Retail banking is facing multiple challenges. These challenges have been categorized in 5 different sources. Security, Decrease cost, Mergers and acquisitions, Regulatory compliance and Revenue growth. (McCormick, Edson, & Natesan, 2007) These variables are also linked to efficacy and efficiency of a service sector. They have also argued that with the increase in access points efficiency is being affected and security concerns have been increased to a greater extent.
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The basic reason behind this point is customer identity is anonymous at these new access points. The anonymity is responsible for increasing crimes and fraudulent which is the major security concern. Novell provides hardware and software management system which helps to increase efficiency in retail banking sector. Manual processes leads to increasing cost of compliance and further leads to regulatory and compliance violence and corporate reputation risk (McCormick, Edson, & Natesan, 2007).
As a measure of efficiency revenue growth can be measured as function of excellence. Merger and acquisition is the crisis situation which impacts the retail bank sector from recovering losses for 3 months average taken from Retail Banking Technology Trends survey Dec.2006. Novell has developed a system which is concerned towards operational excellence as well as regulatory compliance and security as a function of Retail Bank efficiency.
In majority of countries that can be classified as transition economy, foreign capital controls an increasing share of the banking sector (Weill, 2003). This research is based on comparative analysis of efficiency of foreign owned and domestic owned banks. Furthermore (Weill, 2003) has concluded that efficiency of banks with foreign ownership is higher than the efficiency of local banks.
Parametric approaches, such as the stochastic frontier approach, use econometric tools to estimate the efficiency frontier have been used for the study as it provides room for random errors.
Few of variables used in (Weill, 2003) are Personnel and interest expenses, Price of labor, Investment assets etc. While considering the cost efficiency foreign ownership has influenced positively on the banks in countries with transition economies (Weill, 2003). The reason behind it is that foreign banks have better know how of the working and better corporate governance. This research has left a room for further study on origin of advantages of a foreign owned bank.
(OKEAHALAM, 2008) has argued that internationalization increases competition in the banking sector and effects efficiency. However a study has been conducted showing larger but inefficient banks of Namibia and smaller yet efficient banks of Tanzania. Policy makers should ensure that entrants have high quality management and will transfer technology and skills. This finding is consistent with entry and behavior based primarily on the desire to transfer a monopoly structure and derive economic rents (OKEAHALAM, 2008).
Key finding from the study of Namibia and Tanzania is that lack of competition has made efficiency vulnerable. Another unusual thing can be concluded that foreign entry essentially does not make markets more competitive or efficient. Market only becomes competitive when it is already concentrated with local or foreign banks.
Another article discusses that customer efficiency increases with greater self service utilization. In case of self service input cost of retail bank is decreased. This issue exactly mirrors the concern in the firm productivity literature that focuses on methods for “explaining†multifactor productivity of firms given that it is also measured as a residual concept. (Xue, Hitt, & Harker, Customer Efficiency, Channel Usage, and Firm Performance in Retail Banking, 2007)
Possible explanations for the differing efficiency scores for the majors and regional banks are diversification, technological change, organizational restructuring, different customer bases, and the effects of the globalization of financial services (KIRKWOOD & NAHM, 2006).
This study further concluded that efficiency of major banks is increasing. Their productivity has also increased a lot whereas regional banks are in danger their efficiency is decreasing and profits are shrinking. This decreased productivity is directly proportional to banking efficiency in Australian banks. This trend can be used in my study to gauge the tangible factors and their effect in Pakistani Market.
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Another research of Xue related to customer efficiency show that self-service through the Internet has a significant migration effect on personal service and, consequently, saves service delivery costs and improves customer efficiency. Contrary to conventional wisdom, we find no evidence that increasing levels of self-service damage customer relationships (Xue, Customer efficiency: Concept and its impact on service management, 2002). Thus Internet or Virtual Banking services are adding on value to the efficacy and productivity of retail banking services.
ATM’s, Debit Cards, Credit cards, Online Cheque writing facilities, Pay Orders, Demand drafts, Online Banking and all the possible technologically advanced instruments effect the preferences of consumer in selection of a service provider bank. Therefore output relies on customer base which is element of efficacy. Concluding remarks can be technology change has direct relation to banking efficiency.
After reading all articles it can be concluded that efficiency is very broad term and handling all variables will make research complex. Therefore to get more accurate result it is necessary to shortlist few variables.
(NEAL, 2004) has used ROA (Return on Asset) as a measure of efficiency for measuring it from 1995-1999 in Australian Banking case. He has used product of net margin and asset utilization to gauge this variable. The data shows better results for national banks as compared to regional ones. This research is Australia based and focuses on national and regional bank. However corporate and consumer banking has not been separated. The variable ROA in fact can be used for both retail as well as corporate banking.
(Hassan & Isik, 2002) mentions that previously cost efficiency or input saving efficiency were used to measure the efficiency of banks in Turkish researches. This study is the first to focus on output side inefficiency along with input side inefficiency in Turkish banking, using the so-called stochastic frontier approach. The approach behind using it is that Profit is the key while bank is making losses with less or even same input. Profits are the outlook and are punished even when input becomes costly. On evaluating Turkish banks by both criteria Turkish banks becomes efficient while evaluating by profit efficiency methods.
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