a Percentage of Total Assets
  3. Operating Expense as a Percentage of Assets
  4. Front Office to Back Office Banking Staff Ratio
  5. Return on Equity
  6. Banking Efficiency Ratio
  7. Deposit Account Attrition Rate
  8. New Retail Account Setup Error Rate
  9. Percentage of Accounts Opened with Insufficient Documentation
  10. Tier 1 Capital Ratio
  11. Tier 1 Common Capital Ratio
  12. Tier 1 Leverage Ratio
  13. Tier 1 Risk-Based Capital Ratio
  14. Assets Under Management (AUM) per Employee
  15. Fee Income per Checking Account
  16. Net Interest Margin
  17. Operating Profit Per Employee
  18. Revenue
  19. Expenses
  20. Operating Profit
  21. Operating Expenses As A Percentage Of Assets
  22. Assets Under Management (AUM)
  23. Percentage Of AUM Above Benchmark
  24. Return on Assets
  25. Client Survey Score
  26. Average Time To Close Issues
  27. Total Volume Of Accounts
  28. AUM Per Employee
  29. Sales Per Branch
  30. Number Of Workflow Processes Implemented
  31. Efficiency Ratio
  32. NPL Ratio
  33. NCO Ratio
  34. Loans to Deposits Ratio
  35. Tier 1 Common Capital
  36. Book Value per Share
  37. Price to Book Value Ratio

If you or your leaders insist on taking shortcuts like this (even when we know they lead to more wasted time and poor decision-making), then go right ahead and research things like these:

  • Opsdog’s Banking KPI Encyclopedia of 500+ KPIs for banks, an overwhelming amount, but at least less financially focused as the following two resources, and because it does include clear definitions of each KPI, it might a good investment for potential measures after a bank has decided on its strategically important goals.
  • Neil Patel’s list of 17 banking KPIs, mostly focused on efficiency with a few token and not particularly strong KPIs about customers.
  • Bank analyst John Maxfield’s 10 most important banking KPIs, all of which are about financial introspection.

KPI shortcuts, like adopting measures or metrics that someone else has compiled for your sector or industry or function, will end up costing you far more than you think. And it will cost far more than taking the right approach to KPIs selection and implementation.

It’s stupid for banks to select KPIs from recommended lists.

Yes, I do mean ‘stupid’. The beef I have with ready-compiled lists of KPIs for specific industries or sectors or functions is that they are recommended in a vacuum.

Any KPI that an organisation chooses cannot be meaningful unless it is chosen in the context of the organisation’s strategy and business environment.

But this is what many BI, dashboard and KPI companies do: they offer long lists of sector- or industry-specific KPIs. They do this to make it easier for organisations to buy their products and services. Why? Because it’s widely known that most organisations invest in dashboard software, assuming it’s the answer to their KPI problems. But before long, they find that the dashboard isn’t useful because it doesn’t contain the right KPIs.

Adopting a list of industry KPIs prescribed by a consultancy (whose vested interest is in selling BI and dashboard software) is a poor decision.

A perfect illustration follows the banking royal commission’s recent report about gross misconduct across the Australian banking sector. As explained by journalist Ross Gittins, it’s clear that they used the wrong KPIs, which focused on revenue growth at the expense of customer service and employee engagement.

Recommended lists of KPIs for banks drive the behaviours that reinforce misconduct and poor customer service.

Examples abound of the poor behaviours that the wrong KPIs have encouraged in banks.

Mortgage brokers, for example, have traditionally been paid commissions by the banks, which has encouraged them to sell the loans that line their own pockets, with little regard to what is the best loan for the customer. And often brokers also receive trail commissions, paid to them over the life of the loan.

Mortgage brokers are driven to sell bigger loans in preference to the loan size that is most appropriate to the customer.

Another example is the situation for farmers, whose property values are dramatically affected by influences outside their control, like drought or bushfires or floods. Clearly catastrophes like these affect farmers’ revenues. But bank-assessed land values take no consideration of these catastrophes.

Banks assess the value of farming land from the biased perspective of the interest revenue they earn, without regard for the unique context farming land exists within.

And the poor behaviour doesn’t just affect customers. Banking employees, like my friend Mary (not her real name). Her personal KPIs were all about hitting sales targets, like credit card sales, personal loan applications, new customer automatic pay deposits, insurance, and more. And Mary’s performance appraisals were based solely on these targets. The promise of personal development was rhetoric; time was never given for it. Not even after hours, as that time had to be given to sales generating activities, like movie nights, letterbox drops, networking meetings, sponsored events, shopping centre pop-up stalls, and so on.

In Mary’s own words:

“[Sales] was a very frustrating KPI because this was an expectation and also something we all wanted and needed to improve our abilities in, for our current and future roles. But it was never obtainable. Unfortunately, due to staff shortages and requirements to be available out of hours for extra activities, there was never the availability of time or the opportunity provided by our Managers/Regional Managers for any form of Personal Development.”

Banking employees, like Mary, who felt it unethical to sell products to customers who didn’t need them, or couldn’t afford them, suffered poor performance appraisals and no bonuses.

Which KPIs are the right ones for banks to adopt now?

Of course, I’m not going to answer this question, or I’d be like every other KPI-recommending consultant that I’ve just ranted about.

That’s because the first question to ask isn’t which KPIs should banks adopt now. This is the right question that banks need to start with:

What is strategically important for the long-term success of banks and their role in society?

A list of recommended KPIs for banks contains no filtering or alignment relative to this question. KPIs are meaningless and dangerous without the context of strategy. And every organisation, even those within the same industry, have a unique strategy that needs to serve the unique needs of its stakeholders.

But what is clear from the recent biased focus on revenue growth in banks is this:

Banks desperately need to change to a process that sets meaningful KPIs which align to new strategic goals about customer centricity, employee engagement, and social responsibility.
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References:

Neil Patel’s “17 Key Performance Indicators Every Bank Should Track”,
clearpointstrategy.com/bank-kpis/

Opsdog’s Encyclopedia of Banking KPIs, containing 500+ KPIs for banks,
opsdog.com/resources/5-key-performance-indicators-for-banks-to-benchmark/

John Maxfield’s 10 most important banking KPIs,
slideshare.net/johnmaxfield376/the-10-most-important-banking-metrics

See Commissioner Kenneth Hayne’s “Royal Commission into Misconduct in
the Banking, Superannuation and Financial Services Industry

Ross Gittin’s article in the Sydney Morning Herald, “Banks’ misbehaviour shows power of KPIs

DISCUSSION:

Where does you organisation get its KPIs from? A deliberate, logical, thoughtful process? Or the dangerous shortcut of collating KPI lists from where ever it can find them? And do the consequential KPIs meet the essential criteria of excellent KPIs, or not?

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