The Bankwatch

Tracking the consumer evolution of financial services

Retail banking is the backbone of bank profitability but can it evolve and innovate under current leadership

The Economist has a special report on international banking, and the section entitled Retail Renaissance was a trip down memory lane.  Then some lessons learned for banks.

First the memory lane part.  I was with mbanx in Canada since 1996 and then Wingspan in Chicago emulated in 1999 (ok my opinion)

Retail renaissance | Economist

“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).

First the painful assessment of bank performance during this time and how they had little incentive to innovate.  I remember quite clearly the dramatic shift away from internet banking and towards increased branch presence during the aughties.  It made no sense to me.

In retrospect, the years in the run-up to the financial crisis were a golden age for banks. Even the dullest of them could earn high returns by taking big risks. And few really bothered to try to cut costs when their revenues were being massively boosted by a debt-fuelled bubble. Since the mid-1990s Europe’s big retail banks have managed to cut their costs relative to income by an average of just 0.3% a year, reckons Simon Samuels, an investment analyst at Barclays.

Yet even that modest figure flatters the banks. He calculates that costs over the period increased by an average of 8% a year. The only thing that saved them was that revenues increased a little faster.

Finally the lessons learned:

The effect of the debt bubble was more insidious than it appeared at first glance. In encouraging universal banks to build up their investment side, and some retail banks to dabble in exotic instruments that they did not always understand (demonstrating that even boring retail banks can blow up), it made them take their eyes off their bread-and-butter business.

Yet basic retail banking was, and remains, their main engine of profitability. McKinsey, a consulting firm, reckons that it accounts for more than half banks’ worldwide annual revenue, which in 2010 amounted to $3.4 trillion (see chart).

It (ed:  retail banking) has also proved, in the longer run, to be the most reliable generator of consistent profits and high returns on equity. A ranking of the world’s biggest banks by return on equity correlates closely with the proportion of revenue they make from retail banking, rather than from racier investment banking.

Relevance to Bankwatch:

Quite simply how many banks are capable of learning.  Most large banks have replaced bankers with investment bankers to run the business.  How will that hinder the renaissance, or can they learn ‘back to basics’?  Jamie Dimon is definitely right in the midst of that firestorm.

Written by Colin Henderson

May 21, 2012 at 21:19

Posted in Uncategorized

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