The High Cost of the Banking Business

Ed Boyle, CEO, Medici Bank

Conventional banks take pride in being noticed. From big buildings with columns to branches in every city and ATMs on every other street corner, it’s always been important to be local and imposing. Then you throw in billboards, TV ads, radio spots, online ads, and social media posts and you’re pretty much surrounded by the 360-degree brand campaigns. If the bank is big enough, they might pay to put their name on a stadium or arena.

The logic is clear: if the bank appears to be ubiquitous, surely that must make its customers’ lives easier. In a pre-digital era, branches and their associated infrastructure were necessary components to users’ financial lives, they were what made the user experience convenient.

But today things have changed. Is all the real estate and advertising the best way to spend the revenues that banks earn from their customers? 

The cost of naming rights of an office building or stadium are obviously high, but they are cheap compared to the rest of the traditional bank infrastructure. Consider all the branded, dedicated ATMs that banks deploy all over the place. Each machine costs around $4000, then you got to add in rent, insurance, cash-management service and general maintenance.  This, of course, pales in comparison to the costs for a staffed branch. Not including the cost of land, full service branches cost $1.5M to set up and are staffed with around six full time equivalent employees and have an annual operating cost of around $1 million. Each.

There are 78,000 branches in the US and  more than a quarter of them lose money, even though tellers have notoriously low salaries. Then there’s the matter of shipping and transporting cash: Bank of America spends roughly $1 billion a year just moving cash around within Bank of America.

This infrastructure — dedicated ATMs and branches and tellers and cash vaults and so on — was necessary for a cash-centric pre-digital era and useful when borrowing was done locally. But is it necessary in today’s transformed world of cellphone supercomputers and instant borderless communication? Every cost a bank incurs will be passed, in one form or another, back to its customers.

The fastest and cheapest way to get $10,000 from New York to London is to put it in a bag and hop on a plane!

Imagine what might happen if banking could shed the ATMs and branches and, the few things that today must be done in branches, were enabled to be done online. Some of us might be inconvenienced until we got used to it. Renting videos and buying books or music isn’t the experience it used to be, but we got over it. One thing for sure is that bank, like travel agents, would be a lot less visible. But maybe we shouldn’t notice our banks. Maybe their names shouldn’t adorn stadiums and their branches should be shuttered. Maybe they should be invisible, by becoming part of our lives, embedded into processes we already do.

Paying for a taxi used to be a hassle, now customers of Uber and Lyft have that happen in the background, automatically, almost invisibly.

The United States is a traditional hub of innovation in technology, and twenty-first century tech can make “invisible” banking possible. Unfortunately, although the American legal system has been accommodating to most digital innovators, its financial regulatory system is extremely stringent and, whether an intended consequence or not, there are virtually no new banks here.

The number of charters granted annually is down 98% since before the financial crisis of 2008. To understand what the future might look like, Americans should look overseas. In Asia, massive technology companies like WeChat and Alibaba are taking chunks of market share from banks. We know our banks and their regulators won’t let that happen here. But look at the United Kingdom with its vibrant stable of so-called “challenger banks”. Banks there, like Monzo, Revolut, and Starling, are getting financially sophisticated users to try something new. Roughly 15% of bank account holders in the UK now bank with one challenger or another

Banking is a high-volume, low-margin business. When the economy is growing, banks are printing money. But when the market turns, banks need to raise fees and cut costs. Usually because their technology is so entrenched and their branches under 20-year leases, this means they are cutting headcount. Challenger banks, being more digital, have lower variable costs, lower overhead and more efficient organizational structures. A bank with 100 loan officers that decides they’re cutting back lending 50% just doesn’t want to keep 100 loan officers around.

On the other hand, a challenger bank is likely already pretty lean. Monzo Bank of the UK has 3 million customers and is worth more than 100-year old Washington Federal Bank, and yet they have 30% fewer staff. Leaner, more flexible challenger banks enjoy better economics than traditional banks and so can offer better pricing to their customers, or better returns to the shareholders. Given their advantages, it’s hardly surprising that challenger banks have proven popular with savvy bank customers.

As KPMG observed in 2018, millennials will soon be the most important banking population. Many millennials and Gen Z consumer may not know how to write a paper check, but they are certainly habituate to the instant gratification and flexible user experiences that PCs and smart phones have afforded them in commerce, transit, travel, and socializing. Their priorities are not their parents’ priorities, and their banks should not be their parents’ banks.

The younger generations value autonomy; they want a bank so convenient, easy and inobtrusive that they almost forget about it. It’s the customer, not the bank, that should determine the venue, location, and speed of the transaction. The bank should morph into the life and business of the customer. The bank should become invisible and operate like on autopilot. Ultimately, the bank, like a self-driving car, becomes autonomous, designed to optimize on behalf of the customer.

About Ed Boyle

A payments and digital banking expert, Ed Boyle has over 15 years experience at American Express, launching their prepaid card business. After serving as U.S. Managing Director of Fidor Bank (Germany), Boyle brings a deep customer orientation and knowledge of banking technology and partnership development to create more open and efficient solutions.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.