Operating costs are higher in some banks that are growing both organically and by merger, but when are the ongoing costs too high? We are seeing a trend where banks build infrastructure to support growth but never seem to grow into that infrastructure; instead, they continue to add on, following a strategy of high growth.

It is perfectly logical to build call center staff, credit staff, and other direct functional staff related to expected work volumes in an effort to support sales campaigns. It is also acceptable to add to the branch network and expect a lower financial return on the branch system until deposits build and the branch becomes profitable. The key questions are: what is the standard for growth organizations and when does this additional cost lose its justification? It is like buying clothes two sizes too large for growing kids so that they will get more wear out of them, then continuing to replace them with even larger sizes so that they never look right. In this case, what do these growth banks tell investors when their efficiency ratio is higher than that of comparable banks?

A recent examination of the top 50 commercial banks in the United States revealed that the average efficiency ratio is 64 percent as compared to the average of 60 percent for the rest of the industry. The banking industry is facing profitability issues similar to what it saw two decades ago—declining revenue growth and higher operating expenses. The best way to reverse this is through reengineering the core processes to ensure effective delivery at the right cost. Because of a lack of synergies between merging organizations and the difficulties in converting systems, recent mergers and acquisitions have not been as effective in wringing out cost.

Consumer and regulatory pressure on banking fees brings into focus big banks' need to harness their growth engines and focus on retaining their profitable customers. Some major banks have shifted strategy from pure growth to customer service and retention, including Washington Mutual and Commerce Bancorp. They have made substantive changes, including major commitments to process redesign and staff training. This shift toward "profitable customer retention" and away from pure growth allows these banks to increase profitability and get back to providing value to customers and shareholders.

The key to lowering these costs: design service excellence and scalability into the core processes so that the need for building costly infrastructure can be minimized. Growth is fantastic, but not at the expense of profitability year after year.