First Niagara recently announced the acquisition of almost 200 HSBC branches in its market area. When asked if this would result in branch closures and layoffs, the chief executive of First Niagara said there wouldn't be many layoffs, because the overlapping branches would be sold rather than closed.

If that prediction proves accurate, then banks in the area will in total have as many branches and probably as many employees and as much expense as they had before. But if they're like banks in the rest of the U.S., they're already inadequately profitable.

This has been endemic in our industry. Consolidation fails to reduce employment and increase efficiency. Even after many mergers and acquisitions, industry expenses are high and profit is anemic.

Unlike Greece, we can't blame this stagnation on inflexible unions or laws. We can only blame ourselves, the banking industry.

What's unusual is that the seller of the branches, HSBC, is proceeding very differently from the buyer. They recently announced plans to eliminate 30,000 to 50,000 employees over the next few years. They'll hire in some markets, but far fewer people than they lay off.

The aim is to reduce expenses, and the expectation is that if revenues drop, they will fall by much less than the expenses — so that profit will increase.

Meanwhile, JPMorgan Chase says it will go on opening new branches, increasing total employees and expense.

Who's wrong? HSBC? Or JPMorgan and First Niagara?

Unless we can add revenue, we'll have to reduce costs to become sufficiently profitable — as HSBC says it will do. So the threshold question is whether we will be able to increase revenue. If not, then it's HSBC who's on the right track.

No one expects the unbanked or underbanked to come flocking to generate more income for banks. Furthermore, the industry has not shown the ability to raise prices to levels that would provide a better return on the increased capital that is being required by regulators. So, additional revenues would have to come from providing more or higher value services to customers.

Not much of this is visible even at the horizon. Banks are being told to simplify and standardize their products. Financial product innovations, even those originating outside banking, such as the prepaid card, elicit suspicion and investigations.

Regulatory stringency is sure to increase. Costs of uncertainty may be further enlarged by the recent appellate court rejection of an SEC regulation. Rules will take longer to formulate, and once issued they will be more frequently litigated. Resolution will be slower.

Over the past thirty years I can recall no period less propitious for value-added innovation.

Justifiably lacking confidence in our capacity to increase revenue — even when it is normalized for the impact of the economic cycle — we had better focus on cutting costs. Employee costs are by far our largest controllable costs.

In the past, apart from fringe functions with drastically variable volumes, such as mortgage origination, banks have been loath to get leaner. Perhaps this is because our business is indeed cyclical, and over the course of a normal business cycle, it seemingly did not pay to shrink and then re expand the workforce very much.

It's different now. This time, our problem is structural, not merely cyclical. It has some common features with structural problems that arose earlier in manufacturing and then in other service industries. More value can be created with much less labor cost, and the remaining labor can be performed more economically outside the firm. As key functions such as IT and customer contact operations move out of the banks, we lose control of customers and lose a major share of any added value.

Remote deposit capture is a striking example of this. Customers who didn't want to entrust their checks to the mail and who demanded a convenient deposit point now can hold onto those checks and avoid the branch. The result is likely to be a higher-value solution for them. This isn't an oddity, it's a tipping point achieved through a succession of innovations made primarily outside banks. Banks will benefit from it, if at all, only when they embrace its structural implications: fewer tellers, fewer branches. Otherwise we can only lose.

HSBC, with worldwide market positions and opportunities, is cutting back severely. Whether you see your market as the whole U.S., a region or a city, you will need to do the same. The negative economic outlook and increased volatility make this even more urgent now.

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