I think I mentioned in an article a while back that I have this odd fascination with old advertising- early turn-of-the-century stuff to about the 1970s. There’s just so much to learn about our culture and consumer behavior and buying triggers by looking at old print ads. I’ve found that for print advertising of that era, it was all about a headline that would set the tone for the copy. This 1965 ad hawking Total cereal (which BTW is pretty dreadful stuff) describes a mother’s anguish over her daughter’s constant dieting and worry about staying strong and healthy. The answer, of course, was to feed her Total cereal, which would give her all the vitamins she needed every day without tipping the scale.
It was that headline that triggered a thought as I was catching up on the news of the week last week – news dominated by banking regulations, investigations and fines. It made me think that there are some pretty strong headwinds facing banks these days at just about the same time that innovation in payments and commerce is starting to show some real promise.
It make me think, inspired by this old ad … What’s a Banker to Do?
JPMC, which dominated the headlines, seems to be the poster child for the old adage, “let no good deedgo unpunished.” Here’s a bank that didn’t need TARP money during the 2008 financial crisis and at the request—more like begging—of the Treasury took over Bear Stearns and Washington Mutual. Five years later, fines leveraged by the same government that asked them to help approximately 61 percent of the bank’s 2012 profits and as a Businessweek article pointed out, the entire GDP of Angelina Jolie’s and Madonna’s favorite African nation (Namibia) and more than the combined salaries of every single professional athlete in the U.S. and hot dogs for every single American. But that’s just for starters. JPMC is footing a $2 billion annual ticket to employ some 5,000 or so workers hired to ensure compliance with new regulations (it was also fined $309 million by the CFPB related to credit card practices in September) along with paying who knows what country’s GDP in legal fees. Then there’s the threat of more litigation, including a criminal probe in California and the recent comment by Elizabeth Warren that all big bank CEOs should be jailed. The fact that JPMC hasn’t fallen completely to shreds is an incredible testament to the overall strength of the bank and its team.
Yes, I know that there’s debate on all sides of this issue and likely bad stuff from Bear Stearns and WaMu that needed to be cleaned up. But – what’s a banker to do the next time the government phones a friend and asks for a lifeline?
Well, rather than speculate on that, let’s turn to the implications to innovation in the face of this development. Let’s say that you’re a bank and have a great idea for innovation. What’s a banker to do? Well, now, you’ll likely want to see whether, factoring in the regulatory constraints and potential regulatory scrutiny that it will likely attract, on top of all of the other risks associated with igniting innovation, there’s enough potential profit in it for you to create a compelling business case to fund and staff that innovation. When observing the experiences of players like JPMC and others, there’s every possibility that bankers will just say no. We do know what JPMC will do – it announced that it will shutter a number of initiatives.
Let’s turn to another topic of conversation in banking – business models and the changes that now must be contemplated in the face of several developments. First, of course, is the impact to banks from the debit interchange regulation of a couple of years ago. That’s now up in the air again as a result of Judge Leon’s ruling and the Fed’s appeal. The answer to “what’s a banker to do?” in the first go around was to raise fees on checking products and reduce services in order to recover the billions in lost revenues and then watch as their customers, frustrated with these fee hikes, left for alternatives – credit unions, community banks and alternative providers. Adding a bit of insult to injury here, there’s renewed interest now, thanks to mobile and a flock of alternative payments providers using mobile devices, to access customer checking accounts via the ACH rails in some way. Of course, these fees make Durbin-related fees look like a windfall (unless the outcome of the Leon ruling and appeal is to force fees much lower than they are now – a real possibility).
So, what’s a banker to do? Well, for starters probably recognize that you, unfortunately, are in the worst of all worlds with respect to this topic. Fees to issuers on debit will likely take a further hit, and credit is the other shoe to drop – it’s just a matter of time. Networks will be fine no matter what happens, so it will be banks that have to sort out what assets they can monetize and for how much and who will ultimately pay.
Then there’s lending, a bank staple, which has come to a screeching halt. I remember years back being told that bankers only lend money to people and businesses that can prove they don’t really need it. Today, many of them don’t even go that far. A really interesting paper published by the Fed last week documents the state of lending in banks post financial crisis and the implementation of the CARD Act of 2009. They report that by Q3 2011, the number of outstanding loan accounts had fallen below 2000 levels and credit limits had fallen below 2001 levels. While some of this can be related to consumer demand decreasing in light of the economic environment, it is a fact that banks were far more reluctant to extend credit regardless – which hurt small businesses, consumers and bank balance sheets. A survey done by the Fed in October 2008 revealed that 60 percent of surveyed banks had stopped lending or cut limits or both. Today, five years later, even though the cost of funds to banks is about 0 percent, they ‘re not lending, and are ceding ground daily to the crop of new alternative lenders who are filling the gap with creative approaches to making funds available to consumers and small businesses. So, what’s a banker to do? Focus on only lending to the best customers ? Or try in some way to innovate lending products by leveraging its data assets to improve underwriting and risk management?
Finally, mobile is an area where FIs see a white space in which to win and just about every large bank has embraced mobile banking. Many, too, have launched a version of mobile remote check deposit. And, just about every bank has a version of a mobile wallet on the drawing boards out of a fear of being relegated to twelve x’s and four digits in someone else’s mobile wallet – completely invisible and unbranded. So, the great mobile wallet land-grab is on for banks. Except there’s only one problem – it’s hard to see that being nirvana since the consumer experience would be really weird.
Consumers, as we’ve learned, are very deliberate about what cards they use for what purchases – and they rarely stray from those decisions: debit for the dry cleaners and dog food at the local pet store and credit for holiday shopping and home furnishings, for example. While none of us really knows what the “digital wallet” of the future will end up being, it’s unlikely that consumers will accept using as many “wallets” from their banks as they have cards. And, even if banks offer white-labeled products that are open to including lots of other cards, they have to get merchant acceptance which is tough. For proof of that pudding, look at the difficulty that V.me has had in getting traction around its digital wallet which has been given to a number of banks to distribute and have consumers populate – not much has happened there. So what’s a banker to do? Invest in creating its own wallet and then invest further in creating consumer or merchant acceptance? Or recognize that the way to win in mobile wallet land is to make sure that consumers love their product so much that they want to register that card in whatever wallet or app that consumers download onto their phone or connected device?
So, clearly, answering the question “what’s a banker to do” related to innovation in payments and commerce and financial services more broadly isn’t as easy as the mother’s quandary in 1965.
To be fair, regulation is really only part of the issue here since quite a bit of the regulation now in place was designed to remedy the bad behavior that banks had, for years, engaged in and profited from. But, it has clearly created an environment where banks today find themselves in a quandary when it comes to innovating. They, in many cases, have tremendous assets to leverage, including sticky customers and their trust. Some even have relationships that touch both merchants and consumers – which offer a unique set of options when it comes to capitalizing on innovation in payments. But the cost of innovating and the stakes associated with launching that innovation are very material if you are a regulated bank operating in an increasingly regulated environment – one where the relationships with those regulators seem more adversarial they do even in other regulated industries such as telecom, for example.
So, maybe for a whole host of reasons, perhaps the answer to “what’s a banker to do?” when it comes to innovation in payments and financial services more broadly is to, in many cases, push the reset button. Short of carving off business units and making them separate unregulated enterprises, for most banks, the best way to innovate may be to do what some of the most successful players in this space are doing – become a platform for innovation. In the banks-become-platforms play, banks get to leverage their position of trust and access to consumers and consumer assets – and monetize that – and innovators get access to assets that are difficult and expensive to acquire – consumers, small businesses, merchants. Banks innovate by distributing the innovations that others have developed and developing a business model that makes that arrangement work for them. The innovation for banks would be the design of the platform and the business model that supports it. Sounds to me like a win-win.
In parallel, banks have the opportunity here to make their core products the very best they can be, so that customers want them to be the products they can’t live without and chose to “set and forget” in the digital wallets they chose to download. And, that innovators want to innovate with and not always compete against or marginalize. That doesn’t have to be fancy-schmancy stuff either – sometimes the most valuable innovations are those that add value through services and intangibles that make for a better consumer experience.
Yeah, I know. Not the conventional wisdom. And banks can’t operate as platforms in the same way that other platforms can by exposing APIs and the like. I get that. And, of course, there are a few exceptions to consider and one size does not fit all here to be sure. But, hey, the worst thing that could happen, aside from the hate mail that I might get, is that this gets a few conversations going around the conference tables this morning and in the weeks to come. And, who knows what new and innovative ideas might come out of those discussions.
Happy Monday everyone!