Controlling Non-Interest Expense: Reducing the Cost of Processing Transactions

by Trent Fleming

What is your bank's EFT ratio - the ratio of electronic transactions to all transactions? Most banks aren't measuring this, but it is a telling statistic as an indicator of your progress in moving to a more efficient transaction processing environment.

If banks are to remain relevant in the financial services industry, they must retain control of the transaction. Processing the transaction is a key part of maintaining a customer relationship. With transaction volumes - both paper and electronic - growing, banks must find ways to process transactions more efficiently.

For a number of years, I've spoken about something I call "lowering the unit costs of growth." Essentially, I mean investing in technology that, as volumes grow, reduces the cost of processing a given number of items. As volumes increase, I believe that such technology is critical. However, simple investment is not enough. A strategy is necessary to control and manage transaction processing.

First, build a bias in your organization toward electronic transactions. Employees and customers should both be encouraged toward electronic transactions. Key electronic transactions include auto-debits for loans, automatic roll-over or deposit of CD interest, incoming ACH and direct deposits, using check imaging instead of traditional check processing, Internet Bill Pay, and ATM/Debit Cards.

Often, education is the key. Helping customers to understand the benefits of a debit card will reduce the volume of check transactions, while generating fee income on the debit card transactions. Encouraging the use of on-line bill pay will also significantly reduce the volume of checks written, and in turn, reduce the cost of processing a given number of transactions.

Next, identify the systems you have in place today that can aid you in processing more electronic transactions. If you've invested in Internet Banking, Debit Cards, and Check Imaging, the good news is that you already have most of the tools in place to begin significantly impacting the ratio of electronic transactions to all transactions.

While it is easy to focus only on customer generated transactions, don't overlook transactions generated internally - G/L, account to account transfers, payroll, and accounts payable. Internal transactions can represent as much as twenty percent of all the items you process. These transactions can often be automatically handled by your account processing system. In the process, you reduce paper flow, and improve the audit trail for such transactions.

Remember: Electronic transactions are clearly less expensive than paper ones - typically about 75% less expensive.

Finally, measure where you are now, to develop a benchmark for how well your efforts are working. Identifying existing volumes and costs structures begins during the analysis and selection phase for new systems, or at the point where you begin a renewed effort to encourage the utilization of an existing system or product, like debit cards.

Bankers have often been averse to metrics - tracking information about account and item volumes, transaction costs, etc. However, this is some of the most important information generated by your system, and it is well worth the effort to maintain at least some basic information on a daily basis.

Start with the EFT Ratio - daily, measure the percentage of electronic transactions to all transactions. Then, maintain item volume by application, and track the number of accounts by application, again, all on a daily basis. You'll want to discuss with members of your management team other statistics that may be of value to you, including account openings and closings, daily NSF notices issued, etc. Over time, as you track this information, you will be able to see the impact of your efforts to encourage electronic transactions, and subsequently reduce costs.

Next time, a discussion of the long term benefits of electronic transactions, and tips on promoting electronic activity.

First published on BankersOnline.com 12/10/01