Banks are searching for a new business model. The changes caused by technology and regulation have made the old models unviable.
Technology allows customers to do their banking remotely, hence most customers do not visit branches and have no in-person contact with their bank. Regulation adds to banks’ costs and puts pressure on already thin margins. The only logical way out is to use technology to cut costs and find new sources of revenue and new ways of attracting customers to banks that don’t depend on face-to-face relationships.
In the UK, one bugbear is that banks do not charge for basic services such as current accounts and ATM usage. They then try to recoup some of this lost revenue by penalising customers who are overdrawn. This means that those customers who are struggling with their finances subsidise the cost of providing banking free to the better-off.
Many advocate that the way forward is to bring in a sensible charging structure and recoup the cost of these services from the entire client base.
The Banker’s columnist, Chris Skinner, thinks the opposite. In his new e-book The Digital Bank, he describes his vision of the new world order: “Banks offer all of their administrative and transactional services for no charge. There is no charge on being in the red and yet I still get good rates when I’m in the black.”
So the how does the bank make money?
According to Mr Skinner, revenue will come from a combination of the mass community and data effects of online banking (which opens the way for advertisers and retailers to reach a target audience) and by selling additional services related to lifestyle and personal financial management (PFM).
This last point is the interesting one. Under the old model, those who struggled with managing their money were penalised when they screwed up. Under the new model, everyone is invited to pay for a service that not only stops them getting overdrawn but helps them with financial planning and enhances returns on any savings and investments they have.
Will the banks go for it? To be a truly valuable resource for customers, banks would have to break old habits such as not telling savings account holders when an interest rate deal had expired and they were back on a sub-standard rate. This requires quite a transformation, and to take it to its logical conclusion banks might need to alert a customer of a competitor deal better than their own. Banks pay a lot of lip service to doing the best for customers, but I think they are only part of the way there on this journey.
Will the customer go for it? I recently watched a CNBC programme in which viewers ring up a financial guru to ask whether they could afford a holiday, a new home, a new outfit, and so on. The guru runs through their finances and usually tells then what they should already have known – they can’t afford it. They go away satisfied.
In the old days, the same advice would have come from a senior family member, a wise old uncle or grandmother. But in a world where the overspending habit is being passed down the generations, maybe PFM is the new wise old grandmother whose advice is always right and well worth paying for.
Brian Caplen is the editor of The Banker.
