Efficiency, Profitability and Quality of Banking Services

Stavros Zenios and Andreas Soteriou

Center for Financial Institutions Working Papers from Wharton School Center for Financial Institutions, University of Pennsylvania

Abstract: This paper develops a general framework for combining strategic benchmarking with efficiency benchmarking of the services offered by bank branches. In particular, the service-profit chain is cast as a cascade of efficiency benchmarking models. Three models-based on Data Envelopment Analysis (DEA)-are developed in order to implement the framework in the practical setting of a bank's branches: an operational efficiency mode, a quality efficiency model and a profitability efficiency model. The use of the models is illustrated using data for the branches of a commercial Bank. Empirical results indicate that superior insights can be obtained by analyzing operations, service quality, and profitability simultaneously than the information obtained from benchmarking studies of these three dimensions separately. Some relations between operational efficiency and profitability, and between operational efficiency and service quality are investigated.

This paper was presented at the Financial Institutions Center's conference on Performance of Financial Institutions, May 8-10, 1997.

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