Digital Banking

Why It's Not So Easy To Bring Down The Cost Of Banking

Every year, Bank of America spends about $1 billion to move money around in armored trucks and shuffle various other bits of paper about.  It is a cost they might like to cut - along with the costs of fixing broken ATMs and replacing lost cards - but these are costs that just aren't going anywhere anytime soon.

The digital banking revolution gets lots of airtime - and has surely led to many branches being closed in favor of the frictionless smartphone or ATM tech that does the same job better.  Or theoretically better anyway - when it came to cases, consumers complained they weren't getting personalized enough services and JPMC found itself rehiring tellers.

Which, in a nutshell, is the new tight spot banks find themselves in when trying to boost near-term earnings. Interest rates remain at historically low levels and sunk costs are - well, sunk - and also growing.

"There are fundamental costs associated with running a broad retail franchise," said Bob Hedges, who leads consulting firm A.T. Kearney's financial institutions practice. "You can move to part-time help, you can let the carpet get a little more worn, but these are just short-term tactics."

It has not been a great week for the nation's big four banks: JPMorgan, Bank of America, Wells Fargo & Co and Citigroup Inc have all reported profit declines during the last seven days.  While the losses ranged from 1 percent t0 19 percent - all four reported the same top line pressures drawing down earnings and leaving banks looking for news ways to save funds.

But banks have been looking for such methods since the big cost cutting initiatives started in 2011 - and the low hanging fruit (layoffs, bonus reductions, curbing employee travel, reducing excess real estate, renegotiating vendor contracts) has mostly been hit. And as it turns out, trimming the fat doesn't move the needle all that much for investors - banks are now lean, mean and struggling to hit their targets.

"It's tough to take out costs meaningfully from here," said Patrick Kaser, a portfolio manager at Brandywine Global who invests in bank stocks, noting that especially in retail banking, the costs are fairly immovable, no matter how cleverly bankers try rethinking their business.

"Near as we can tell, we spend about $1 billion a year just moving cash around in our company," Bank of America CEO Brian Moynihan said on a conference call earlier this year.

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