As we pass from one more year of crybaby banking into still another, the prevalent refrain from bankers is: "The uncertainty is killing me!"
In other words: With so much uncertainty about what the government will do impacting banks and the economy—how can I do anything but tiptoe forward on the treadmill, with all transformative strategies on hold?
That's particularly ironic because it's hard to remember a time when there was so little uncertainty about the outlook for banking. Do you want to know what the yield curve will be a year or even two years from now? You've already been told, by the Fed. This wasn't so in 2002, or 2007. Do you need to know if there will be strong GDP growth in 2013? There's no room for doubt, all the pundits say it won't happen.
The same goes for regulation. Given the track record of obfuscation, delay and confusion since Dodd-Frank, there's no need to anticipate that anything new and important—such as a horrifyingly clear directive on QM, QRM, GSEs, the Volcker Rule or Basel III—could become effective next year. At most we'll get vague, complex and screwed-up proposals such as the Government's GSE think piece and the recent Remittance Rule--fodder for more controversy and delay. And how can you doubt that the SEC and the CFTC will remain underfunded paralytics, courtesy of congressional Republicans?
The wailing and howling about the cost and pain inflicted by uncertainty actually signifies something quite different: a strongly unfavorable outlook for banks, stretching farther ahead than we can usually see. So, bankers want the great deus ex machina in Washington to reach down and pluck them up. Don't hold your breath. Science recently proved that if you just sit, you'll die faster. Same for banks.
A piquant case in point is branches, once the main service channel. The telephone, PC, ATM and smart phone came. All impose additional costs. Yet, despite the multiplication of alternative channels and their increasingly frequent use, the total number of branches has remained nearly constant for years, with no breakthrough to reduce their cost or increase their value.
Not coincidentally, the worst position a banker could hold in 2011-12 was head of Retail. Many failed. Did any have a clear idea of whether they wanted customers to come to branches more often—or less? And whether you went for grocery store branches or financial supermarkets, whether you wanted every employee to sell, or you trained newly acquired salespeople to buttonhole customers — the results didn't change.
Bookstores and video rental outlets didn't have to worry about these intricacies. They just shut down. But banks feel egregious expense levels such as $300 per year to operate a (branch-based) checking account are sustainable. How? By revenue from nonbranch activities, in a good year. Rationalization of branch networks is just too darned "expensive."
Costs, employment and compensation levels must shrink in banking for the same reason they're shrinking across our economy. Technology replaces not only paper pushing, but human judgment. No need for an army of people making decisions about consumer credit. Machines are better, even if a few laggards don't yet admit this. Meanwhile, customers have grown accustomed to the increasing difficulty of finding a responsible person to speak with—whether they're dealing with an airline, a store, or a government agency. Banks' increasingly exceptional "guarantee" that you can always talk to a real live U.S. agent "for free" stands out like a sore thumb.
Who did better after the crisis: Banks that kept dubious assets on their books and even tried to hide them? Or those that sold them and took their losses? The latter, given access to adequate capital.
So, 2013 is drearily predictable rather than shrouded in mystery. Don't await a miracle. Make a strong start at restructuring. Write off your less productive assets and take back all the functions critical to customer value previously shucked off to outsourcers. A winner said: "We build most of our own stuff because we don't want to rely on a third-party vendor."
Otherwise you'll soon be doing little more than renting out your charter jewels, preemption and deposit insurance—while acquiring and operating irrelevant, low-growth, cyclical, non-synergistic, unintegrated businesses such as commercial insurance, retail securities brokerage, and investment banking, for which banks have consistently demonstrated lack of both affinity and competence. That's for certain.
Andrew Kahr is a principal in Credit Builders LLC, a financial product development company, and was the founding chief executive of First Deposit, later known as Providian.