Customer profitability analysis within the banking sector

Abstract

Purpose: The aim of the study was to examine the Customer Profitability Analysis (CPA) system adopted by the banks operating in Malta and the reasons behind the exclusion of such a system from some of these banks. Design: The objectives were achieved by interviewing an official from each of the eleven banks operating in Malta in a personal semi-structured manner. Findings: Interview results indicated that a system that caters for CPA was still lacking within most of the banks operating in Malta. In fact, the study revealed that there were variables that hindered the effective application of CPA systems. These included: the narrow customer base; the inferior software used to analyse CPA; the low frequency of evaluating CPA results; and the complexity in allocating indirect costs. Conclusion: The study concluded that banks still required more sophisticated tools and costing systems to perform and support CPA. Nonetheless, most banks recognised the significance of this analysis in today's challenging financial environment, as was evident by the interest shown in developing better profitability systems. Value: The study sought to encourage further development of CPA within the local Banking Sector, particularly with respect to: the adoption of more appropriate costing systems; the reinforcement of communication amongst bank officials; more frequent profitability analysis; and the development of Customer Lifetime Value (CLV) models.