The End of Consumer Banking as We Know It
“Banking on Your Phone”
“Time to Ditch CDs for Savings Accounts”
“Branch Banks Need to Fear Upstarts”
“Financial Marketers Tip Toe Between Irritating New Fees and Profitability”
“The Hidden Burden of Ultra-Low Interest Rates”
While I read many articles about consumer banking on a weekly basis, the five headlines above stood out from the others in the past several days.
Because I consider them to be canaries in the coal mine.
As I see it, the consumer banking business – supported by an expensive brick and mortar branch network – is in the midst of creative destruction. Yet, I’m convinced that a majority of bankers are pretending it isn’t so.
It’s the myopic perspective that if we don’t acknowledge it, perhaps it won’t come true.
This reminds me of an observation made many years ago by one of America’s most prolific authors and one-time candidate for Congress, Upton Sinclair: “It is difficult to get a man to understand something when his salary depends on his not understanding it.”
What requires understanding these days is that for a number of reasons, consumer banking is facing significant changes – one of which could be the end of expensive brick and mortar branches as we know them. They are simply too expensive to accommodate the needs of fewer and fewer consumers…consumers facing an array of new banking alternatives.
In most cases, major change doesn’t occur all at once. It slowly creeps upon us until a single defining event occurs that leaves many people shaking their heads in disbelief.
The near demise of American’s auto industry is a case in point. So is the ability to walk into a store and rent movies. Soon, we’ll look back and wonder what happened to our land-line phones. And let’s not forget the middle-class lifestyle.
While our realization that something dramatic has happened hits us suddenly, the signs of significant change underway have been available for quite some time. They appear as single articles in magazines and newspapers. They can be heard as brief stories on network news. They appear in conversations between co-workers, friends, and family members.
While each story or tidbit of information may seem inconsequential by itself, they are like pieces to a giant jigsaw puzzle. Slowly putting them together over time gives you an advance warning as to what might be on the horizon somewhere down the road.
This is what I’m experiencing by reading, printing, savings, and assimilating as many of these stories and articles as possible. I believe they are foretelling us what the future holds for traditional branch banking.
Like me, you have to open your mind to the possibility that branch-based banking is on its way out – made obsolete by a combination of rapidly changing technology, a lingering recession, and consumers’ changing behavior towards, and attitudes about, banking.
Like a good friend of mine reminds me from time to time: “The writing on the wall does you no good if you can’t read.”
The impact of changing technology
Most likely, when the history of the demise of branch banking is written, the beginning of the end most likely will be identified as the first ATMs installed through the walls of branch banks. The goal was simple – keep customers out of the branch.
Over the years ATMs began appearing all over the country in just about any location imaginable. Aided by the quick switch from ATM cards to the ubiquitous debit card, consumers found themselves free to access their checking and savings accounts almost anytime, anywhere.
Quite some time elapsed before the next big technological event appeared. But when it did, it spread like a wildfire and continues to burn out of control – changing the business landscape in ways heretofore deemed unimaginable.
The Internet introduced us to websites and online banking, including paying bills via our computers. It wasn’t long before consumers could choose an online-only bank free of brick and mortar branches.
The telecommunications revolution soon followed, enabling millions of consumers to do their banking via their mobile phone.
But perhaps the most significant breakthrough occurred when major companies like Apple, Microsoft, and Google opened up their software to millions of programmers who immediately began developing free, or low-cost, software to enhance the capabilities of today’s hardware devices.
As a result, consumers can now make payments via PayPal and Square, borrow money via peer-to-peer lending and microfinance, and move their banking to upstarts like BankSimple – later shortened to “Simple” – and Suze Orman’s new Approved Prepaid MasterCard Debit Card.
Orman commented that she created her new prepaid card “…after I heard from so many people who were tired of being taken advantage of by the tricks and traps of the banking industry.”
Once you start pushing people out of your branches, follow-up with online banking, deposit of checks via a mobile phone, and encourage them to apply for loans online, at some point in time they come to realize that they really no longer need to visit a branch for any reason.
To millions of consumers, branch banking has already become obsolete. This includes 67-year-olds like me.
The damage wrought by the great recession
What started out as a simple recession quickly turned into a great recession with a growing number of people referring to it as the great correction.
There will be no recovery if “recovery” means that things go back to the way they were before the collapse of the Dotcom bubble and the housing market.
What’s really occurring is a great correction that is slowly correcting the profligate borrowing and spending habits of the past several decades. When it is all said and done, the recovery will deliver a very different economic landscape.
One outcome could be the beginning of the end of branch banking.
One of the most damaging things for consumers during this prolonged recession is the near zero interest rates – compliments of the Federal Reserve and the banking system. With the Fed telling us that we can expect near zero rates until the end of 2014, this will mean at least six years of earning little to nothing on checking and savings balances.
During 2011, the combined interest earned on my checking and savings and my spouse’s checking and savings totaled a tad over $10. Our joint money market account earned a mere 83 cents. That’s pathetic.
And one thing is for sure, regardless of “who” is to blame for these ridiculous rates, most consumers will blame their local bank or credit union.
And that’s not all the banking system is being blamed for.
We can add the mortgage lending crisis and the resulting foreclosure disaster, including equity lines that have been abruptly cancelled.
Getting a consumer loan is much tougher these days.
As for piling on, we can look at the rash of new and higher fees being added or threatened and the cry to eliminate free checking.
And let’s not forget the billions of tax dollars doled out to many of the nation’s banks a couple of years ago to keep them from failing.
Bottom line – as Joe Swatek mentioned in yesterday’s blog, according to the November 2011 Gallup study, only 15% of consumers have confidence in the U.S. banking system.
It’s in difficult times like these where creative destruction arrives on the scene to force changes that have been long in coming — changes that will occur in spite of the efforts of many to forestall or prevent them from happening. Branch banking could be on the list of changes.
Sharing the saddle of the creative destruction horse are change agents like Suze Orman, Jack Dorsey, and others who are aware of the canaries in the coal mine and are taking action to meet the rapidly changing needs of today’s consumer.
As I encounter the many banking articles on a weekly basis, it amuses me to read and hear comments from “experts” advising consumers that they’d better get used to higher bank fees and the loss of free checking. It’s as if they believe consumers have no choice but to shut up and go along.
The problem here is that a growing number of young techies feel otherwise and will accelerate efforts to provide non-bank alternatives like those mentioned above.
Who knows what they are working on right now?
But you can be sure of this – the world of consumer banking at brick and mortar branches will be undergoing significant changes over the next several years. The clues can be found in the many articles like the five whose headlines appear at the beginning of this blog.
The ultimate metaphor here is the boiling frog story that is told often. Drop a frog in boiling hot water and he’ll jump out. But place him in a pot of cold water that is slowly heated, he will not perceive the danger and will be cooked to death.
Likewise, it appears many bankers have an inability to perceive the danger posed to branch banking from everything that’s been happening since the first ATM was deployed decades ago.
My recommendation is that you begin paying attention to the canaries in the coal mine.