Banking on Analytics published The Top 10 Trends for 2011 in Retail Banking listing industry changes that they believe will be significant. A consulting firm, Banking on Analytics made sure to note banking trends in which their services could be of use. However, they did highlight a few interesting challenges and opportunities for both banks and consumers aside from their consulting pitches.
We’ll discuss their most salient points, touching on their potential pitfalls and possible outcomes for consumers. You’ll notice we skip a few numbers: Some “trends” are blatant advertising for their consulting services and were omitted.
1. Get Ready to Compete with Wal-Mart
Banking on Analytics notes that Wal-Mart is poised to enter the financial services sector, offering prepaid debit cards and buying a 1 percent stake in Green Dot, a prepaid card provider. Wal-Mart offers cash back for gas purchased on their cards, rather like the Shell Super Saver Card, and beginning this summer, customers can apply for small business loans at Sam”s Club stores.
The article argues that competition from easy-access, ubiquitous Wal-Mart will force banks to price their fees competitively and increase their availability. However, so far Wal-Mart has limited itself to the prepaid debit card market, a far cry from the credit card and mortgage mainstays of traditional financial institutions. In any case, as Forbes notes, Wal-Mart debit cards seem to be method for driving traffic to their stores.
The Wal-Mart prepaid card is also not without fees. Each card costs $3, and while it is accepted everywhere, every ATM withdrawal comes with a fee. Users will not be able to overdraw or build up their credit score; it is unlikely that the 1% cash back on gas purchases will be sufficient incentive to abandon a traditional checking account. Wal-Mart’s prepaid card, in particular, pales in comparison to Target’s generous debit rewards program.
Our Take: Will Wal-Mart’s foray into the debit card market cause a permanent, or even temporary, increase in value and convenience for consumers? Unlikely. In fact, Wal-Mart’s focus on alternative financial services shows that they are targeting underbanked customers that are typically ignored by the traditional banking industry.
4. Shift Media Investment to Online Channels
Reflecting a societal trend toward online marketing and social media, banks are experimenting with an increased online presence despite traditional reliance on brick-and-mortar accounts. The article, with little ceremony, segues into its pitch for how it can help banks to navigate the world of social media.
Once again, we will focus on the deeper trend that underlies Banking on Analytics’ self-promotion. Online banking, and particularly online checking, is on the rise as banks attempt to reduce their bottom line. Many offer free checking only on online accounts and charge for use of tellers or any other brick-and-mortar services. Unlike many other industries, however, financial institutions have been slow to move towards social media and other online channels.
Instead, a number of auxiliary services–including GoBankingRates and NerdWallet–have stepped in to mediate between banks and potential consumers and, hopefully, increase transparency. Bank sponsorship of credit card comparison sites is prevalent and is indicative of the institutions’ ability to harness the power of online dialogue. The move to online comparisons, and consequently greater access to information, has benefited consumers more than it has provided an opportunity to banks.
Our Take: While banks may attempt to influence the online dialogue to their advantage, the democratizing impulses of the internet are likely to force greater transparency and lower prices across all institutions. Additionally, a new focus on social media is more likely to become another source of self-promotion for banks, rather than an avenue for improved customer service.
5. Survive the Death of Free Checking by Getting Fees Right
Free checking is not extinct, but it is endangered. In the process of dying out, however, there has not been an across-the-board increase in fees. Rather, many banks increased checking fees that target certain accounts or account holders. For example, Chase and Bank of America now charge a $3 fee on some debit cards, and up to $9 on some minimalistic checking accounts. Many now charge for receiving paper statements and receiving help from tellers.
This is mostly a reflection on shifting costs from a select few customers to a broader burden on many. Free checking was never actually without cost. Rather, it was once paid through overdraft fees and other penalties. With such revenue streams limited, banks are now imposing smaller costs on a majority of customers.
Our Take: Free checking accounts will continue to be phased out and free services will be more and more limited in scope. In their place, banks will start to focus on premium services that customers are willing to pay for, or impose higher minimum balance requirements on account holders who want to avoid paying fees. On the flip side, lower income consumers will find their traditional banking options more limited, creating renewed opportunity for alternative services like check cashing and prepaid debit.
7. Prepare for Rate Increases
While deposit rates are at all-time lows, interest rates on credit cards are at their highs. Recently, in particular, rates have risen dramatically for one category of borrowers: Those with no credit or bad credit.
As a result of the Dodd-Frank bill, lenders are restricted in their ability to raise rates on existing customers. This does not mean that rates will not rise at all, but it may mean that banks will try to hold out as long as they can before raising rates. If one bank can keep its rates lower for slightly longer than its competitors, the 45-day announcement period will provide a window in which customers can switch accounts.
Our Take: Interest rates will not remain at historic lows forever. We can only hope that this increased transparency and competition in rate hikes, as well as guaranteed opt-out protection, will incentivize banks to keep rates lower for as long as possible. However, we believe a consumer with a poor or limited credit history will continue to command a significantly higher interest rate, with the gap widening to account for banks’ reduced ability to impose penalties.
10. Acquire More Profitable Customers
Banking on Analytics argues that banks previously focused on acquiring as many customers as possible, but must now focus on attracting the most profitable customers–those who will remain with the bank long-term.
In the past, a profitable customer was one who triggered penalty APRs, overdrew on his account or used a prepaid debit card that came loaded with fees. While penalty APRs and prepaid debit cards are still allowed under Dodd-Frank, the overall result of financial form is that lower income or irresponsible borrowers are less profitable.
Our Take: The “profitable customer” is no longer the one who falls behind on his payments. Similar to their tactics with checking, banks are starting to roll out premium travel rewards on credit cards with higher annual fees, targeting those consumers willing to pay. We may also seem them diversify revenue streams by increasing reliance on less-regulated products like medical credit cards and business services.
