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Consumer banking
Counter revolution
Retail renaissance
Branches
Withering away
Spain
Dispatches from the hothouse
Big data
Crunching the numbers
Mobile payments
A wealth of wallets
Remittances
Over the sea and far away
Wealth management
Private pursuits
Winners and losers
World, here we come
Jonathan Rosenthal is The Economist’s London-based international banking correspondent, a post he assumed in early 2011. He joined The Economist in 2005 as British business correspondent, having worked for several years at Bloomberg News in London and Johannesburg. Before that he was the mining editor of Business Report, a South African daily newspaper. His previous roles at The Economist have included European business and finance correspondent, based in Berlin, and British business correspondent, based in London.
In January 2008, Jonathan won the Feature of the Year award at the WorkWorld Media Awards, and the following year he was named Reporter of the Year. He has appeared on television and radio in several countries, including BBC News 24, Sky and ITV’s Tonight programme. Jonathan wrote The Economist’s 2011 special report on international banking, which examined the reregulation of finance after the crisis.
This special report benefited from the time and insight of many people in addition to those mentioned in the text. The author would like to thank in particular: Sebastian Arcuri, Jan Bellens, Roelof Botha, Louisa Cheang, Sylvia Coutinho, Douglas Flint, Noel Gorden, Greg Hinston, Ed McLaughlin, Tim Murphy, Gloria Ortiz Portero, Narciso Parales, Emmanuel Pitsilis, Simon Samuels, Michael Shepherd, Antonio Simoes, Tim Sloan, Paul Thurston, Huw van Steenis, Mark Weil and others who wished to remain anonymous.
Fusty old retail banking faces its biggest shake-up in 200 years
FINANCE has seen plenty of dramas over the years. But one thing has remained constant for a century at least: the branch banking system. Across most of Europe a handful of large banks, each with thousands of branches, stand astride their national markets. In America Depression-era legislation constrained the growth of big national banks, but at the state level the bricks-and-mortar architecture is pretty similar. While the rest of the sector innovated, expanded and collapsed, retail banking has been staid and reliable.
Now an upheaval is coming, driven by technological changes—the growth of internet usage on smartphones, the rise of “big data” computer processing and the increasing willingness of customers to do complicated things online. These developments have long promised to transform the way banks do business and organise themselves. This special report argues they are starting to do so.
Really smart phone
The revolution will be most visible on the high street. Branches will become less important and there will be far fewer of them. Those that remain will look quite different. Instead of walking into one to deposit cheques or get statements, most people will do this on the fly from their mobile phones. Instead of opening wallets in shops and being confronted with a choice of whether to pay by cash or plastic card, they will wave a phone at the checkout. On it will be a virtual wallet provided by a firm such as Google, PayPal, Square or some company that hasn’t been thought of yet. If you have forgotten your phone you will type in your phone number and a secret code (or simply speak your name) and carry on shopping.
If this was just a more convenient way of paying, the banks would probably shrug. But it also promises to overturn your existing financial relationships. Instead of reaching for the first card that happens to be in your wallet to pay for a $2 cup of coffee (and risk being charged a $35 penalty by your bank for exceeding your overdraft limit), your phone will choose the best method of payment. Credit cards with the highest rates of interest, or the meanest rewards schemes, will be shunted to the back of this smart wallet. Repayments will automatically be channelled to pay off the most expensive loans first. Penalty fees for inadvertent overdrafts will become things of the past.
These changes will give bank customers more clout, allowing people effortlessly to find the best deals, mainly at the expense of banks’ profits. Some of the biggest beneficiaries will be migrants, who have been failed by a banking system that charges them up to 20% of the sums they regularly send to support their families at home. People with bad credit scores will also surely no longer have to pay interest rates of 1,000% a year to payday lenders. But virtually all customers should gain.
This will undermine the old model of retail banking. Pricing will become more transparent. It will be harder to pretend that banking is free when in fact it relies on customers giving banks virtually interest-free loans in the form of deposits; harder to profit from the disorganisation or sloth of customers who slip into unauthorised overdrafts or roll over balances on high-interest credit cards while leaving cash in low-yielding savings accounts. Banks will probably have to accept lower margins on credit cards, personal loans and mortgages.
Yet there is a big opportunity for banks, too. They will cut costs by closing many of their branches. Banks will also tap into new sources of revenue by mining their enormous troves of customer data. A bank that knows what you have just bought or where you have booked a holiday will be able to offer real-time discounts on related products (much as Google targets advertising at people based on their searches). The retail revolution will also offer the best banks the opportunity to gain new economies of scale through their IT platforms.
In most retail revolutions politicians have had to do little other than move out of the way. But banks are different: their central role in the economy means that governments have to make sure that they are both accessible and safe.
In terms of access, some worry that as banking moves further online, the old, the poor and the computer-illiterate will be excluded from the financial system. But the simple, low-cost mobile-banking systems that operate in countries such as Kenya, India or Brazil suggest otherwise.
The issue of safety is a tougher problem. Oligopolies that generate fat profit margins and leave banks with little incentive to take risk actually suit regulators. They have a built-in safety cushion; and if it comes at a cost to consumers, so be it.
That cosy world will disappear as banking goes truly digital, and new intermediaries emerge between the banks and their customers. Many regulators, fearing that change and competition will bring greater risk, will be inclined to smother some of this innovation, by stifling start-ups or keeping foreign rivals out of their home markets.
They should resist that temptation. The basis of financial stability remains ensuring that banks have enough capital and liquidity to stay in business when times are tough. As long as they do, banks should be left to compete as hard as they can.
The internet and mobile phones are at long last turning boring old retail banking into an exciting industry.
“IF YOUR BANK could start over, this is what it would be,” trumpeted the marketing campaign for the launch in 1999 of Wingspan, an internet bank. The following year the bank was gone. In September 2000, a few months after the dotcom bubble burst, it was absorbed by its boring American bricks-and-mortar parent, Bank One (now part of JPMorgan).
For all the high hopes that the internet would transform banking, most other internet banks launched around that time met with a similar fate. Citi f/i, an online bank started by Citigroup, was folded back into its parent in 2000. NetBank, an American pioneer of internet banking, soldiered on for longer than most but was shut down by banking regulators in 2007. On the other side of the Atlantic, Egg, Britain’s first stand-alone internet bank, shook the market in 1999-2000 when it gained more than 2m customers within months of starting up. But within a few years it, too, had in effect disappeared, its customers having been sold first to Citigroup and then to Barclays and the Yorkshire Building Society. It was an ignominious end to a bold experiment in online banking that had caused palms to sweat in banking centres around the world.
The promise of internet banking had seemed obvious. More than most other industries, banking was already largely digitised. In most rich countries the cash that people carry in their wallets represents only a tiny fraction of their assets and is used for only a small portion of their spending. The rest exists only in the pattern of magnetic charges and flickering electronic impulses of banks’ data centres.