Clarifying the end of retail banking

Brian Jackson, a member of the global financial services team at Microsoft, has just posted this analysis on the future of financial services, quoting my suggestion that banks could be out of the financial services business within 10 years. Actually, while he quotes me correctly (Brian was kind enough to come to our side event at CLAB in Mexico city, where I did say this), it is important, I think, to be clear about what I meant.

Obviously, banks are always going to be around. But - and I say this knowing the position is quite a controversial one - I believe that their role in society is changing, and that bankers can either accept this, or not.

If not, then they face declining revenues as traditional revenue streams, such as those from payment systems and less complicated loan products, go to non-bank institutions that have more efficient business models. Even a telco - with a single means of billing a customer, no interchange, and, let's face it, the potential of much broader distribution (who doesn't have a  mobile phone always with them?) - is more efficient at processing some classes of payment than a bank.

It is probably a gross generalisation to say this, but it seems to me that most of the threat to banks today is coming from players entering the low-margin end of the market. The end of the market where the inefficiencies of banks makes them most vulnerable. But bank inefficiency in this segment stems from the operational and regulatory load required to make them safe and efficient at the other end of the market. Where complicated, labour intensive, and more bespoke products are the norm.

This represents a quite huge opportunity, in my view, since the sophistication of customers continues to increase year on year. I've just spend an hour trying to find the data justifying this statement (I know I have it somewhere, and will post when it turns up), but I doubt you'd find many people arguing the point.

With increasing sophistication comes demand for more complicated, more tailored solutions. And these are something banks are either well tooled to provide, or are busily rebuilding themselves to provide. When you see terms like mass affluent, personal bankers, and financial advice bandied around, you know what is actually happening is that banks are recognising that transactions aren't going to be the business of the future.

The other day, I went to a bank in Columbia to look at their new pilot branch concept for the mass affluent. The key thing I noticed was that there were so many people there. There were account executives, receptionists, support officers, and, tucked away into a corner, one or two tellers. I had the chance to speak with one of these account executives, and discovered that, since she'd moved from a conventional branch to the new one, she'd increased her revenue by a significant amount. Product count was doubled, and customer profitability way, way up. She attributed the reason to the high touch, personal service she was providing.

Transaction mix? High value, very low frequency ones commencing and concluding the life of more complicated products such as term deposits.

Now, this bank did all of this without any new systems, and without much of an investment beyond the extra people. They already had the capability to do the high touch tailored approach, but were coming from a transactional, very retail, background. In other words, most of the investments they needed were already in place.

Clearly, if all you are going to do is process deposits and withdrawals, this is an example of the inefficiency of banks that I was referring to earlier. Dealing with more sophisticated products and customers? A barrier to entry for non bank players that will be hard to get across. Especially as most of the new players have been around for less than 10 years, and don't have the decades (or more) of experience that a bank has.

So let me restate, then, my prediction that bankers will be out of business in 10 years. I think that retail banks will be out of the low margin, high volume transaction business, perhaps not in 10 years, but sometime in the future. Then, they'll use their inherent advantages to snap up all the high value transactions and the customers that come with them, leaving the relatively slim pickings to those who want to fight for them.

Comments

[Colin Henderson]

This is a great post James. I think the prediction, "banks will be out of the low margin, high volume transaction business" is here now. With 70 - 80% of basic transactions handled in self service, it makes little sense to have a branch network configured with banks of tellers. I like the Columbia Bank example here .... the Financial Management Centre designed to address revenue based services, and online banking/ ATM's to handle transactions.

[John Januszczak]

Regarding your payments by mobile phone example: I recall a survey on online payments by Javelin (I believe) which suggests most consumers would like their broadband supplier (usually a cable company or telco) to handle payments made online. So if your wireless supplier is owned by your cable or telco and they happen to be your isp - perfect!

[benry]

can you share who the Columbia bank was and some shots of their MA branch prototype?

[James Gardner]

Hi Benry,

Actually, it didn't occur to me at the time to take pictures, though I should have done. Actually, I think that particular day I left my camera phone in the hotel anyway.

Sorry - and next time I will make sure to get the right snaps.

[John Januszczak]

Perhaps not exactly the point you are making, but nonetheless along the lines of the "end of retail banking" theme - I really see banks becoming wholesale providers of banking services to other retailers and marketers. The President's Choice Financial brand in Canada comes to mind (owned, branded, retailed and marketed by grocer, operations run by a big bank).

In reading Adam Levitin's excellent The Merchant-Bank Struggle for Control of Payment Systems where he is discussing opt-in strategies for merchants to deal with the (high) costs of credit card acceptance he makes a much broader statement that I think resonates here:

"It may be easier for a merchant to become a successful bank than for a bank to become a successful retailer, managing supply chains and inventory. Merchants who enter banking have significant advantages because they have established customer bases where financial transactions are already occurring. The only reason to show up at a bank is to do a finance transaction. But for the busy soccer mom, it is a major plus if she can do her banking at Target or Wal-Mart and not have to run a separate errand. It is far easier to put a bank branch into a Wal-Mart than a Wal-Mart into a bank branch."

[Alex Bell.]

[...]thank,very handy post http://www.conciant.com
[...]