The financial services industry is arguably the most turbulent, competitive and unpredictable of all market sectors. The breathtaking advancements in information technology in recent years have totally transformed both how financial services organizations go to market and how they are perceived by their customer base.
The competitive environment in the banking/financial institution industry has made it very difficult to increase revenues and market share that is sufficient in growth and maximizing shareholder’s wealth. The minimal growth in the area plus the over saturation of banks, financial institutions and other sectors (mortgage companies, insurance agencies, internet companies, etc.) competing for the traditional banking products has forced banks to look at ways to control their costs to reach the profitability levels that are necessary to appease their shareholders.
The only way to control expenses is to have a better understanding of how products, services and activities contribute to the overall expenses in day to day operation of a bank. The traditional costing system in banking does not effectively assign actual costs to the actual transaction. This is where activity-based costing will give bank managers a greater understanding of the true cost and profitability of all transactions in daily processes in the bank.