Everyone knows it’s broken
tiltthewindmill.com
Everyone knows it’s broken
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Re: Everyone knows it’s broken
#2This isn't as complicated as it looks.
The services around time deposits (providing a checking account, processing transactions, balance inquiries, ATMs) are not that expensive to provide relative to the profits made lending that money back out.
The reason for the explosion of fees is that retail banking in America, as an industry, lost its mind in the 2000s. Every bank brand massively increased its numbers of branches while simultaneously marketing ever more elaborate "private banking" services. Branches are expensive. Marketing to the 1% is expensive. Actual banking is cheap.
This expansion was all funded by cross-subsidy: Banks used to charge huge fees to a small number of consumers who got caught in various traps, e.g. "overdraft protection." A small number of people subsidized services to everyone else. Regulation made a lot of these abusive "services" into opt-in measures, so now retail banks are scrabbling to find new revenue sources to support their bloated, overwrought retail bases.
A more rational system will see the number of retail bank branches fall precipitously. Bank firms that have fewer, more central branches will earn higher profits with fewer fees. Consumers are likely to flee to low-cost offerings. It will take time, but if nothing else, new accounts won't be opened with high-cost banks as often as low-cost banks.
You can already get a preview of the world of tomorrow (and yesteryear) -- credit unions. Small numbers of branches. Lots of ATM sharing. Low fees.
Re: Everyone knows it’s broken
#3You've probably all read it already, but the best thing about this article was the link to the venmo discussion:
http://qz.com/277509/read-what-happens-when-a-bunch-of-over-...
Re: Everyone knows it’s broken
#4This isn't as complicated as it looks. The services around time deposits (providing a checking account, processing transactions, balance inquiries, ATMs) are not that expensive to provide relative to the profits made lending that money back out. The reason for the explosion of fees is that retail banking in America, as an industry, lost its mind in the 2000s. Every bank brand massively increased its numbers of branch…
What is the thought process behind the expansion of branches? I work in a downtown business district, and there are two storefronts that have banks that literally have zero foot traffic.
Both are relatively new entrants to the market, but their account terms/fees are so poor that I cannot imagine why anyone would bank with them. (And judging by foot traffic, nobody is) So why do these branches exist?
Re: Everyone knows it’s broken
#5You've probably all read it already, but the best thing about this article was the link to the venmo discussion: http://qz.com/277509/read-what-happens-when-a-bunch-of-over-...
I'm 27 and identify more with the over-30s. Then again I've never really grokked the new wave of smartphone-based social media. I never use Twitter, I deactivated my Facebook, and I consume 99% of my internet time at a desktop computer.
I feel like an old fogie and like I'm missing out on something. I like text messages and wish everyone would go back to using AIM -- it worked better than most social communication apps do now.
Re: Everyone knows it’s broken
#6This isn't as complicated as it looks. The services around time deposits (providing a checking account, processing transactions, balance inquiries, ATMs) are not that expensive to provide relative to the profits made lending that money back out. The reason for the explosion of fees is that retail banking in America, as an industry, lost its mind in the 2000s. Every bank brand massively increased its numbers of branch…
What is the thought process behind the expansion of branches? I work in a downtown business district, and there are two storefronts that have banks that literally have zero foot traffic. Both are relatively new entrants to the market, but their account terms/fees are so poor that I cannot imagine why anyone would bank with them. (And judging by foot traffic, nobody is) So why do these branches exist?
As someone who used to work with a broad cross-section of banks and credit unions, I got the impression that they viewed their physical locations and "the personal touch" as what separated them from online-only services. Not a surprising conclusion, given that their physical-first clients would -- by virtue of their presence -- be over-represented in the minds of managers.
That said, having a bunch of physical branches provides as much an advantage as not having to buy gas when you use a horse instead of a car.
Re: Everyone knows it’s broken
#7This isn't as complicated as it looks. The services around time deposits (providing a checking account, processing transactions, balance inquiries, ATMs) are not that expensive to provide relative to the profits made lending that money back out. The reason for the explosion of fees is that retail banking in America, as an industry, lost its mind in the 2000s. Every bank brand massively increased its numbers of branch…
I respectfully disagree - or at least another perspective:
The core earnings of a retail banking operation is net interest margin - essentially the spread between what the bank pays depositors and is paid on loans. That spread has been in a pretty negative downtrend http://research.stlouisfed.org/fred2/series/USNIM/. However, that is for all banks (think BofA as well as you local 1st national whatever), so my guess it may look worse for purely retail operations (maybe not).
My point is this, most figure it costs ~100-150bps to manage a retail branch network (which is a relatively fixed cost) and for the most part (with the past couple of years being the exception) you're getting squeezed in the interest rate side of things (not to mention what you're reserving for defaults). So of course if you are managing one of these banks you are going to want to diversify your revenue stream towards fees.
So why not move to the online only banking model and scrap the branch network? Because retail branch deposits are sticky and are good at gathering stable deposits. That's a much longer discussion - but while some of this may seem idiotic from the outside there is a method (or least logic) to the madness...
Re: Everyone knows it’s broken
#8This isn't as complicated as it looks. The services around time deposits (providing a checking account, processing transactions, balance inquiries, ATMs) are not that expensive to provide relative to the profits made lending that money back out. The reason for the explosion of fees is that retail banking in America, as an industry, lost its mind in the 2000s. Every bank brand massively increased its numbers of branch…
What is the thought process behind the expansion of branches? I work in a downtown business district, and there are two storefronts that have banks that literally have zero foot traffic. Both are relatively new entrants to the market, but their account terms/fees are so poor that I cannot imagine why anyone would bank with them. (And judging by foot traffic, nobody is) So why do these branches exist?
It depends on if you're talking about brokerage or retail branches. Brokerage branches exist for the one guy who comes in and makes a bunch of large investments or reorganizes his portfolio. Yes, this can be done online, and probably more cheaply, but those of a "certain" generation are more comfortable working with another person on the other side of the desk when it comes to their money.
Retail banking, on the other hand, I totally agree with you. Basically everything that can be done in a branch can be done on your phone, faster. And the stuff that can't be done on the app can be done by calling in, which still takes a fraction of the time of going to the branch. I've personally had great experience with bank customer service, and routinely have 5 minute calls with them, whether it's to authorize a charge on my card or change my ATM limit.
Banks definitely see this change coming. It's just a question of when they draw the line between catering to the subset of their customers who prefer in-person interaction and the cost of running a branch (especially when compared to the kind of overhead that comes with running an app).
I'm more curious to see how ATM's evolve.
Re: Everyone knows it’s broken
#9This is a great article. I expect that quite a few people aren't fully aware of the fees they pay in full. If you look at some of the statistics you'll find the average bank account costs about $250 a year, with some customer groups (e.g. those prone to overdraft fees, often optimized for fees by re-ordering of transactions, e.g. see the short documentary Spent: looking for change[0]) you typically see numbers between $500 and $1000.
It seems to be there are tens of millions of people in e.g. the US who aren't fully aware of this, and aren't aware of the alternatives. I mean, a great phone like a Nexus 5 with a modest data plan for two years costs about the same as most people pay for their bank account. Yet that same Nexus 5, combined with an elegant mobile banking app (or at some point apps built on non-proprietary technology like bitcoin) could replace those services entirely.
It seems it's only 2-3 years away before we see massive changes. From the rise of internet-only banks to non-bank digital wallets, the rise of peer-to-peer payments and even non-fiat currencies, it all seems imminent.
The big question for me is, will this be a big regulatory / dependency battle more than anything else? Despite Paypal being digital only, it hasn't really made huge headway outside ecommerce. It seems most forays into digital banking is dependent on the banks themselves. Look at Apple, it created a way to store bank (creditcard) credentials on a piece of hardware. Square created a way to read bank (creditcard) credentials on a piece of hardware. Paypal created a way to send money using bank credentials in software. And most of the bitcoin ecosystem has a foundation in payment processors and exchanges that all require a bank account.
Despite the disruption being clearly on the way, I can't help but notice that it's all very highly integrated with banks, and quite dependent on them, too. There's a lot of power in that to slow down disruption.
Re: Everyone knows it’s broken
#10You've probably all read it already, but the best thing about this article was the link to the venmo discussion: http://qz.com/277509/read-what-happens-when-a-bunch-of-over-...
I'm not a venmo user, but it reminds me of the ease of money transfer that my circle of friends had when we were all big time into playing online poker. We used the simple and free money xfer systems to pay each other back for heaps of things.
Then of course the US decided that online poker was evil and it all went to hell :(