In retail banking, we look for trends: the branch of the future; the winning mobile banking platform; prepaid cards. It's harmless fun.
Well, here's a much more significant though less titillating trend to consider:
In recent months, senior executives with responsibility for retail banking have left the following institutions: Citi, Chase, B of A, Capital One. I'm sure there are plenty more. Maybe this is a cascade that will ripple down to smaller banks.
What's the common denominator here? I'd say it's the failure of retail banks to meet earnings expectations.
There is no relief ahead. Retail is a net gatherer of funds and will continue to suffer from prevailing minuscule funds values. There will also be continued regulatory pressure on punitive fees, such as check overdraft fees. The relentless, seemingly unstoppable rise of average interchange rates has been decisively reversed — first by the Wal-mart Settlement and then by Durbin. Many wonder when this will reach credit cards.
Do you see some counter trend that is going to restore retail banking profitability? New value-added services for which customers will be happy to pay? Dramatic cost savings in delivering the functions customer now use? I don't.
Banks are laying off mortgage origination employees. Larger institutions, under much greater shareholder pressure for earnings, raise basic checking account fees. They correctly project that this will drive at least some customers away. But the changes so far have not been sufficient to reverse the downdraft on earnings.
What is most conspicuous in this is the crushing structure of costs that are perceived as fixed and allocated to checking — primarily associated with branches and paper. A checking account is seen as "costing" over $300 per year. Who would pay $25 per month for a transaction account? Who would need to do so? If not many consumers will, then we better think again about how we structure and deliver our services.
Already, most consumer non-purchase payments are made using "unlimited, free" electronic payment systems operated by non banks and utilized not just by banks but also by operators of prepaid cards and other accounts. What is not yet apparent to many is that the day is coming when consumers who require physical access to a banker and/or who need paper checks are going to have to pay a lot more for these luxuries—while all the rest of us opt for much less expensive payment vehicles.
In the past, some early-adopter banks have tried to price deposit and payment accounts more or less this way, namely, to charge for branch and paper check access or transactions. These institutions were ahead of the market. (Being too early is nearly as bad as being too late.) To the extent that banks are increasingly charging less affluent customers for "checking accounts," transaction pricing might no longer be too early.
How can anyone imagine that the solution is to charge for debit cards (low cost or no net cost to banks) and not checks (high cost)? You want customers to use checks instead?
At a snail's pace, we are starting to offer small incentives for customers who do without paper statements. Teller transactions use paper too. How about: No fees if no paper at all, $9 per month any month that you use paper (or use it more than once)? Avoiding paper makes cultural as well as financial sense.
But whether or not our industry rises to this challenge, there will be increasingly strong and numerous non-bank "program managers" and other marketers moving in. Some of them will leverage existing service points that are not bank branches. They will contract with specialist institutions to get the benefit of FDIC insurance, card networks and other utilities. So long as these arrangements don't impose improper risks on banks or unfair burdens on consumers, it is hard to imagine that regulators will object to them.
We're in danger of ending up doing business only with the customers who are most expensive to serve — as alternative payment vendors progressively bleed off the others. Ending up like Borders or BlockBuster.
When GM and Chrysler went broke, the "Auto Czar," who is accorded far too little credit for his good work, closed 1/3 of their dealerships, making the car companies more efficient. That's what it took to thin out the sales and service points. Shall we wait for the next solvency crisis to thin out our service costs? Or can you imagine winning by eliminating just 10% of your employees and doing more outsourcing?
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. He can be reached at firstname.lastname@example.org.