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Banking outlook for ’12 grim

By Claes Bell ·
Tuesday, January 3, 2012
Posted: 4 pm ET

If you're a bank customer frustrated by declining perks and rising fees, you might think banks and their stockholders are raking in the dough, but that's not actually the case.

Jack Hough of The Wall Street Journal published his outlook for big bank stocks in 2012, and it's not looking great:

"Banks have much more capital today," says David Rolfe, chief investment officer at Wedgewood Partners, a St. Louis investment adviser overseeing $1.3 billion. "But for the big players, the business simply isn't as profitable."

Why are big banks looking at an ugly year ahead?

In the past, a big branch network was necessary to attract deposits, says Mr. King. In the current environment, it's a burdensome expense for banks to carry.

The idea that big banks enjoy economies of scale is largely a myth, says Frederick Cannon, director of research at Keefe, Bruyette & Woods, an investment bank that specializes in the financial sector (and the creator of the KBW Bank Index). What they have enjoyed is a funding advantage, and that is changing.

"For 70 years, regulators viewed large, diversified banks as safer and thus able to make do with lower reserve levels," says Mr. Cannon. "Now they're taking the opposite view."

It's interesting that the root causes of growing frustration among big bank investors and customers seem to overlap significantly. The fee hikes and perk cutbacks customers hate and the poor profit potential investors hate stem from the same two factors: fundamental changes in regulation and banks' bloated overheads.

I've written about those regulatory changes a lot in this space, from Durbin to more stringent capital requirements that are rolling back the benefits that used to come with being considered too big to fail, and they're definitely taking their toll.

But I think there's a more fundamental problem in the banking business. We've seen technology revolutionize the way we perform all kinds of transactions, from buying an airline ticket to buying a book, and that's killed off or totally transformed brick-and-mortar facilities for affected industries. But banks are still trying to conduct business the same way they've always done it: a row of teller lines and a little book where you can sign in to talk to a customer service representative.

Banks need to face up to the fact we're reaching a tipping point in banking technology, and consumers' comfort with that technology, where branches are going to be increasingly anachronistic. I think comedian Louis C.K. said it pretty well in his 2010 comedy special, "Hilarious," when he went on at length about the wonders of ATMs:

When I was younger, you had to go in the bank. Remember that? You had to go inside the bank. Now you look in the bank, you say, "What are those people doing in there? Are they cleaning? The money's out here!"

A 2011 Novantas report found that the number of monthly transactions at the average bank branch declined from 11,400 in 2006 to 8,550 in 2010, a decrease of 25 percent. And yet banks continue to invest in keeping bank branches on every street corner, and continue to expect bank customers to pay for them in the form of rising fees and declining savings yields.

Banks' current reliance on a decades-old way of doing business is hurting customers and investors alike, and a change to a more streamlined, more ATM and Web-centric model for banking would go a long way toward helping both.

What do you think? Are big-bank business practices hurting customers? Should banks rely more on ATMs and the Web to service customers, or should they stick with the branch model?

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Karen Gordon
January 04, 2012 at 6:24 pm

I believe banks will need to find the right balance of customer service channels for meeting both profitability and consumer preferences. Branches are expensive, but eliminating them is not the answer. Many people across all generations still prefer branch banking for opening accounts, mortgage services, and other large loan interactions. The focus in the near future needs to be on streamlining services to make the online channel as effective as the branch (i.e. online interactions can result in the process not being able to be fully executed causing frustration)and evaluating branch locations that could be eliminated based on foot traffic (or lack thereof). With the influx of bank mergers there are more branches in specific geographic areas that are redundant rather than planned.

January 04, 2012 at 11:34 am

Banks are pushign technology: online banking/statements, debit cards, using ATMs instead or teller, direct deposit, etc. All of these are designed to keep customers out of the branches thereby reducing the need for tellers.

All this is great, but what happens when you have a problem with your account? Most people still want to talk to someone face to face- not through an online chat or over the phone.

If customers want the option to go to a branch, how will getting rid (or reducing) them help the customer?

Jennifer C.
January 04, 2012 at 12:09 am

I think that there are still many customers of a certain generation who prefer doing things the old fashioned way and prefer to work with a bank representative or teller. To eliminate accesible branches would be to alienate those customers who rely on human interaction.

In time, though, I think that the demand for personal service will continue to decline and the branches will be downsized accordingly.