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.
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.
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 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...
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.
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 :(
Personally, I prefer to keep my phone and my banking completely separate. Actually, the only "important" account I log into on my phone is my email. Anything else? I'll just wait until I get home or go to work.
I personally enjoy this comment the best:
> venmo is great also because it is sort of a social network too, like you have to put in a sort of “memo” field and so you see a news feed of what your friends paid each other for
Um... WHY? I don't see why I should care? I guess that's just part of an over sharing culture.
Here comes the old fogie... If I owe someone money I just give them cash. What's wrong with cash? I hope cash isn't going the way of the personal check... (which, hilariously, I still use personal checks)
Perhaps it has to do with individualism? My friends and I operate on a more informal method. If Joe bought the cab then John pays for the beers. Then Jake pays at the next place or the next time. This isn't stated or organized in advance, just everyone seems to go by it by default.
I personally set all my Venmo payments to private - but it does offer a very slight form of entertainment giving the news feed a quick scroll whenever I make a payment. It's certainly not something I check unless I'm already using the app though. Funny to see "John paid Christy for 'Moldy cheeseburgers'" or whatever your friends come up with.
The actual use of it is absolutely amazing though. When I needed to pay my sister for my share of our parents anniversary gift I was out backpacking in Europe, it took all of 5 seconds to send her the money across seas from my bank account and for her to receive it.
This 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.
One of the things about modern electronic payment systems that weirds me out is how easy it is to lose everything.
If the government takes my money, there's process. Not always transparent, but supposedly hewing to some legal process.
If the bank goes under then, in theory, I get back some portion of my deposits thanks to insurance (not always the case, some banks for rich people don't have insurance, but presumably the rich can have people killed or something to make up for it).
But if Paypal takes my money by force or by bankruptcy ... well, so long money. It's just gone and I'm probably not going to see it ever again.
In all cases, I probably signed some sort of contract about the deal. But banks are offering the better contract.
The above is a gross oversimplification, but I don't think its wrong in that. If so, please elucidate.
Agree. I think one way retail banks could reinvent themselves is as a trusted escrow and analytics platform for your money across all other tools: Venmo, Paypal, etc. They already do this for Visa (which they don't own, but work with.)
In Europe Paypal is a bank, and bound by banking regulations. But as the article says, there's a tradeoff with that: a company bound by the regulations can't move as fast as one that ignores them. If your bank offers better terms than PayPal, stick with them. But for many small businesses, the gains of using PayPal to accept payments outweigh the risks.
> The above is a gross oversimplification, but I don't think its wrong in that
That does seem like a gross oversimplification.
First and foremost, I'd say that there is nothing inherently unique about recourse when a bank goes bankrupt. It's merely based on conventions and contracts. How that works is that there's an insurance corporation, the federal deposit insurance corporation, which insures deposits at banks up to $250k. That's all. Of course, this isn't free. It's costing all of us money, as any insurance does.
What this means is that you can build any type of system and throw an insurance product on top and it'd be no different. There's nothing unique about FDIC.
Of course, we must realize also that FDIC insurance only covers about 1%, at most 2%, of deposits. So it's only really effective when a few banks go bankrupt. A complete systemic meltdown that we were very close to would've made FDIC useless. Fact is, the only reason that didn't happen is because we magically created a trillion dollars out of thin air to create magic demand for toxic assets nobody wanted and were causing imminent bankruptcies. And that, too, comes with a price to ordinary citizens. Nothing special about it, and it's certainly costing us all money.
As for Paypal? It's regulated to death. In some places it's regulated like a bank. In other places it's regulated as a money transmitter, as a money services business, as a non-bank financial institution. All of those carry real regulatory obligations. For example, there's a law where a money services business can't do fractional reserve, i.e. you're by law required to keep 100% of your custodial funds (funds from customers that you hold). There's another requirement that requires you to separate company funds from custodial funds, meaning if your company goes bankrupt, the customer funds are untouched. As for Paypal simply 'taking your money', that's illegal, and you have legal recourse. That may not be perfect, I'm not saying it is, but it's similarly imperfect as when the police seize your funds. In both case you have legal resource, Paypal is not unique in being above the law.
And then lastly, there's surety bonds. So in virtually every state Paypal operates, it needs to hold sufficient surety bonds. That means, literally, insurance. They pay every year some company which insures them, so that if say they go bankrupt or flee the country, this company has a surety bond for the customers to get paid out.
And lastly, a non-legal point, but just a practical one: Paypal is worth a lot of money, the 150m users are worth a lot of money. That doesn't mean they can't go bankrupt, but unless they're knee-deep into complex derivatives they don't understand, like banks the past decade, I'd say the chances of them disappearing with everyone's money is pretty slim. Not saying it won't happen, just saying it wouldn't be a reason for me not ever use Paypal.
Also keep in mind that this is clearly American banking which is often quite behind the rest of the world(this is due to the fragmented nature of the banking industry in the US compared to other countries). I mean checking account? I have never had one of those. Paper statements? I haven't seen one of those in I dont know how long... 10 years?
There are some strange regulations on savings accounts in the US. You're only allowed a set number of transactions on them per month. Checking accounts don't have these limits.
In regards to monthly statements...yes, I e those all the time for getting financing, accounting, proof of residency, etc. I need them. Others need them. Most web portals offer "all transactions" or "since last statement views". Just because months are arbitrary doesn't make them useless.
Purchasing a house recently, I offered a CSV of 6 months banking transactions, but they would only accept a paper statement from the bank - clearly showing fees charged in order determine if I had any insufficient funds charges. The bank provides explicit PDF images of statements, even though they don't send them, so I was ably to comply (actually sending the pdfs to the mortgage broker to print for the underwriter.)
I've never understood why people put up with the ridiculous fees banks are charging these days. My credit union charges me one $5 fee per year, and I have checking, savings, overdraft protection, an ATM Visa check-card, Visa credit card, a free bill-pay service, and a smartphone app that can do mobile check deposits. Plus, my mortgage rate is lower than any local bank offered.
All local credit unions share each other's fee-free ATMs, and I still have several nearby branches I can visit when I need a real person. In addition, they are rapidly growing not in spite of these consumer-friendly practices, but because of them.
Why would anyone choose a Wall Street bank other than for something gimmicky like a rewards credit card or non-traditional loan?
Modern bank customers ... want their banking
history, in escrow, stored by a third party
where it acts as inarguable proof.
Without paper statements, if you close a bank account for whatever reason, then you lose access to your banking history for that entire time. Poof, gone. How long will a bank continue to allow you to log into their system once you are no longer a customer?
24 comments
[ 3.3 ms ] story [ 70.8 ms ] threadThe 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.
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?
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.
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.
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...
Regulation and a less friendly lending environment showed us who's swimming naked with over-extended branch networks: everyone
http://qz.com/277509/read-what-happens-when-a-bunch-of-over-...
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.
I'm still a bit puzzled as to how re-inventing instant messaging (WhatsApp) can be the hot new thing worth billions of dollars.
Then of course the US decided that online poker was evil and it all went to hell :(
Personally, I prefer to keep my phone and my banking completely separate. Actually, the only "important" account I log into on my phone is my email. Anything else? I'll just wait until I get home or go to work.
I personally enjoy this comment the best:
> venmo is great also because it is sort of a social network too, like you have to put in a sort of “memo” field and so you see a news feed of what your friends paid each other for
Um... WHY? I don't see why I should care? I guess that's just part of an over sharing culture.
Here comes the old fogie... If I owe someone money I just give them cash. What's wrong with cash? I hope cash isn't going the way of the personal check... (which, hilariously, I still use personal checks)
Perhaps it has to do with individualism? My friends and I operate on a more informal method. If Joe bought the cab then John pays for the beers. Then Jake pays at the next place or the next time. This isn't stated or organized in advance, just everyone seems to go by it by default.
The actual use of it is absolutely amazing though. When I needed to pay my sister for my share of our parents anniversary gift I was out backpacking in Europe, it took all of 5 seconds to send her the money across seas from my bank account and for her to receive it.
Sure there's a generation gap on privacy, but that's totally tangential to value the service has.
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.
[0] https://www.youtube.com/watch?v=YAxL4TB6pmQ
If the government takes my money, there's process. Not always transparent, but supposedly hewing to some legal process.
If the bank goes under then, in theory, I get back some portion of my deposits thanks to insurance (not always the case, some banks for rich people don't have insurance, but presumably the rich can have people killed or something to make up for it).
But if Paypal takes my money by force or by bankruptcy ... well, so long money. It's just gone and I'm probably not going to see it ever again.
In all cases, I probably signed some sort of contract about the deal. But banks are offering the better contract.
The above is a gross oversimplification, but I don't think its wrong in that. If so, please elucidate.
That does seem like a gross oversimplification.
First and foremost, I'd say that there is nothing inherently unique about recourse when a bank goes bankrupt. It's merely based on conventions and contracts. How that works is that there's an insurance corporation, the federal deposit insurance corporation, which insures deposits at banks up to $250k. That's all. Of course, this isn't free. It's costing all of us money, as any insurance does.
What this means is that you can build any type of system and throw an insurance product on top and it'd be no different. There's nothing unique about FDIC.
Of course, we must realize also that FDIC insurance only covers about 1%, at most 2%, of deposits. So it's only really effective when a few banks go bankrupt. A complete systemic meltdown that we were very close to would've made FDIC useless. Fact is, the only reason that didn't happen is because we magically created a trillion dollars out of thin air to create magic demand for toxic assets nobody wanted and were causing imminent bankruptcies. And that, too, comes with a price to ordinary citizens. Nothing special about it, and it's certainly costing us all money.
As for Paypal? It's regulated to death. In some places it's regulated like a bank. In other places it's regulated as a money transmitter, as a money services business, as a non-bank financial institution. All of those carry real regulatory obligations. For example, there's a law where a money services business can't do fractional reserve, i.e. you're by law required to keep 100% of your custodial funds (funds from customers that you hold). There's another requirement that requires you to separate company funds from custodial funds, meaning if your company goes bankrupt, the customer funds are untouched. As for Paypal simply 'taking your money', that's illegal, and you have legal recourse. That may not be perfect, I'm not saying it is, but it's similarly imperfect as when the police seize your funds. In both case you have legal resource, Paypal is not unique in being above the law.
And then lastly, there's surety bonds. So in virtually every state Paypal operates, it needs to hold sufficient surety bonds. That means, literally, insurance. They pay every year some company which insures them, so that if say they go bankrupt or flee the country, this company has a surety bond for the customers to get paid out.
And lastly, a non-legal point, but just a practical one: Paypal is worth a lot of money, the 150m users are worth a lot of money. That doesn't mean they can't go bankrupt, but unless they're knee-deep into complex derivatives they don't understand, like banks the past decade, I'd say the chances of them disappearing with everyone's money is pretty slim. Not saying it won't happen, just saying it wouldn't be a reason for me not ever use Paypal.
All local credit unions share each other's fee-free ATMs, and I still have several nearby branches I can visit when I need a real person. In addition, they are rapidly growing not in spite of these consumer-friendly practices, but because of them.
Why would anyone choose a Wall Street bank other than for something gimmicky like a rewards credit card or non-traditional loan?