USA Today ran a story in March on the changing nature of retail banking in America. This sounds kind of boring, perhaps, but it has broad implications both for bank clients and, potentially, for investors. The gist of the story is that banks are closing retail branches in small towns. A lack of traditional banking services is not a rural phenomenon, however, with substantial populations of people in urban areas who do not use traditional banks. For an informative interactive tool that allows you to explore the populations of people lacking key financial services, see here. There is a substantial population of people who have little or no access to traditional bank services (the under-banked or the un-banked), and it would seem that this population is likely to continue to grow if banks close their smaller retail branches. The solution, I believe, is that online banking services will serve the under-banked and un-banked, just as they have in the developing world.
In general, poorer households hold little if any assets in savings accounts and primarily use banks to cash checks. Banks don’t make money from check cashing, so they have a hard time profitably serving these customers. With interest rates at or near record lows, even bank clients with meaningful levels of savings provide little in the way of income to banks. And banks, not surprisingly, are focusing on wealthier clients as the way to boost revenues. The goal is to sell more profitable investing and financial planning services to wealthier clients. As the large banks try to move up-market in terms of products and services that they offer, it seems likely that an increasing number of less-wealthy Americans are quite likely to have less access to traditional bank services.
What does the future of retail banking look like? First, it seems inevitable that serving less-wealthy clients in physical branches will continue to be a relatively unattractive business. Second, check cashing and payday lending businesses—alternatives to traditional banks–will probably continue to grow. Lisa Servon, a professor of Urban Policy, argues that payday lenders provide a valuable service and that the industry is unfairly demonized. If people need to borrow money and don’t have access to a traditional bank, a payday loan may be worth the cost. Third, the increasing role of online banking and bill payment among the middle class reduces the time that customers spend in physical branches. There are a range of perspectives on the future of retail banking (see here and here).
My belief is that physical retail bank branches will largely disappear. If you really want or need to go to a physical branch – to access your safety deposit box, for example – you probably don’t mind driving. Otherwise, what does the retail bank really provide that you cannot get online? Bank analyst Dick Bove actually makes the case that quality customer service at branch locations is not necessarily even a good sign for investors. He posits that bank employees generate more revenue for the bank by spending their time “selling products”, rather than by trying to solve problems for customers.
As the systems for mobile banking expand, this could dramatically help the un-banked and under-banked as well as displacing retail banking services for the more affluent. In the developing world, for example, mobile banking (banking services provided via mobile phone) is already a dominant force. Businesses can pay their employees via mobile banking, entirely removing the need to cash a physical check. The M-Pesa mobile payment business now serves seventeen million people in Kenya alone. Mobile payments were the fastest growing form of payments in China in 2013, totaling $1.6 Trillion. There are also a host of non-banking firms that are providing services that look like banking. There is no obvious reason that some or all of these types of services cannot expand into the U.S. to serve the un-banked and then move up-market to replace some or all retail banking services to more affluent customers. The current situation reminds me of a number of cases of technological innovation discussed in The Innovator’s Dilemma, the ground-breaking book by Clayton Christensen. The book argues that new technologies first succeed not by displacing entrenched providers, but rather by first meeting the needs of an un-served population. After the new technology has proven its worth, it then moves up-market to disrupt the traditional business model. The current state of mobile banking is in serving the developing world, where people often have little or no access to traditional banks at all. The enormous growth in these businesses suggests that the future is to move up the food chain. Mobile payment technology and usage is growing in the U.S., albeit slower than expected. Accenture projects that as much of 35% of retail banks’ revenues could be lost to a range of online services providers by 2020. Given that retail banks in the U.S. are seeing their traditional businesses struggle along with less use of their branch offices, coupled with a growing population of potential clients who the retail banks do not serve at all, mobile banking looks to me like the future of retail banking.