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Process Variation as a Determinant of Bank Performance: Evidence from the Retail Banking Study

  • Frances X. Frei

    (Harvard University, Cambridge, Massachusetts 02163)

  • Ravi Kalakota

    (Georgia State University, Atlanta, Georgia 30303)

  • Andrew J. Leone

    (University of Rochester, Rochester, New York 14627)

  • Leslie M. Marx

    (University of Rochester, Rochester, New York 14627)

This paper explores the relation between retail banks' branch-based processes and financial performance. There are 11 processes included in this study, which represent the bulk of the activities performed in a typical retail branch (e.g., opening checking accounts). The first finding of this study is that the financial performance of banks that perform better across these processes tend to be better than that of other banks. In addition to the variation in process performance across banks, there is also substantial variation across processes within banks. That is, banks that performed well in one process often performed quite badly in another. We present an analytical model that shows that improvement in process variation can be more important than improvement in aggregate process performance when dealing with certain customer segments. Empirical evidence from the Wharton Financial Institution Center Retail Banking Study of bank holding companies in the United States provides support.

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File URL: http://dx.doi.org/10.1287/mnsc.45.9.1210
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Article provided by INFORMS in its journal Management Science.

Volume (Year): 45 (1999)
Issue (Month): 9 (September)
Pages: 1210-1220

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Handle: RePEc:inm:ormnsc:v:45:y:1999:i:9:p:1210-1220
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  1. Allen N. Berger & Loretta J. Mester, 1997. "Inside the black box: what explains differences in the efficiencies of financial institutions?," Working Papers 97-1, Federal Reserve Bank of Philadelphia.
  2. Rust, Roland T. & Metters, Richard, 1996. "Mathematical models of service," European Journal of Operational Research, Elsevier, vol. 91(3), pages 427-439, June.
  3. Frances Frei & Patrick Harker, 1999. "Projections Onto Efficient Frontiers: Theoretical and Computational Extensions to DEA," Journal of Productivity Analysis, Springer, vol. 11(3), pages 275-300, June.
  4. Milgrom, Paul & Roberts, John, 1990. "The Economics of Modern Manufacturing: Technology, Strategy, and Organization," American Economic Review, American Economic Association, vol. 80(3), pages 511-28, June.
  5. Roger E. Bohn, 1995. "Noise and Learning in Semiconductor Manufacturing," Management Science, INFORMS, vol. 41(1), pages 31-42, January.
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