Tuesday, 18 September 2012

The end of the Retail experiment in Retail Banking?






With the announcement that Joe Garner, CEO of HSBC's UK retail bank and First Direct, will leave the bank early next year, following in the footsteps of Deanne Oppenheimer (Barclays), Andy Hornby (HBoS) and Helen Weir (Lloyds Banking Group)  the era of  former retailers running UK banks appears to have come to end.

The recognition that Retail Banking had lessons to learn from the retail industry was really born with the launch in 2000 of the 'Occasio' branches by Washington Mutual under Deanne Oppenheimer's leadership. These were completely novel bank branches with the screens between the tellers and the customers removed, bright open spaces which looked much more like a retail outlet than a branch. They even included areas with toys for children to play with while the parent took out a mortgage or a loan.

This concept of moving from 'branches' to 'stores' took off across the world. Abbey National (now part of Santander) openend up branches co-located with Costa Coffee outlets The thinking being that when a customer popped in for their cappuccino they might just take out a loan or open a savings account.

This model was taken even further in one bank in Puerto Rico where bank tellers were expected to take their turn operating as a barista in their branches handing out bank-branded coffees.

In Australia this concept took a uniquely Australian twist with one bank offering to wax your surf board while you did your banking.

Behind all of these radical changes to the design of  bank branches was the core retailing philosophy of the importance of footfall i.e. increasing the number of customers in the branch. The thinking behind this was that if there were more customers in a branch then this would increase sales, which is certainly true in retail.

However whilst having a coffee shop in a book store may have sold more books, with the Abbey National Costa branches it would appear that it was the sale of coffee that went up more than that of financial products.

One of the retail concepts that Joe Garner has brought to HSBC is the January Sale. For the last few years at HSBC branches loans have been offered at special deals and branches have had signs in the windows advertising the January sale. Again this is all about increasing footfall to increase product sales. In retail the usual reason for the January sales is to make room for new stock by selling off old stock at a discounted price rather than having to write off the value of the stock. That concept does not exist in retail banking. There are no old mortgages or old personal loans that are sitting around in the banks taking up branch space. Equally while in retail the January sales can result in impulse buys a loan or a mortgage is not and, never should be, an impluse purchase.

Meanwhile in The Netherlands the idea of making financial services products more physical was taken up. With one Dutch bank when a customer took out a loan they would leave the branch with a smart looking box. Quite what was in the box and what the customer would do with this 'physical' loan is still a mystery. Needless to say this experiment was quietly dropped.

Another concept that has been introduced into HSBC branches is HSBC Radio. Again this is a concept brought in from retail. Fashion shops such as Top Shop have for some time had their own radio stations both to improve and extend the shopping experience as well as increasing basket size. However the reality is that retail banking customers do not want to spend any longer than they possibly can in a branch. While they are queuing to pay in cheques running adverts for loans and mortgages is no more likely to create an impluse purchase than the January sales.

A concept brought from the white goods retail sector of heavily discounting the cost of appliances such as televisions, fridges and washing machines and then making up for the discount by selling highly profitable extended warranties was brought to the retail banking sector at the height of the credit boom in the form of low interest personal loans, credit cards and mortgages along with PPI (Payment Protection Insurance). In many cases the interest rate of personal loans was below cost (due to the high wholesale loan interest rates driven up by the excess demand over supply) making it essential for the banks to sell PPI in order to make a profit.

Finally introducing the retail compensation model of low basic salaries with commission based on sales targets including large incentives to beat targets into the retail banking sector has been key to the misselling of products to customers.

There is no doubt that the way branches looked and operated needed to change. Certainly a lot of the branches today are far more attractive and appealing places than they were before the injection of retail experienced executives into the banks.

However it would appear that the retail experiment is largely over. When Chase took over Washington Mutual  it took a conscious decision to refit the Occasio stores and make them look more like traditional branches.Underpinning Chase's decision was the reality of who the users of branches are today. With the exponential increase in the use of smart phones and other ways of connecting with the internet the vast majority of personal customers do not visit branches on a regular basis. Most personal customers will not either remortgage or take out a new mortgage more than once very three years (and increasingly longer than that), therefore their need to visit a branch (and even here increasingly mortgages are taken out online) is almost never. The users of branches today tend to be small businesses and private banking customers. The open style of branches with the bank private radio playing does not work for either of those segments of customers. Those customers want, and need, a difference experience.

The last 10-15 years has seen the injection of retailing ideas into retail banking. It has had some benefits for customers, but also has had some serious downsides. What we are now seeing is a recognition that banking has always been about servicing, and focusing on the total customer experience across all possible points of contacts is the most important way to retain customers and build loyalty. It is also clear that there are industries other than retailing that excel at delivering a great customer experience that banking should learn the lessons from.

Monday, 10 September 2012

Winners and losers if 'free banking' ends



With UK politicians appearing to see the end of so-called 'free banking' as a panacea for the woes of retail banking, bringing about more competition and a fairer deal for customers, who would the winners and losers be if the end of free banking came about?

If there is to be transparency about fees, which is the whole point of the end of free banking, then the charge will need to be related to the cost of providing that service.

Certainly those who use branches for transactions will be worse off. So the person who comes into the branch on the daily basis to have a chat with the teller and withdraw £10 (as I witnessed at my branch recently) is going to find that experience expensive. Some of the most vulnerable people in society who have low balances and see their branches as part of the community and a way to break the monotony of life will find that this will no longer be affordable to them.

As is already being seen for customers of RBS and Lloyds TSB with basic bank accounts (accounts where there is no overdraft facility and the most basic debit card)  who are already not being allowed to use ATMs which don't belong to the bank who their account is with. This is due to the charge each bank makes to other banks for allowing their customers to use their cash machines Come the end of free banking when charges for making a withdrawal from an ATM will kick in, as already exists in Australia, then those customers with basic bank accounts and low income earners who will be worse off.  Having a bank account will become for many of these people a luxury that they can't afford. The knock on effects will not be limited to the individual, but also government. Government relies on bank accounts to pay benefits into. By the number of people without bank accounts rising and the continued closure of post offices the cost of getting benefits to individuals will rise.
The knock on effect of not having a bank account for the individual is far more than the loss of banking services. The cost of  utilities - gas, water, telephone, etc rise if customers are not able to  have direct debits, since these attract discounts. This will drive low income households further into poverty.
Charges for transactions in branches will inevitably be higher than transacting online or via a call centre (due to the costs for banks being higher to provide these services). As a reuslt there is likely to be a drop in the number of transactions being carried out in branches, which will inevitably lead to branch closures. Many branches, particularly in rural areas, already struggle to be profitable because of the low volume of business transacted in them, so once again the vulnerable, particularly those without access to public or private transport, will be hit the hardest.

One of the arguments for the end of free banking is that charges will be fairer and, in particular overdraft charges will drop. However with the end of free banking interest on balances will need to be paid, and not at the paltry 0.1% banks had been paying prior to the financial crisis. With the wholesale markets expensive, attracting customer balances is a lower cost way of banks raising funds. This will be where competition may well come in as banks and new entrants compete for customers who have a high average balance from month to month. This could lead to a situation where rather than overdraft charges falling they may rise as the balance of the number of customers with large balances to fund those overdraft moves to the competition and  hence the cost of funding the overdrafts for the banks rise.

Another set of losers will, ironically, be those who manage their current account well. These are the people who maintain a low current account balance, don't go over drawn and use direct debits and standing orders to pay their bills. These are the customers who are currently subsidised by those who maintain high current account balances and those who regularly go overdrawn. These smart users of banking accounts, however only become profitable when they use other facilities such as mortgages, credit cards and loans. There is clearly an argument that these are precisely the people who should be paying a fair price for the services they use.

The fundamental challenge for any government who brings about the end of free banking is how to address the issue of the unbanked and the low earners. Certainly with the introduction of fees competition could increase, but it will be competition for the profitable customers, which does not represent the majority of the customer base of the big five banks. Without the economies of scale of a large customer base the big five banks will not be able to maintain the large branch networks they currently do.Compelling the big five banks to offer basic bank accounts and maintain a large branch network, but not compelling new entrants to do that, whilst populist, cannot be a long term strategy. Already the banks being forced to sell basic bank accounts are demonstrating that they are no longer prepared to do this at a signifcant loss.

The alternative is to take the unbanked and basic banking sector out of the commercial sector and have a state funded and run basic banking service. The level of investment required to set this up, particularly given the current economic climate, makes this option unlikely in the extreme.

So whilst the politicians can clamour for the end of free banking it is highly unlikely that anyone will be brave  (or foolish) enough to actually bring this about.