Banks Must Innovate or Die

Change is inevitable. Conditions are never frozen in time. As the clock and calendar move forward, people and organizations must adapt to different circumstances. Human thought and creativity is constantly exploring ways to make our lives better. The fruits of technology change our expectations and our demands.

The market is spectacular at adapting to people’s wants and desires. The government, and entities protected by government, not so much. Government attempts to stop time and progress.

Even in a business like banking, heavily protected and subsidized by government and regulation, competition and consumer tastes force changes to a business that, while hated by many, is patronized by the majority of Americans.

Bankers are not known for innovation. For example, In the wake of the 2008 financial crisis, ex-Fed Chair Paul Volcker famously quipped, “the most important financial innovation that I have seen the past 20 years is the automatic teller machine (ATM). That really helps people and prevents visits to the bank and is a real convenience.”

As ATMs evolved, open 24 hours a day, 365 days a year (the situation in Cyprus notwithstanding), these machines became the only bank many people ever need to visit. No employees required. Additionally, in October 1994 online banking was born in the U.S. and over time more and more customers began to do their banking using clicks instead of visiting sticks-and-bricks. Now customers can do their banking on their mobile phones.

Over the years banks have provided customers plenty of alternatives to showing up at a branch and interacting with live bankers. PNC Bank estimates the bank saves $3.88 per transaction if a living, breathing teller isn’t involved in a simple transaction. You help banks prosper when you deposit a check by snapping a picture of it with your mobile phone.

However, during banking’s go-go years bankers still raced to expand their physical branch networks. The number of bank branches doubled during the past thirty years. After the building boom, there were just shy of 100,000 bank branches in the U.S. by June 2009. Bank failures and consolidations had trimmed that number down to 93,000 as of last year.

However, transactions done online now account for 53 percent of all banking transactions. Only 14 percent are completed during in-branch visits. This shift in consumer preference now make a third of all bank branches unprofitable.

In a white paper entitled “The Bank Wears Prada” AlixPartners points out that as fewer customers visit bank branches, the real estate itself become less productive and “often cannot cover the operational cost and related credit structure.”

A bank’s average sales are only half that of a large retail chain on a square meter basis, according AlixPartners. “The return on the branch property assets is now often significantly lower than that which could be realized by the best available user, an argument that, taken to its logical extreme, suggests that the premises should be re-let or partially sublet.”

The market is saying that there are too many bank branches, and for that reason, AlixPartners expects the number to drop further to 80,000 over the coming decade.

Similar to banking, technology has had its way with the postal service. Phones, cell phones, faxes, emails, texts, pdfs, not to mention FedEx and UPS has driven the USPS first class mail volume down 28 percent over the past decade. This despite the postal service having a monopoly on the delivery of first class mail that for many deliveries is underpriced.

The U.S. Postal Service operates 31,272 retail locations and 417 processing centers while on the verge of losing, assuming U.S. Postal Service (USPS) CFO and EVP Joseph Corbett is right, $14 billion a year for each of the next five years.

One would assume that the first thing to go at the USPS is more than a few of their redundant or unprofitable locations. In fact 3,700 locations were targeted for closure under the Retail Access Optimization Initiative (RAOI). Thanks to the nationwide protest against post office closings, the RAOI never was implemented. Then a moratorium on closings went into effect from December 2011 to May 2012.

As hard as it is to believe, abcnews.com reports, “One in four post offices bring in, on average, a mere $52 in revenue per day and serves about four people. A full quarter of the 31,000 post offices operated by USPS operate at a loss” and 13,000 offices have less than one hour of work to be done on the average day.”

Economics and customer service do not hold sway in the short term future of the post office, just politics. So, rather than close locations, one of the plans to save money and keep the USPS going is to decrease service by cutting out Saturday delivery.

However, union members have aggressively organized and gather at rallies mindlessly chanting things like “six day is the only way” and protesting any job cutbacks. These protest speeches don’t talk about “customer service” but instead “jobs.” If the unions have their way Saturday delivery will live on just as the formerly targeted 3,700 branch sites remain open.

Protecting jobs is the name of the game. The postal monopoly creates inefficiencies and reinforces them with its focus on job preservation. Because of the government’s backstop and political pressure it operates under, the USPS has an incentive not to take advantage of faster, more efficient technologies to transport mail. Go to a rural post office and it is as if time has stopped: No technology allowed. But career postal workers still have jobs.

AlixPartners explains, “The bank of the future must be able to develop its offerings beyond credit and finance….banks can use digital innovation as a key to their transformation from mere money brokers to entertainment and shopping solution providers.”

The AFL-CIO brass will not be organizing rallies to save bank teller jobs or keep bank branches open. Bankers must innovate or die. The USPS should do the same.

Sincerely,

Doug French

Chris Campbell

Written By Doug French

Douglas French is a Senior Editor for Agora Financial. He received his master's degree under the direction of Murray N. Rothbard at the University of Nevada, Las Vegas, after many years in the business of banking. He is the author of two books, Early Speculative Bubbles & Increases in the Money Supply, the first major empirical study of the relationship between early bubbles and the money supply, and Walk Away, a monograph assessing the philosophy and morality of strategic default. He is founder and editor of LibertyWatch magazine.