What the Efficiency Ratio Misses

The efficiency ratio still has a place in banking. But on its own, it can tell a flatter story than many institutions can afford to believe. 

Steve SaLoutos, chief financial officer at ProSight, and Mark Leher, director of product management at Alkami, say that the efficiency ratio still matters, but it now needs to be read with more context—especially as banks pursue different strategies, invest more heavily in technology, and rethink what drives long-term profitability. 

A few things to remember about bank efficiency: 

Do not mistake a common metric for a complete picture. SaLoutos described the efficiency ratio as “how many pennies it takes to create a dollar in revenue,” which helps explain why it has long been useful as a shorthand measure. But he also stressed its limitation. “It doesn’t take into account strategy,” he said. Two banks can post similar ratios while operating with very different business mixes, growth plans, and risk profiles. 

Higher expenses are not always a sign of weaker efficiency. Efficiency is not the same as cost-cutting. Because the ratio measures expenses against revenue, it can improve even when expenses rise—as long as revenue grows faster. That matters for banks making deliberate investments in digital platforms, infrastructure, customer experience, and other capabilities that may hurt the ratio in the short run but strengthen the business over time. 

Technology can reshape both costs and customer behavior. Leher argued that digital tools, automation, AI-driven service, and analytics are no longer optional extras. They are becoming foundational. He pointed to the cost gap between branch and digital transactions as one reason. But the bigger opportunity may be on the relationship side. “If we can engage with our account holders in meaningful ways,” he said, banks can create more loyal customers rather than simply competing for rate shoppers. 

Not every customer relationship should be treated the same. Leher said some early AI models aimed to predict which customers were likely to leave, only to show that the least engaged customers often had already made their decision. “They’d already broken up with you,” he said. The implication is that efficiency can improve when banks focus more energy on onboarding and deepening the relationships that create long-term value. 

Efficiency gains cannot come at the expense of control. SaLoutos also warned that automation and AI in the back office need to be balanced with sound risk management. Cost savings that create regulatory or control problems are not real gains. 

The larger message: the efficiency ratio remains useful, but only when banks pair it with strategic clarity. As SaLoutos put it, “Don’t just look at the number. Look at what’s behind the number.”