Earnings season is upon us, the time when corporations must take stock of all that took place over the past calendar year, and when all is tallied up, decide whether it was a good year or a bad one. From these calculations, they must make plans for the next year: promises to their shareholders that they’ll improve upon their flaws, however major or minor they may be. It’s like New Year’s Resolutions, if they only had to do with money.
Perhaps Mitt Romney and our Supreme Court were right — corporations are people. This week, we look at what banking corporations are doing to improve themselves this year, however they can.
Bad Business Model
This week kicked off with a report from McKinsey Quarterly that examined the American banking industry’s profitability problem. The revered consultancy identifies three key structural threats to banking’s business model (in addition to the cyclical market problems they face): Basel III, Dodd-Frank, and prolonged consumer deleveraging.
While the Dodd-Frank Act’s limits on debit interchange cut into an easy and lucrative source of revenue for big banks, Basel III requires that they keep more Tier 1 capital to prevent any liquidity issues should there be another downturn in the economy — presumably these two regulations don’t interact well with one another.
Meanwhile, our economy has yet to turn around, and with customers taking on less debt — and banks are less willing to lend because of tightened credit standards — leaving banks with a serious problem. They have lots of cheap capital due to low interest rates, but they can’t lend it out.
Innovative ATMs, More Prepaid
As banks are forced to raise fees and end free checking (as Bank of the West just did this week) new services are popping up in an attempt to restructure banks’ relationships with their customers. Some come from within banking and some from outside it. From within, we have ATMs in Arizona that are now dispensing gift cards, in an effort to expand the services that banks are able to provide their customers remotely, around the clock. As branches become less relevant to customers’ experience with a bank, this seems like a wise idea, though potentially difficult to scale.
From outside of formal banking, TV personality Suze Orman introduced a prepaid debit card, and positioned it as a good low fee alternative to both credit and checking products. I took a look at the card, and concluded that the it is less impressive than Orman would like us to believe. The low-fee claim is misleading because if you were you able to circumvent the fees, that would mean you’re likely in a financial position that would obviate the need for a prepaid debit card. Furthermore, the “Credit Project” that accompanies the card — it reports spending data to TransUnion so that maybe someday they might completely upend the way they determine creditworthiness — strikes me as pernicious.
Banking Coffee Shops, Big Box Tax Services
Meanwhile, Walmart is offering free tax preparation services, keeping up the strategy towards offering better value and convenience to its customers than big banks are able to anymore. On the other end of things, ING Direct, which is an online bank, has been opening cafes across the United States. There are baristas, and no actual tellers, but sales associates who are happy to talk to you about ING Direct’s products while you sip some coffee. Critics think that ING Direct is simply trying to circumvent Community Reinvestment Act regulations. That may be the case, but with retailers like Walmart offering financial services, is it not natural that banks like ING Direct, when it actually opens a storefront, to want it to have reliable revenue streams? Everyone likes coffee and money, after all.
With banking less profitable than ever, and no end to the suffering in sight. We can reasonably expect to see traditional banking services and responsibilities split up among an even more diverse group of actors in 2012.