The Problem of Costs and Cost Identification

Abstract

This chapter uses the banking sector to illustrate the problems of low profits and problems of strategic and operational profitability, together with the response made by banks towards improving their profitability relative to the new competitive environment in which they operate. The financial services industry in the UK has moved since the 1980s from a traditional domestic retailing service centred around the main High Street banks to a competitive industry where the retail credit market is dominated by a number of leading players with new entrants to the market jostling for position. This increased competition has been partly the result of the growth of the market for retail credit, but is closely connected to a complex mixture of other factors arising from political, commercial and cultural changes in the 1980s. These changes are detailed in more detail below, but in essence they arise from the increase in consumer credit, the diversity of the banking industry, a generally low industry profitability, an expensive product delivery system and a general problem of cost identification in an industry where many costs are fixed and the products sold are intangible.