the future of the banking industry

[SmallCap]

In my small town of Holland Michigan we have a plethora of bank and credit union branches sprinkled throughout the city but what surprises me is that this last year they have built 3 new ones. I don't understand why they are building more bricks and mortar branches. Some of these branches are from banks that have other branches within 5 miles. Personally I almost never go to a bank branch, haven't for many years and I just don't understand who exactly uses the branches and why banks need all these branches. Does it seem to anyone else that the branches per capita ratio has grown dramatically over the last 20 years?

 

here is someone saying that trend is coming to an end.

 

https://www.linkedin.com/pulse/future-retail-banking-thorsten-linz?trk=eml-b2_content_ecosystem_digest-hero-14-null&midToken=AQET-U9lvg_BlA&fromEmail=fromEmail&ut=11HRySb09zl7k1

 

what does this mean for everything from small town banks that Nate talks about all the way up to BOA?

[oddballstocks]

I'm guessing you're a retail customer correct?

 

Think about this differently.  You own an excavation company.  You have 10 dump trucks, a number of shovels, people, some land and steady work.  You need a $800,000 loan for a new excavator.  Where do you go?

 

You can't get that loan online.  You can only get it through a relationship with a banker in person.  Where are those people?  In branches.

 

Branches also get you a foothold in a new market.  A relative of my wife who owns a bank has talked about how he entered a number of new markets by buying existing branches.  There are already relationships build and he can grow on top of that.

 

I agree, I do almost all my banking online.  But there are needs beyond basic checking and savings.  For example if you wanted $10,000 in cash from an online bank or ATM you'd be going to the ATM for 20 days straight and withdrawing $500 at a time.  Or you can walk into a branch and get it 15m later.

 

I find myself in my bank's local branch for business banking needs, and large dollar needs.  I'm not mailing the check from the closing of a house to an online bank to be cashed..

[oddballstocks]

Now the counterpoint to my last post.  Some of these bank and CU's might be looking for growth.  And they're looking for growth by doing what they've always done, open branches.

 

There were 93,000 branches in the US in 2015, and 94,000 in 2014.  In 2013 96,000 and 2012 97,000.  There are still a LOT of branches, and the number isn't shrinking as rapidly as the number of banks.  Meaning that most banks still see value in these branches.

[fareastwarriors]

Every time I can go to a branch, there is always a line! :(

I like the people working the BofA branch in my area. Wonderful people.

[SmallCap]

Nate, I am a retail customer but also own two small businesses but not ones that I have needed a loan for equipment, I have raised money from investors but not banks so your right there is a need for local people. I am not questioning the need for local bricks and mortar, I go to the bricks and mortar around 3 times a year for some of those needs that you mentioned. I don't see a time of doing away with all branches what I am questioning is the continued proliferation of branches even when they have two other branches in the same city of 35K, those times i need a bank I can drive a few minutes to see an actual person.

[Jurgis]

What oddball said. +1.

 

Also, it might be harder to judge branch numbers in big suburbia, but I think in our area it's stable to going down a bit. Consistent with oddball's national numbers.

 

Edit: I don't know why there would be huge branch growth in your small city. Some kind of local bank competitive war?

[Packer16]

Part of the branch demand is where you operate.  In small to mid-sized communities, branches are key to developing and keeping relationships but in large metros they are more folks used to using on-line options and real estate is more expensive.  In Upstate NY, the more rural banks are expanding branches.

 

Packer

[glorysk87]

I find myself in my bank's local branch for business banking needs, and large dollar needs.  I'm not mailing the check from the closing of a house to an online bank to be cashed..

 

Funnily enough, I sold my house last year and deposited the biggest check of my life without stepping foot in a bank branch...I simply used the camera on my iPhone and my bank's mobile app.

 

Branche's are obsolete for deposit needs, in my opinion. The only thing I've ever needed a physical bank branch for was to get a cashier's check for the deposit for my new house. Other than that, I haven't had any need to step foot in a branch in the last 5 years minimum.

 

I will say, I can't speak to business needs as I don't own my own business. But I would envision bank branches slowly disappearing until there are only branches left in key locations.

[boilermaker75]

In my small town of Holland Michigan we have a plethora of bank and credit union branches sprinkled throughout the city but what surprises me is that this last year they have built 3 new ones. I don't understand why they are building more bricks and mortar branches. Some of these branches are from banks that have other branches within 5 miles. Personally I almost never go to a bank branch, haven't for many years and I just don't understand who exactly uses the branches and why banks need all these branches. Does it seem to anyone else that the branches per capita ratio has grown dramatically over the last 20 years?

 

here is someone saying that trend is coming to an end.

 

https://www.linkedin.com/pulse/future-retail-banking-thorsten-linz?trk=eml-b2_content_ecosystem_digest-hero-14-null&midToken=AQET-U9lvg_BlA&fromEmail=fromEmail&ut=11HRySb09zl7k1

 

what does this mean for everything from small town banks that Nate talks about all the way up to BOA?

 

I don't know anything about bank branches in Holland, MI, but I am familiar with New Holland Brewing, my favorite craft brewery. The Dragons Milk Stout is to die for and at 11% alcohol a couple can really knock you out! The Poet oatmeal stout is also superb.

[rkbabang]

I find myself in my bank's local branch for business banking needs, and large dollar needs.  I'm not mailing the check from the closing of a house to an online bank to be cashed..

 

Funnily enough, I sold my house last year and deposited the biggest check of my life without stepping foot in a bank branch...I simply used the camera on my iPhone and my bank's mobile app.

 

Branche's are obsolete for deposit needs, in my opinion. The only thing I've ever needed a physical bank branch for was to get a cashier's check for the deposit for my new house. Other than that, I haven't had any need to step foot in a branch in the last 5 years minimum.

 

I will say, I can't speak to business needs as I don't own my own business. But I would envision bank branches slowly disappearing until there are only branches left in key locations.

 

I've started using Fidelity's cash management account as a checking account.  I have checks, an ATM card, direct deposit, mobile deposit, and online bill payment.  I still have a savings account with a local credit union with a little money in it, just in case I need a physical bank to deposit a large check (Fidelity has a $10K limit on its mobile deposit feature) or to get a large cashiers check (I don't know how I would do that with Fidelity).  But since you can move money back and forth from the bank account to the Fidelity account it is the best of both worlds, you can bank online 99% of the time, but have access to a bank if you need it.  And since the Fidelity cash management account has no fees and most banks don't charge fees for savings accounts, I don't pay any monthly fees at all.

 

[wknecht]

Dick Kovacavich talks about this branch question from a big banks perspective here if I recall:

 

His basic point is it doesn't matter for big banks. Branches are just a different distribution channel that isn't smart to ignore. As long as it's justified from an economic standpoint they'll build branches of one type or another. And they're also a great online bank, so they'll adapt their distribution as tastes change. A good video in general.

[Aberhound]

Banking industry in 20 years you ask? Let me speculate as I believe radical change is already in progress so the trends can be seen. Here is what I see.

 

The new blockchain shekel will have the sender ID the receiver id and the amount and every transaction in the blockchain. Every transaction will use the blockchain if only 1 millicent to identify it. Everyone will use it as if you don't you get no loans, no mortgage, no insurance, no government cheques etc.. Banks are unneeded and are dis-intermediated and probably operate from Jerusalem where the first central bank which supports the blockchain currency is located. Margins are much tighter as costs are eliminated and everything is automated, online and run by the new quantum computers. Collection is much easier if a fraction of each transaction is devoted to payment. Credit risk similarly becomes mathematical algorithm both instant and near perfect. Any bank which fails to get on board will disappear. Probably the existing big banks will be the amongst the first to sign on so check to see who owns most of the shares of any of your bank holdings.

 

It could be New York, London or Frankfurt with the new blockchain dollar, pound or Euro but they are all so busy fighting the last war they are going to leave the field to the commander with his eyes on the future. Shekel because they are the only country left with sufficient homogeneity to develop, adopt and run such a system together with the ability to get the businesses approved elsewhere and full governmental backing of the blockchain. You don't set up such a system if you don't trust the guy or gal on your left or your right. Maybe the Chinese have the necessary skill and homogeneity but they won't have the power to get it adopted in as many places and they are slow to approve the blockchain. Hopefully North American and European commanders start fighting the next war, not the last and start removing all obstacles to the blockchain. The financial war determining who will have the next reserve currency is already in progress and few realize it.

[Gamecock-YT]

all the way up to BOA?

 

For the big banks you are seeing tellers being let go and ATMs taking over. BOA now has ATMs where you can speak to customer service people from a centralized location that can provide services for you from the ATM. The big push at the bank branches (at least at BOA) now are towards sales, specifically wealth management. They're about to open their first new branch in Charlotte since 2012 and it's going to be geared big time towards sales and a lot less towards operations. Not to mention the big push into technology, though I'm still waiting to be able to use my smartphone as my ATM ID....supposed to be coming by the end of the summer in certain markets. And of course cant forget the almighty buzzwords: "responsible growth" "Simplify and Improve"

[oddballstocks]

Credit risk similarly becomes mathematical algorithm both instant and near perfect. Any bank which fails to get on board will disappear. Probably the existing big banks will be the amongst the first to sign on so check to see who owns most of the shares of any of your bank holdings.

 

 

VaR (value at risk) was near perfect super computed mathematical model of risk right?  How'd that work out in 2008....?  If there is garbage data in the system (and any system with humans contains it because we're not rational and do weird things that don't make sense) then you can't predict anything with perfect accuracy.

[wknecht]

Dick Kovacavich talks about this branch question from a big banks perspective here if I recall:

 

His basic point is it doesn't matter for big banks. Branches are just a different distribution channel that isn't smart to ignore. As long as it's justified from an economic standpoint they'll build branches of one type or another. And they're also a great online bank, so they'll adapt their distribution as tastes change. A good video in general.

Sorry it was this one at around the 48 minute mark

https://youtu.be/R2MV6CpGCwU

 

[wknecht]

Credit risk similarly becomes mathematical algorithm both instant and near perfect. Any bank which fails to get on board will disappear. Probably the existing big banks will be the amongst the first to sign on so check to see who owns most of the shares of any of your bank holdings.

 

 

VaR (value at risk) was near perfect super computed mathematical model of risk right?  How'd that work out in 2008....?  If there is garbage data in the system (and any system with humans contains it because we're not rational and do weird things that don't make sense) then you can't predict anything with perfect accuracy.

Yes, and not to mention the massive government intervention in all the data all of these models are calibrated to and likely will be in the future.

[Junto]

A few points, agree that  retail transactions are on a downward trend at branches but disagree that they don't play a pivotal role in marketing a bank and as sales centers for new customers. Brett King has been articulating the death to banks for years and yet only part of his futuristic comments have come true.

 

Most the "innovations" are built with regional banks being the guts behind the facade (The Business Bank), including Brett King's Moven.  Simple, hailed as a large disruptor to retail banks, was sold to...wait for it...a bank.  The banking industry has been around for thousands of years in one form or another and I don't see that changing in the next thousand years. However, the method of delivery has constantly changed and involved with the technologies and wants/needs of the time (invention of ATMs, debit cards, credit cards, online banking, mobile banking, etc...)

 

Here are some items to consider (http://thefinancialbrand.com/36707/the-calculus-of-bank-branch-networks/). They have not changed much in the past couple of years.

 

Oddballstocks is right on.

 

The disruption that should be considered is the impact of low net interest margins coupled with higher regulatory compliance costs and capital needs. This will drive consolidation in the industry. Over the past 20 years it has remained relatively consistent in my district (factoring deaths, births, mergers, etc). My expectation is that if the outlook for rates stay low, M&A activity will break out from this trend. As a result of concern of too big too fail regulation has in fact driven larger banks to get larger and smaller banks to consolidate thereby making more concentration of the banking system not less as was the intent with Dodd Frank and other regulations over the past 10 years.

 

Lastly, credit unions are operating on government subsidies (no taxes) expanded reach and less regulatory oversight (simple call reports, no Community Reinvestment Act (CRA), etc...) than the banks they have essentially become.  On a retail side, they are becoming material factors in local markets given their ability to loosen the common bond and as their size and reach escalates.

 

Competition in banking is tough right now. There is a reason why many pink sheet banks sell for less than book value.  Banks who focus on niches and create expertise in these niches are the banks executing the best in today's market. Many of the best performing banks are secondary mortgage lenders, SBA lenders, or business banks.  Many other successful (top 25% ROE/ROA banks) community banks have oligopolies on their local market when looking at physical branches and concentration of deposits. In my market, Wells Fargo and US Bank have 70%+ market share.

 

Good luck investing. I am a big financial investor and am making my investments accordingly.

[Spekulatius]

Dick Kovacavich talks about this branch question from a big banks perspective here if I recall:

 

His basic point is it doesn't matter for big banks. Branches are just a different distribution channel that isn't smart to ignore. As long as it's justified from an economic standpoint they'll build branches of one type or another. And they're also a great online bank, so they'll adapt their distribution as tastes change. A good video in general.

 

Wells Fargo's online banking platform is the worst of all major banks that I know (far inferior to BofA) and even my small CU is better than what these guys came up with. They have not really changed anything in their banking interface for about 10 years as far as I can tell.

 

And don't get me started in Wells Fargo Brokerage, although the latter has been recently updated. It is simply amazing that a major bank has such an antiquated inline Interface. Their IT budget must be really really small...

[wknecht]

Dick Kovacavich talks about this branch question from a big banks perspective here if I recall:

 

His basic point is it doesn't matter for big banks. Branches are just a different distribution channel that isn't smart to ignore. As long as it's justified from an economic standpoint they'll build branches of one type or another. And they're also a great online bank, so they'll adapt their distribution as tastes change. A good video in general.

 

Wells Fargo's online banking platform is the worst of all major banks that I know (far inferior to BofA) and even my small CU is better than what these guys came up with. They have not really changed anything in their banking interface for about 10 years as far as I can tell.

 

And don't get me started in Wells Fargo Brokerage, although the latter has been recently updated. It is simply amazing that a major bank has such an antiquated inline Interface. Their IT budget must be really really small...

The point was more thematic, but understood.

[Spekulatius]

Besides the rationalization of the consumer banking, the bigger industry challenge may be the rationalization of the investment banking, which I think is in the early innings.

Investment banking is rally not earning any reasonable return on the invested capital since 2009, which in my opinion means that the business impaired if not broken. Yet, I have not really seen much rationalization and in particular don't know, why the sky high salaries in this sector have come down. It kind of funny to see an industry that tries to model all other industries (and to some extent determines how they are run) having such abysmal result itself year after year and not going through a rapid transformation that they would probably recommend for any other business sector, but their own. ::)

[SmallCap]

I don't know anything about bank branches in Holland, MI, but I am familiar with New Holland Brewing, my favorite craft brewery. The Dragons Milk Stout is to die for and at 11% alcohol a couple can really knock you out! The Poet oatmeal stout is also superb.

 

one of the many benefits of living in Holland Michigan is New Holland brewery and the many other micro breweries that it has spawned and inspired. I love NHB and its poet stout but have hung out more at our brewery which is 3 doors down from NHB and has no national distribution but some really great beers.

[Drake]

VaR (value at risk) was near perfect super computed mathematical model of risk right?  How'd that work out in 2008....?  If there is garbage data in the system (and any system with humans contains it because we're not rational and do weird things that don't make sense) then you can't predict anything with perfect accuracy.

Yes, and not to mention the massive government intervention in all the data all of these models are calibrated to and likely will be in the future.

 

Yes, mathematical models have been blamed a lot - so it's disturbing that a central remedy for the crisis by regulators has been to introduce a vast amount of new mathematical model and even more regulatory intervention in their calibration.

 

However, I think that it's not fair to put all the blame to the mathematical models: One does not need VaR to understand that NINJA loans are a stupid idea.

[Drake]

Besides the rationalization of the consumer banking, the bigger industry challenge may be the rationalization of the investment banking, which I think is in the early innings.

Investment banking is rally not earning any reasonable return on the invested capital since 2009, which in my opinion means that the business impaired if not broken. Yet, I have not really seen much rationalization and in particular don't know, why the sky high salaries in this sector have come down. It kind of funny to see an industry that tries to model all other industries (and to some extent determines how they are run) having such abysmal result itself year after year and not going through a rapid transformation that they would probably recommend for any other business sector, but their own. ::)

 

I am not certain what investment banking comprises, today - so, I would like to ask: In my understanding, due to Volcker rule in the US and similar rules here in the EU, large banks are unable to do any prop trading, anymore. Wouldn't that mean that investment banking today is basically services and consulting, e.g. in mergers and acquisitions?

 

If this is the case, does it still make sense to take ROI as a meaningful metric for investment banking? (I simply don't see how there is  potential for capital intense activities in investment banking as of today).

[Drake]

Part of the branch demand is where you operate.  In small to mid-sized communities, branches are key to developing and keeping relationships but in large metros they are more folks used to using on-line options and real estate is more expensive.  In Upstate NY, the more rural banks are expanding branches.

 

A large part of this value is that the local banks know the local economy and the companies of their region and thus have competitive advantages in judging the creditworthiness of debtors and prospects of local projects in need of financing. However, at least here in Germany, these advantages are fading away. Reasons is new EU regulation and German legal requirements: there is more and more pressure to leave out all subjective estimation and reduce the loan approval process to certain objective metrics. This makes it harder to obtain financing for debtors, reduces the competitive advantages of local banks, and increases their costs for complying with regulation over-proportionally to the sizes of their balance sheets. In turn, this increases the competitive advantages of large banks. I am convinced that here in Germany, a lot of small banks will disappear - partly caused by regulation, partly caused by Fintech, partly caused by the low interest rate environment.

[SharperDingaan]

Banking industry in 20 years you ask? Let me speculate as I believe radical change is already in progress so the trends can be seen. Here is what I see.

 

The new blockchain shekel will have the sender ID the receiver id and the amount and every transaction in the blockchain. Every transaction will use the blockchain if only 1 millicent to identify it. Everyone will use it as if you don't you get no loans, no mortgage, no insurance, no government cheques etc.. Banks are unneeded and are dis-intermediated and probably operate from Jerusalem where the first central bank which supports the blockchain currency is located. Margins are much tighter as costs are eliminated and everything is automated, online and run by the new quantum computers. Collection is much easier if a fraction of each transaction is devoted to payment. Credit risk similarly becomes mathematical algorithm both instant and near perfect. Any bank which fails to get on board will disappear. Probably the existing big banks will be the amongst the first to sign on so check to see who owns most of the shares of any of your bank holdings.

 

It could be New York, London or Frankfurt with the new blockchain dollar, pound or Euro but they are all so busy fighting the last war they are going to leave the field to the commander with his eyes on the future. Shekel because they are the only country left with sufficient homogeneity to develop, adopt and run such a system together with the ability to get the businesses approved elsewhere and full governmental backing of the blockchain. You don't set up such a system if you don't trust the guy or gal on your left or your right. Maybe the Chinese have the necessary skill and homogeneity but they won't have the power to get it adopted in as many places and they are slow to approve the blockchain. Hopefully North American and European commanders start fighting the next war, not the last and start removing all obstacles to the blockchain. The financial war determining who will have the next reserve currency is already in progress and few realize it.

 

+ 1

 

.... & a few  things to add to this.

 

The BoE, the BoC, the US & China all have the equivalent blockchain Shekel; what isn't being talked about is their FX conversion rate between other blockchain &/or paper currencies. We assume that the FX conversion rates for both the blockchain & paper versions of a currency will be the same; when in fact - it is highly unlikely. Material & significant disruption.

 

Replacement of credit score with a 'reputation score' as the loan granting criteria. It's brings 2B+ more people (& billons of other micro applications) into the banking system, - opening the door into micro-banking. This isn't possible under todays cost structure.

 

JIT & systematic removal of 'float', drastically reducing profitability. NA equity 'trade through to settlement' can now be done in 10 minutes (& less), versus 3 days; bond settlements are going the same way. Trillons of $/day that don't have to be financed - is a lot of saved interest.

 

Global versus bank network. The entire global network of a 'Google Pay' versus the more limited network of even a major global bank. Hawala systems, & remittance payments - moving onto the global network for the cost & transparency benefits. Expansion feeding expansion.

 

No people, significant job loss, & lower wages for the young. There are few youngsters in the developed world, lots of competition for their labour, & therefore push towards higher & rising wages. With blockchain the automation does the work, there is no demand for labour, & wages decline - & fall. Scaling up doesn't increase the labour requirement either - just add another server.

 

Higher speed, reliability, flexibility, & transparency. Terrifying to many bankers, & the opposite of what their banks are about.

 

It's already here; just in the early stages of being rolled out.

 

SD