Computers and the Cost of Producing Various Types of Banking Services

Abstract

It is generally claimed that adoption of computers leads to decreased operating expenses because fewer employees can coordinate the same volume of operations at a smaller total wage and salary expense. These savings in wage and salary expenses more than offset increases in supply costs, building space rental costs, transport costs, and other costs which occur with automation.1 Yavitz, in a study of 40 banks, found that adoption of a computer for demand deposit accounting operations reduced personnel requirements by 10-67 percent.2 Feasibility studies for most of these 40 banks showed net savings which increased over time. The purpose of this study is to determine whether, or to what extent, the claim that automation reduces operatings costs for various types of banking activities is justified. The activities subjected to analysis include demand deposits, time deposits, installment loans, real estate loans, and business loans. A model for analyzing costs is presented in Section I. In Section II, the data source is discussed, and two alternative empirical versions of the cost model, which will be used to evaluate the impact of computers on operating costs, are developed. The results derived from the first empirical model are discussed in Section III, and those for the second empirical model are discussed in Section VI.