By Joseph Akossey
Banks are financial institutions licensed to provide financial intermediation.
Through lending activity, banks help businesses to access funds to grow and expand thereby spurring economic growth.
Currently, Ghana has 23 Universal Banks with several branches spread across the 16 regions.
Besides the universal banks, we have the Specialized Deposit Taking Institutions made up of Rural and Community Banks, Savings and Loan Companies, Finance Houses and Microfinance Companies.
Banks primary objective is to create shareholder value through profit maximization.
In compliance with banks and Specialized Deposit Taking Institutions Act (Act 930), the universal banks have published their 2023 financial statements. It is heartwarming to say that most of the banks recorded impressive profits despite the turbulent microeconomic environment. Indeed shareholders, financial analysts, management and staff of these banks are excited.
However, the question arises: are banks making good or bad profit? The article will therefore explore the following: What is bad profit, how some banks are making bad profit and going forward what they should do.
According to the book, the ultimate question written by Fred Reichheld and Rob Markey of Bain and Company “bad profits are earned at the expense of customer satisfaction”.
They further said that “bad profits come from poor customer experience or extracting value from customers rather than creating value”.
This means that when banks customers feel dissatisfied as a result of poor services and other practices amounting to cheating, profit generated can be tagged as bad profit.
On the contrary, they defined good profit as profit that results from delighting customers such that customers are compelled to engage in repeat business and provide enthusiastic referral.
The following are situations in which profit can be described as bad profit.
First, when banks impose unfair fees and charges on account holders, the resultant profit can be tagged as bad. It is significant to note that it is not wrong when banks impose service charges and other fees since fees income is a major source of banks income that enable them to offset their operating expenses. However, in their quest to generate profit some banks tend to exploit customers through unfair fees and charges such as credit insurance premium overcharges, maintenance fees on savings account, high COT charges among others.
It is gratifying to say that few years ago, the Regulator, Bank of Ghana cane out with notice of abolition of nuisance fees and charges.
Second, some banks pay dwarfish interest on customers savings account vis a vis exorbitant interest rate on lending.
This usually results in astronomical interest rate spread leading to the so-called impressive profit. This profit can be viewed as bad profit because customers are being short changed.
Its undeniable fact that banking is expensive business because of associated high cost such as occupancy cost, staff cost and other operating expenses.
However, this should not be a basis to short change customers.
I recently conducted a survey among a few universal banks and I was shocked to realize that some are offering 1–2% interest per annum on customers savings.
Let’s appreciate the fact that with the current inflation rate of 25.8%, offering 1% or 2% interest on savings account amount to negative interest rate.
It is important to note that banks have responsibility to deliver superior experience to customers. This is crucial because customers are banks lifeline.
It is sad to say that some banks in Ghana fall short when it comes to maximizing positive customer experience.
Profit that results from poor customer experience such as poor customer interaction, longer turnaround time, poor complaint resolution and others can be described as bad profit.
Banks must therefore invest and prioritize customer experience excellence in order to drive customer satisfaction and good profit. They should also balance profitability with customer satisfaction.
Another situation that can lead to bad profit is when a bank earns profit at the expense of employee satisfaction.
This means that banks that offer their staff poor remuneration and other condition of services as a deliberate strategy to reduce cost and make colossal profit to impress shareholders are not making good profit from marketing perspective. It has been observed that some Banks and Specialized Deposit Taking Institutions offer meager remuneration to their Mobile Bankers and other contract staff with a view to controlling cost and maximizing profit. This often results in fraud such as deposit suppression.
Conclusion
Going forward, banks must avoid practices that may lead to bad profit. This is vital because bad profit often results in customer dissatisfaction which in the long run might to lead to customer switching, losing market share, reputational risks among others. Banks must also adopt the triple bottom-line strategy. In this way, they might be impacting positively on society.
