November 5 was bank transfer day in the US. Started simply as a Facebook page by disgruntled Bank of America customer Kristen Christian, a gallery owner in Los Angeles, the initiative was designed to encourage retail customers to leave their large banks and join small credit unions.
It illustrates the frustration customers in the US are feeling at growing fees and poor customer service, and is undoubtedly also spurred by the ill-feeling towards the financial industry over the economic crisis. The Credit Union National Association reported that more than 40,000 individuals joined their members on the day and estimated that 650,000 have joined since the end of September. The Independent Community Bankers of America (ICBA), which represents community banks, said visits to its members had risen 500% from the first week of October to the first week of November.
This collective rallying of a nation to remove deposits from the big banks and transfer them to smaller ones could not have come at a worse time for the large banks. Retail banking is crucial for the universal banks, and profits for retail banks, be those as part of universal banks or just large regional banks, are under such pressure that losing customers is disastrous.
The large retail banks in the US are having to revisit their models, and they are having to do it fast in a period of uncertainty, regulatory burden, low interest rates and anti-big bank sentiment.
For the universal banks, retail banking is now of utmost importance as it must compensate for reduced revenues from investment banking. Dodd-Frank regulation, inhibiting the use of deposits or client money in proprietary trading, is hitting the profitability. Basle III and domestic regulation also mean banks are having to set aside more capital to engage in higher-risk and more profitable activities in their investment banks.
Universal banks will therefore not be able to grow their investment banking businesses at a speed that will bring their return on equity back to pre-crisis levels.
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If you compare retail banks with supermarkets or electronic retailers, you can see the way that the former understands the customer – and provides products and services based on that understanding – is very behind
Likhit Wagle, IBM GBS |
"They are looking at RoEs now of between 8% and 9%, which is just above the water in terms of returns to shareholders," says Likhit Wagle, global banking leader at IBM GBS. "Prior to the crisis, those RoEs were more like 20%; it is unlikely that we will return to that level in the near future. As a result, the universal banks will have to focus very hard on making their retail side of the banks more profitable in addition to higher growth in order to get to an acceptable rate of return for shareholders."
To boot, the capital requirement regulation makes retail banking even more appealing. "It makes retail deposits more valuable as they help lower capital requirements relative to corporate assets," says Laurent Desmangles, a partner in the financial institutions practice of Boston Consulting Group.
But retail banking has its own issues. Retail has suffered from the macroeconomic environment and regulatory changes in the same way as investment banking. In the lower interest rate environment, margins on the deposit side have been crushed.
Historically, banks priced deposits 100 to 150 basis points below the Fed Funds rate. Now, with Fed Funds at zero, that is impossible. Loan volumes are sluggish as there is less demand for loans and less appetite to underwrite loans. According to a national consumer research study, only about 30% of consumers are planning to take out new loans – the lowest figure since 2003.
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Revenues from deposits at all time lows |
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Historical deposit margin revenue |
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Source: Nomura research |
On the regulation side, Reg E adversely affected overdraft fee revenues for banks by allowing customer funds to go overdrawn only if customers have agreed to an overdraft, although there has been an increase more recently in overdraft revenues as consumers have struggled with expenses. According to economics research firm Moebs $ervices, in September, while revenue from overdraft fees has fallen for six quarters in a row from its peak of $37.1 billion in 2009, it has begun to climb again.
The Durbin Amendment, which came into effect in October this year, is also expected to have a negative impact on deposit margins. It reduces the amount that banks are able to take as a fee from retail merchants on debit card transactions.
Retail businesses have been paying banks an average of 44 cents every time a debit card transaction goes through. As of October the fee is now capped at 21 cents. Banks have made as much as $16 billion from the fees annually, and although they are now pushing customers to pay with credit cards, which are not subject to the amendment, their profits will not recover until 2013. The largest banks in the US are expected to take a hit of $6 billion to revenues as a result of the legislation.
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| When Bank of America announced that it planned to introduce $5 a month charges for debt card users in early October, president Obama called on customers to withdraw their funds – prompting one BofA employee to remark to Euromoney that it “was the only time in history that a head of state has actively sought a run on a bank” |
The response from the banks was to propose fee increases for customers with debit cards. However, opposition from politicians and customers to the $5 to $12 charges forced all the banks to abandon the proposal.
Indeed, when Bank of America announced that it planned to introduce $5 per month charges for debit card users in early October, president Obama called on customers to withdraw their funds – prompting one BofA employee to remark to Euromoney that it "was the only time in history that a head of state has actively sought a run on a bank".
