Banking industry plays an important role of financial intermediate in the country's economic activities. The related issues of banking performance motivate a lot of scholars to study. Some of scholars apply the balanced scorecard to explore banking performance, i.e., Wu (2011) distinguishes banking industry from four perspectives (Financial, Customer, Internal business process, and Learning and growth) by the balanced scorecard to explore its performance. This chapter adopts Wu's classification and reviews past researches about banking performance. Firstly, it describes the contents and application of the balanced scorecard, and then discusses the banking performance in financial measure, customer, internal business process, and learning and growth, respectively.
2.1 The balanced scorecard
The balanced scorecard, a widely used framework for performance measurement, proposed in recent years, was introduced in the early 1990s by Robert Kaplan and Nolan Norton.
Kaplan and Norton (1992) observe that traditional measures of financial indexes can only provide a confined and imperfect picture of business performance, and that the dependence on the financial data restrains the value creation of future business.
Kaplan and Norton (1992) therefore propose the balanced scorecard from four perspectives (finance, customer, internal business process, and learning and growth) to complement the traditional financial measures.
The financial perspective emphasizes that the financial perspective metrics can measure economic performance in terms of financial outcomes. The customer perspective highlights the market segmentation of customer, organizations should utilize their intrinsic advantages and resources to distinguish the differences with
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their competitors. The perspective of internal business process focuses on defining the critical internal operations and objectives that enable a company to increase value creation over time. Learning and innovation put emphasis on the importance of organizational capabilities that ensure continuous improvement of knowledge management, human resource capabilities and sharing of information (Kaplan and Norton, 1992, 1996).
Each perspective of the balanced scorecard provides a different view of the organization, the related business processes and how these business processes contribute to the successful implementation of the corporate strategy (Kaplan and Norton, 1996).
Through the balanced development of the four aforementioned perspectives mentioned above, the company not only keeps the measure of financial perspectives but also prompts the measure of the elements of the performance motivation toward the financial goals directly or indirectly, so that the company can pursue the growth and consider the development of future at the same time (Kaplan and Norton, 1996;
Gumbus and Lyron, 2002). Chenhall (2008) also indicates the distinctive feature of the balanced scorecard is that it identifies financial and non-financial measures covering different perspectives, which provides a way of translating strategy into action.
The concept of balanced scorecard is that can make an organization to clarify its vision, improve internal and external communications, and monitor organization performance against strategic goals by four perspectives, and make it to be a performance of measuring for all aspects (Kaplan and Norton, 1992, 1996).
Furthermore, Kaplan and Norton (2004) created a tool of management, strategy map, which companies can use it to convert intangible assets into tangible outcomes with
an unprecedented degree of clarity and precision.
The balanced scorecard is a widely used framework and is applied to many industries, i.e., manufacturing industry (Hoque and James, 2000), hotel industry (Banker et al., 2000), health care organizations (Bisbe and Barrubés, 2012), extension education centers in universities (Wu et al., 2011), banking industry (Tseng and Jheng, 2008) etc. In addition, many scholars also combine another methodology with the balanced scorecard to evaluate the performance of business, i.e., the balanced scorecard and fuzzy data envelopment analysis (Hsu, 2005), fuzzy MCDM based on balanced scorecard (Wu et al., 2009), fuzzy AHP and BSC approach (Lee et al., 2008), balanced scorecard approach based on a hybrid MCDM model combining DEMATEL and ANP (Chen et al., 2011), data envelopment analysis and balanced scorecard (Chen et al., 2008).
2.2 Banking performance in financial measure
Under the environment of hyper-competitive and risk increasing, it's important to manage operating performance in bank industry. In the financial perspective, Wu (2011) concludes that there are six factors (i.e., operating revenues, debt ratio, return on assets, earnings per share, profit margin, and return on investment) can be used to evaluate banking performance. Chen (1999) applies in-depth interviews to research the banking performance measurement by the balance scorecard and finds that asset utilization efficiency, capital allocation analysis, earnings achievement ratio, profitability, and rate of return can be used as the indicators of financial perspective.Chu (2008) studies the case of domestic banks’ operational performance in Taiwan, he found that the five factors, i.e., profit ability, growth ability, capital adequacy, operational ability, and assets quality, the results show that growth ability, operational ability, and asset quality have significant influence in financial-holding
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subsidiary banks.Huang et al. (2011) apply the analytic hierarchy process to investigate the measures and strategies in a BSC framework. According the result, assure sustainable shareholder value, intellectual property, maintain the asset quality, and customer relationship management are the prioritizing strategies for strategy execution.
In the traditional business of banking, Saunders and Schumacher (2000) investigate the determinants of bank net interest margins in six selected European countries and the US and find that capital-to-asset ratios, interest-rate restrictions on deposits, and reserve requirements have a significant impact on bank’s net interest margins.
Banks also can enhance profit by diversification. In the issue of diversification, it is indicated that both interest spread and non-interest income generating activities can improve banking performance. Rogers and Sinkey (1999) conclude that commercial banking in the United States has become more involved in nontraditional activities that provide financial services and generate fee income in recent years.
They suggest that these banks tend to be larger, have smaller net interest margins, have relatively fewer core deposits, and exhibit less risk by empirical analysis. Li and Zhang (2013) indicate that there are diversification benefits of the increase in non-interest income by analyzing the data from the Chinese banking industry in 1986–2008. The results of diversification also show a circumstantial evidence for the presence of economies of scale (Amidu and Wolfe, 2013).
2.3 Banking performance in customer
In some studies, customer satisfaction is indicated that is positive and statistically significant associated with short-term and longer-term future performance.
The results also showed that the enterprises with higher-level customer satisfaction can increase higher profitability (Christopher and David, 1998; Zhang and Pan, 2009;
Sim et al., 2010).
Mohammed and Tony (2006) think that customer satisfaction is confirmed as a mediator in the relationship between performance and automated service quality. Jose (2000) also indicates that customer loyalty, customer satisfaction and service quality are some of the most important concepts in the marketing of banking. Ho (2009) recognizes that relationship marketing plays an important role for bank's competence.
The major factor of determining the success of the relationship marketing is the customer loyalty. In the study about efficiency of customer service and performance, Duncan and Elliott (2004) indicate that performance measures i.e., capital adequacy, expense/income, interest margin, and return on assets are positively correlated with customer service quality. Liu and Wu (2007) examine the effects of direct mailings, firm reputation, firm expertise, locational convenience, and one-stop shopping convenience on both cross-buying and customer retention. The results of this study conclude that banks can influence customer retention and cross-buying by different service attributes. Chen (1999) selects market share rate and customer growth rate to be the indicators of customer perspective in her study of banking performance.
In addition, based on a case study conducted in Chase Manhattan Bank, Namchul and Donald (2002) show that the internal business process projects such as service charge reengineering and e-fund disbursement cards will result in new products and services in addition to producing dramatic increases in operating
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savings and revenue. Datta and Kundu (2011) apply secondary data on selected Indian public and private sector banks to examine whether e-banking initiatives can be considered as a successful case of business process reengineering implementation.
They conclude that customers prefer electronic delivery channel (i.e., ATMs and electronic funds transfer) more than that of traditional branch banking.
2.4 Banking performance in internal business process
Banks not only apply in financial and customer perspective but also focus on internal business process to enhance the performance of business. In order to achieve competitive advantage, internal business process must be different from the organization's rivals or perform in a superior way (Litter et al., 2000; Škrinjar et al., 2008). Škrinjar et al. (2008) study the impact of business process, the results of empirical research show that business process orientation create better non‐financial performance and indirectly affect to better performance.
Benaroch et al. (2012) apply an event study to examine the economic impact of a diversified sample of IT operational risk events from the U.S. financial services industry during 1985-2009. They indicate that IT control is important of the dependence of business processes on IT systems and a tendency to build into these systems' automated managerial controls. Banking can cut down the cost by the efficiency of transaction processing and the frequency of operating equipment utilization (Chen, 1999). Wu et al. (2010) also think that banks can evaluate organizational performance on the basis of innovation in system programming, certification of a financially integrated professional platform, and management stratum support in the perspective of internal business process. Some indexes of internal business process (i.e., new service items, rationalized forms and processes, sales performance, and management performance) were selected to evaluate banking
performance (Wu, 2011).
As a result of financial globalization and liberalization, the development of financial institutions has led to the establishment of financial holding companies to pursue the economics of scale and scope and enhance the operational efficiency. Haan and Poghosyan (2012) find that bank size reduces return volatility by using quarterly data for bank holding companies in the United States and controlling for the quality of management, leverage, and diversification. Hu et. al (2009) conclude that it is an important for financial holding companies to be operated efficiently by using data envelopment analysis. Chiou (2009) investigates whether commercial banks in Taiwan establishing or joining in financial holding companies could promote their efficiency and productivity. The results show that except for pure technical efficiency, other efficiencies and productivity of commercial banks do not be enhance because of establishing or joining in financial holding companies.
2.5 Banking performance in learning and growth
Sim et al. (2010) indicate that if employees have the ability of diagnosing and responding to complaints of customer, the negative effects of a service failure will be reduced. Therefore, management should make frontline employees to have trained, that would help to enhance repurchase behavior and brand loyalty and improve performance. Davis and Albright (2004) employ empirical analysis to investigate the impact of the balanced scorecard on a banking institution's financial performance.
The conclusion of that study is business train employees with customer service, office technology efficiency, product offerings, and sales techniques can enhance employee's ability to recognize customer needs, cross-sells, referrals, and customer service. Ardichvilia and Gasparishvilib (2001) indicate that the use of learning technologies is a growing trend towards in medium-sized banks. A study of
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Australian financial institution’s training program, the authors suggest that training of social skills should theoretically be crucial to gain competitive advantage. Based on a cross-sectional sample of 155 banking firms, Lin (2007) finds that both capability of information technology and human capital investment contribute directly to the overall value-creation performance of banking firms. Wu et al. (2010) evaluate the performance of WM banks in Taiwan by applying the analytical hierarchy process and grey relational analysis. The result of this study suggests that employees’
professional knowledge, education and training of employees should be considered in bank industry. Chen (1999) also selects training in a specialty of employee and stability of employee to be the indicators of learning and growth perspective.
In sum, since banking industry plays an important role in the economic activities attracts scholars to explore the banking performance. Several analysis approaches have been applied to evaluate the banking performance, i.e., analytic network process (ANP), balanced scorecard (BSC), decision making trial and evaluation laboratory (DEMATEL), data envelopment analysis (DEA), ratio analysis, and regression analysis. This research employs balanced scorecard as a framework to investigate the banking performance by DANP method.