There has been a lot of talk about bank size. With the financial crisis, too big to fail became a public policy issue. When banks are so large that their failure can risk the entire economies’ stability, we have an unacceptable risk. Ironically, TARP and the consolidation of the banking space has resulted in even larger institutions. JPMorgan Chase and Bank of America are true banking behemoths. JP Morgan Chase, for instance, has something like $2 trillion in assets.
Within these institutions, large size is seen as a strength. Much of this lies well beyond the day-to-day retail banking we all engage in, and is driven by corporate and institutional banking. But let’s just stick to the retail implications for a moment. Their national reach, networks, and economies of scale enable them to create the offerings that drive preference. For instance, people choose which bank to open up a checking account primarily based on the location – it is more convenient to bank near your home or work. ATM networks are also important. So banks like Chase, who advertise the most ATMs and who have branches that dot the entire nation, have an advantage in attracting customers.
And checking accounts are like anchor stores at the mall. Bill pay is the glue that locks people in. Later, banks cross-sell savings accounts, car loans, mortgages, HELOCs… Chase will entice customers to bring in more and more of their business with offers like Chase Exclusives, better prices the more you consolidate. I get the same offer from the AAA because I have both my homeowner and car insurance with them. But banks try to create other benefits of integration and costs for outside transactions as a means to drive consolidation among users. They are busy building walled gardens, or walled cities, with proprietary and locked-in offerings that create ever-greater switching barriers for their customers. Everyone wants to be the Apple of banks. But the anchor account comes from size.
But as the size arm’s race runs, the great banking empires may miss vulnerabilities that ultimately are their ruin. The focus on the walled garden, building and linking infrastructure to create benefits, may make these banks vulnerable to challenger business models that create the same benefits without the costs. First we have to understand the banks' key weaknesses.
Customers will begrudgingly bring their different businesses to a Band of America, when the carrot is seen to outweigh the risk. And there is a perceived risk of having all of one’s eggs in a single basket. It is not the fear of a run on the bank and losing your deposits – everyone knows about FDIC insurance and not many people have more than $250,000 sitting in a particular bank.
There is some fear, particularity among those who have tight budgets, that if a bank were to fail or be acquired, that even a brief service interruption might occur – meaning that they could not access their much needed funds for a few days or even weeks. Others fear giving the bank too much leverage over their finances. It I have an accident and the AAA increases my car insurance, they may also increase my homeowners premium because of their risk models. If I forget to pay my credit card, will the bank change the interest I get on my other account, etc.
Most people do not want to give the bank too much control over their finances because they already feel powerless when it comes to the banks. When there is a mistake, people have to jump hurdles and navigate an amorphous faceless institution to get problems resolved. The bank is not seen as a calculated malicious entity, but something far scarier. A kind of masterless golem that cannot be reasoned with or negotiated with. Acephalous.
All the press about robo signers, homes mistaken foreclosed upon, and the like only throw fuel on the fire, giving the Move Your Money organization validation.
So – customers fear the large banks that are unresponsive to consumers. They want the benefits of integration that the walled garden models represent but fear giving the keys away to the bank. Smaller local banks are seen to be much more responsive. They lack the behemoth internal bureaucracy that makes it so hard to find a decision-maker and resolve problems.
What if you could get all the benefits offered from the larger bank from a much smaller bank - an unmatched network of ATMs, convenient locations, good rates and pricing on products. Even better, points, a rocking interface…
Enter in BancVue. Their tag - "Domination Through Innovation." In the Dec 2010 FactCompany is an article describing how BancVue is enabling small banks to compete with rewards, ATM reimbursement that parasitizes off of the big bank infrastructure, and Kasasa 360- a universal banking platform that provides among other things, data visualization and budgeting. As check deposits go the way of the dodo and cash transactions continue to lose share of wallet, how important is the infrastructure of the megabanks – with all the overhead it demands (economies of scale aside).
People clearly want a way to painlessly integrate their finances from an intelligence and a transactional perspective, while also preserving customer service. Third-party services such as Mint offer the intelligence half of the equation. If a platform offers banking agnostic transactional integration as well, where does that leave the larger banks. Suddenly the playing field is very very flat. What if the platform began to own the primary relationship over the bank? If I were a Kasasa or a MoneyView fan and moved across the nation, would I simply move bank accounts while maintaining my Kasasa account?
Down in the unpleasant muck of the underbanked world may develop a bypass technology - the Boxee or Hulu of the retail banking industry.
For most retail customer, banking is primarily about plumbing and access to lines of credit. Say that small banks can via a BancVue-like platform competes for the transactional business. What if the small local bank is more capable of pricing risk and providing lines of credit?
If the large retail banks were to begin to shed deposits from the retail base, would their other lines of business be able to keep the banks flourishing?
Perhaps they started to do this a long time ago. Around 31% of Americans are either unbanked or underbanked. That is, they do not have a checking or savings account and instead use a host of other financial services like check-cashing stores and pre-paid cards to transact their finances. Within this niche, new players like Mango Money are appearing that are looking to serve the population with competitively priced services that manage risk. (Notice they are not called Mango Bank.)
Meanwhile the big banks are busy going after the mass affluent or affluent market. Perhaps this is a reflection of the larger class income distribution shift in the United States. Or an unintended consequence of Reg E and the Dodd Frank bill. Perhaps we are headed to a two-tiered banking system, where affluent have accounts and the masses transact.
But in those ignored downscale markets there is a lot of innovation going on that could come to bite the larger banks, by circumventing the infrastructure that they have so heavily invested. It can trickle upstream very easily.
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