Practically every bank of any importance in the United States has installed a system of cost accounting and made a careful study of the principles involved. In Canada, however, very little attention has been given the subject by the banks, altho in almost every other line of commercial industry cost accounting is accorded thoro consideration, and in fact has become an absolute necessity under modern business conditions.
The necessity of a cost system to a bank is really greater than in any other business, owing to the narrow margin of profits on the gross amount handled in banking, and the number and variety of services rendered by the banks to their customers and the public without remuneration.
In the stress of competition most banks overlook the fact that every transaction made for a customer, no matter how simple, bears a basic cost to the bank. They have allowed the public to encroach gradually on their legitimate exchange and other profits. Banks are not only rendering a great many services for nothing, but frequently at a loss to themselves. The public has been quick to grasp this weakness of the banks, and has naturally pressed its advantage to the utmost.
Until the beginning of the present century the profits obtained from the banking business were large enough so that the loss from a few unprofitable accounts had no appreciable effect on a bank's net earnings. Competition, however, has brought conditions to a state such as has existed for some time in other lines of business, so that it has become more and more necessary that all the business handled by a bank should show a certain amount of profit or, at all events, not be transacted at a loss.
The development of a new class of business - that of small and unremunerative checking accounts - the vast increase in the volume of checks, the tendency to carry active checking accounts in the savings bank department and the constantly increasing cost of operating, have made the analysis of the profit or loss on individual accounts an absolute necessity. The only remedy for excessive or unintelligent competition among Canadian banks lies in an accurate knowledge of costs. No ordinary argument will appeal to a branch manager sufficiently to restrain him from offering extra inducements to customers, as long as he honestly believes that he is securing such business at a profit. But few managers would persist in offering the goods or the services of the bank for less than cost if they knew the actual facts.
With expenses constantly on the increase, and with returns for banking services steadily diminishing, the banks have been forced to study seriously the reduction of expenses, both by the introduction of improved labor-saving methods in the work, and by systematic study of costs, with a view to adjustment or elimination of any accounts or transactions which have hitherto been handled at a loss.