Brett King

Archive for March, 2012|Monthly archive page

The unintended consequences of the Durbin amendment

In Branch Strategy, Economics on March 26, 2012 at 09:38

In the UK and Australia, account keeping fees are nothing new. In the US, however, since the introduction of the Durbin amendment, many US banks have been moving to monthly fees on checking accounts (we call them current accounts generally outside of the US) for the first time. These moves have resulted in often massive backlash from the public, including social media campaigns, “Bank Transfer Day” and further fuel for the Occupy Movement.

In the US, there are actually people you meet who will tell you that free checking is, or at least should be, a constitutional right. Thus, emotion runs high when a bank suggests that you now have to start paying for the right to keep YOUR money with their bank – it’s an outrageous concept to many!

The biggest problem for the US banking industry is that for the longest time it trained customers to believe that this was exactly how they should feel, what they should demand. Advertisers promoted ‘free checking’ for decades as the basic hook for new customers, although it could hardly be called a differentiation. The logic is that there is nothing better than free to attract customers to a new service platform. So how did banks pay for ‘free checking’?

Not really free

Well, it was never actually free. Banks initially made money off deposits (or Assets under Management), but as regulations tightened in the last 2 decades, rates dropped and spreads decreased, margins became razor thin. In th 80s as interest rates climbed, some banks instituted basic fees to combat the cost of savings accounts, but when credit cards became popularized in the 90s, banks now had fallback sources of revenue in credit fees and interchange that could sustain ‘free checking’. A side effect of the Global Financial Crisis is that credit card usage has declined as consumer “saving has become the new spending”, this means that a credit card isn’t working as an offset against basic account costs. With interest rates at historical lows and with no immediate signs of improvement, basic account profitability is at further risk. Then to add to all of this pressure along came the U.S Senator from Illinois, Dick Durbin…

The Durbin amendment to Dodd-Frank, has cut off the lifeblood of interchange fee from larger institutions, many of whom claim it will cost Billions in lost revenue. So while account keeping fees are seen as a mechanism to claw back loses on interchange, I expect it will have a secondary, more subtle consequence on retail banking.

Branch Economics Fail

In the light of revised economics of interchange and debit cards, the first reaction to loss of interchange fee in the US was to try to find new sources of revenue. However, the second reaction inevitably will be a realization that the cost base banks carry to support checking accounts via the branch is no longer viable – network is simply a luxury in a world where consumers just aren’t utilizing physical spaces for their relationship. With the best customers only visiting branches occasionally as they become increasingly digitally enabled, the expense of sustaining a network for a core product or relationship which looks more and more like a cost than a profit, becomes rapidly apparent.

The UK has had more than a decade to deal with this, which is undoubtedly why the UK has halved the number of retail bank branches since 1990. The US, with the false economics of consumer credit and interchange, have paid for their bloated physical infrastructure without the realization of the cost of changing behavior on their distribution model. That realization is now hitting hard as the real costs of an outmoded business model hit home.

Unintended Consequences

The Durbin amendment will give banks the imperative to better manage the economics of their debit card and checking account business. As they are forced to be more disciplined around metrics, two issues will emerge. The first, that while the economics of branch banking are oft justified as supporting high-net worth customer interactions, that increasingly this demographic is moving to digital channels and the branch is no longer the lynchpin in this coveted relationship. How can it be when I use my mobile or internet to talk to the bank 30 times a month, but I visit the branch only twice a year? Secondly, the least profitable customers also are laggards to digital (largely due to adoption cost) and rely more heavily on tree-killing paper statements, ‘free’ checks and over-the-counter interactions.

Once you’re forced to re-examine your cost base in the light of changing distribution, behavior and regulation, the realization emerges that branches are not the profit centre they once were, but are now largely a cost that was hidden by the buffer of high interchange and credit card fees. Couple this with new challenges to the distribution model through Internet direct banks and non-bank FIs who offer better savings rates and lower fees on the basis of better economics, and branch banking will be mercilessly attacked by the big banks looking to retain their earnings-per-share.

The unintended consequences of Durbin may very well be the rapid unwinding of branch banking in the US. It takes a long time to turn the ship, but once that turn starts the momentum of branch closures will speed up rapidly.

Big Banks are like SuperTankers - they don't change direction easily

Lessons from Apple – Great Branches don’t bring customers back

In Branch Strategy, Customer Experience, Retail Banking on March 8, 2012 at 13:22

The new iPad just launched to the usual hype, anticipation and fanfare. Every time a new Apple product comes off the assembly line, it gets put under the biggest magnifying glass imaginable as crowds of onlookers parse the announcement with scholarly intensity, hoping to piece together a picture of what might emerge and what the implications for the world at large will be.

Apple calls their latest release “Resolutionary” in reference to the retina display capabilities of the screen embedded in the new iPad. The New iPad’s “Retina Display” has 1,000,000 More Pixels than a HDTV, and its resolution is so dense that it is beyond the capability of the human eye to recognize individual pixels. We’re reaching the theoretical limit of display resolution – higher resolutions won’t matter if we can’t see the detail.

But that’s not the interesting observance. Apple is the most valued company in the world right now, and it is in that position because it inherently understands consumer behavior in respect to product, brand interaction and purchasing behavior. There’s a lot of banks that would like to think if we turn all our branches into “Apple Stores” that customers will flock back to the branch. But that’s not what the Apple story is telling us.

Will “Apple Store” Branches Save us?

On the eve of 16th December, 2010, Citi opened a glamorous, high-tech branch in New York City’s Union Square. The 9,700 square foot branch was designed by Eight, Inc., the same firm of architects responsible for the unique design of the iconic Apple store. Although Citi actually launched their store concept in Singapore first, the New York store was almost positioned as the saviour of branch banking itself and the “Apple store” moniker was applied repeatedly to indicate it’s revolutionary nature. If you read some of the reports and commentary on Citi’s branch it was clear that many bankers believed that if you just got the branch format right, made the space more attractive for customers, that they’d storm the branch and all would be made right with the world.

But that’s not what happened. While Citi’s “store” was certainly innovative, there’s no evidence that there’s been any net gain in retail activity because of the evolution in branch design. However, some brands like Umpqua, Jyske (Danish) and Che Banca (Italy), playing on the same premise, have claimed some increased branch activity as a result of their evolved spaces. So what is the reality? Are innovative new branch layouts going to change behavior when it comes to banking?

You only need to look at Apple to answer that question.

Store First?

For many Apple newbies their first interaction with Apple products is through an Apple Store or a Apple retailer, but not always. The new iPad that was released yesterday is not yet available in-store, but already there are tens of thousands stacking up to buy the product through their online store. Pre-order activity for the iPad has already had an effect on the online store for Apple.

Checks by Computerworld through 4:15 p.m. ET from multiple locations in the U.S. found the Apple e-store either still sporting a “We’ll be back soon” banner, or if it did load in a browser, becoming unresponsive during the purchase process – Computerworld Article March 7th, 2012


What we know of Apple is that they don’t insist on you coming into a store to make a purchase, or start your relationship with their brand dependent on some process that requires a face-to-face registration for their first product. For the release of the iPad Apple had to actually restrict online customers to buying only two of the devices, due to overwhelming demand through the online store.

The argument often heard by bankers is that regulation forces physical face-to-face compliance processes on us, but even regulations don’t force chartered banks to insist on a face-to-face interaction to onboard or identify a customer. Like Apple, today’s behavior of consumers means we should be ambivalent to the channel a customer chooses.

For the sake of the argument though, let’s assume that the first interaction is in an Apple Store or in-branch. How do customers behave in their interactions with the Apple brand once they have purchased their first iPad, iPhone or Mac computer? Does the most excellent ‘store’ experience drive them back to the store repeatedly over time? No

Great "Stores" don't bring customers back

Let’s look at the revenue story.

Show me the Money!

The average Apple Store makes approximately $34m in revenue annually, with $8.3m in operating income. However, if you examine the 10-K filing for Apple, revenue is split almost 50/50 between online (& device-based store) sales and their retail presence.

Since the Apple “App store” opened on July 10, 2008 Apple has booked close to $6 billion in revenue just on “Apps”. CyberMonday is used as the benchmark for US online and mobile retail sales, and figures show that iPhones and iPads account for a staggering 7-10% of all US online sales activity on those days.

What we know from all the data is this. Customer’s might start their relationship with Apple in-store, but they don’t have to, increasingly they’re choosing not to. Even if they do, 70-75% of the lifetime revenue from the average customer comes from sales online and that is increasing over time.

Customers simple won’t ever go back to the store to buy an App after they’ve bought an iPad or iPhone in-store.

There’s a lot about banking that are like Apps in our financial relationship. Credit limit upgrades, wire transfers, bill payment, CDs/Fixed Deposits, etc. In fact, once we’ve started our relationship with a bank as a customer, pretty much every product we engage with could be purchased just like an App through a better ‘store’ interface online.

Banks don’t sell well online because unlike Apple, we think that the primary store customers want to shop at is our ‘branch’ and when they come to internet banking, we often don’t even integrate sales into that ‘transactional’ platform. But the behavior of Apple customers shows that even with the best benchmark retail presence in the world, customers don’t come back time and time again to your store or even chose the store first. Once they are connected with your brand, they buy your product and utility wherever is most convenient, and that isn’t at the store or branch.

The big question is, how many branches can you afford to support if customers only visit them the first time out and do the rest online?