The world has gone mobile. iPads, smart phones, 3G and 4G wireless, and a thousand other technologies are shrinking the world, making it possible to unchain ourselves from our office and our home.
Mary Meeker of Kleiner Perkins publishes her annual “Internet Trends” slide presentation each year to much anticipation, largely because it paints such a compelling picture of the future of the internet — dynamic, robust, and mobile that enhances everyday life for individuals across the world.
Banks, just like every other industry, are working to adapt to these changes with a variety of strategies. At the center of these changes is the future of the retail bank branch.
Branch’s are expensive. They cost money to build, acquire, or lease the actual location. The locations require insurance, maintenance, landscaping, and property taxes. It’s expensive to hire a branch manager, four or five tellers, and lending officers.
Banks of all sizes all over the world are asking: in a world gone mobile, is there a better way?
The Old School Model – Business as usual (with a mobile app)
There is a school of thought in some banks that the traditional branch network will be the backbone of retail banking in the future, just as it has been in the past.
JPMorgan Chase & Co. (NYSE:JPM) spent $1.2 billion growing its already expansive branch network in 2012, part of a long-term plan to double down on the community branch model. This investment represents 46% of the core business investments the company highlighted in its year-end 2012 investor presentation, by far the large single spend.
These investments have increased JPMorgan’s branch network 6.6% since 2010 to 5,614 branches at year end 2012.
The theory for JPMorgan Chase & Co. (NYSE:JPM) is that synergies between its retail, asset management, and commercial businesses could create efficiencies that would offset the expense of expanding and maintaining the branch network.
The results thus far have been mixed. Average deposits in the consumer and community banking unit have increased from $363.6 billion in 2010 to $414 billion in 2012; this is significant because deposit gathering is very closely tied to the branch network, and it is a source of reliable, low-cost funding for the bank to grow.
Return on equity for the unit is also up from 11% to an impressive 25%, driven by an increase in net income of 131% over the two-year period. This result is not linked to the branch strategy though, as $14 billion of the increase is related to decreasing credit costs as the real estate markets have improved. Revenue is up, but it is more than offset by rising operating expenses.
More telling is the overhead ratio, a measure of non-interest expenses (ie. branches) to revenue, which has increased from 48% to 58% since 2010.
At the same time, the bank notes that the number of customers using online banking has increased 8.3% to 31 million customers. Mobile customers increased 153% to 12.4 million.
The New School Model – The App IS the New Branch
At the polar opposite end of the spectrum are banks such as Ally Bank and Capital One Financial Corp. (NYSE:COF) who are betting on a future where the need for a physical branch is minimal, or even unnecessary. Capital One currently has over 1,000 physical branches, but recent acquisitions are transforming the company into an online-first business model.
Best known perhaps for its TV ad campaigns promoting credit card products with Alec Baldwin, Jimmy Fallon, and vikings, among others, Capital One has transformed itself into one of the top online-only banking institutions through its 2012 acquistion of ING Direct. Re-branded today as Capital One 360, this platform is considered among the best in direct banking.
Financially, the theory is that banks can compete for core deposits by going straight to the consumer online. By developing a fully featured banking app for mobile and a robust, yet simple to use online banking experience, the technology can essentially replace the branch network. Instead of property taxes and insurance on 5,000+ branches, Capital One Financial Corp. (NYSE:COF) and Ally can reduce that expense by replacing it with a centralized group of programmers and server space.
The ING Direct acquisition brought Capital One the technology to expand the online platform, and also a signficant level of core deposits. Capital One reported an increase in deposits from $128 billion in 2011 to $212 billion in 2012, all driven by the integration with ING Direct.
Capital One Financial Corp. (NYSE:COF)’s efficiency ratio for 2012 was 55%, a solid number but not an outlier. With the transformation to the online platform, the company intends to over time improve upon that efficiency.
The business model at these banks (collecting consumer deposits, making loans, managing cash) is no different than other traditional retail banks. The online platform is not an attempt to short cut the customer relationship building process (these deposits are core deposits, not even close to high-risk brokered deposits).
The branch has not gone extinct; it has simply evolved. The online platform is the new branch, while the customer relationship is the same — core deposits, loans, cash management services.
There is a middle ground. This past Monday, Wells Fargo & Co (NYSE:WFC) opened a new branch in Washington, D.C., designed to meld the traditional branch experience with the technologies and capabilities of the internet age.
The new branch is in many ways more like an Apple Store than bank branch, as teller stations have been replaced with tablets, self-service kiosks line the walls, and customized user experiences greet each individual as they transact their business.