In the past decade, the banks deemed “too big to fail” have given the distinct impression that it’s business as usual—they’ll always get backing from the government, and they’ll always dominate the market because of consumer confidence. While the first may be true, the latter assumption rests on increasingly shaky ground. Traditional banks are in serious need of rethinking and rebranding.
Here, at the ten-year anniversary of the collapse of Lehman Brothers and all the madness that ensued, the consensus appears to be that lessons learned have been ignored, nothing much has changed, and big banks remain confident they’ll survive because, well, they’re big.
On the face of it, there’s some justification for the confidence. According to the Financial Times, the top five US banks have grown their revenues by 12% and their assets by 10%, while their headcount has shrunk by less than 10% (by contrast, the top five European banks have shrunk their revenues by 20%, their assets by 15% and their workforce by almost 30%).
But a lack of innovation—and a whole new breed of technology-led competition—is inevitably eating away at the foundations of big banking. If you want a demonstration of this, take a walk down Main Street. U.S. banks have reduced their bricks-and-mortar retail footprint by a measly 8 percent since the financial crisis, from 97,000 branches to roughly 90,000, nearly 6.5 times as many as there are McDonald’s restaurants. You can’t eat a burger online, but you can sure as heck conduct the vast majority of your banking needs via computer or smartphone. Why would banks cling to retail branches, when figures from the FMSI 2017 Teller Line Study shows the average monthly volume for teller transactions is down 34.2% since 1992, while teller labor costs for the same period have risen a staggering 147.9%?
Dinosaurs bitten in the tail already
The so-called big four banks (Citigroup, JPMorgan Chase, Bank of America, and Wells Fargo) have met the new, virtual world of banking with plodding inertia. It is reminiscent of the behavior of many industry dinosaurs, such as Kodak, whose carcasses are rotting at the side of the information superhighway because they failed to realize digitization had bitten them in the tail, and would proceed to fatal injuries. One could argue the only difference is the US government didn’t intervene to prop up the fortunes of Nokia, Xerox, and Blockbuster with tax-payers’ money.
Things are rapidly moving in the direction of virtual banking elsewhere in the world, particularly in the UK, where the High Street’s big four are being confronted by so-called “Challenger Banks,” some of which are outgrowths of existing banks or private equity firms. But, in the US, the biggest challenges are coming from the financial fringes: Square, Venmo (recently acquired by PayPal), Apple Pay, Lending Club, Kabbage, and SoFi. While Bitcoin, continues to struggle for mainstream acceptance (and public trust), these alternative services are undoubtedly diverting business and profits from the big banks.
Somewhat more established challenger Quicken rhetorically asks in the ad for its Rocket Mortgage mobile app: “What if we did for mortgages what the Internet did for buying music, plane tickets, and shoes?” The question is directed at the consumer, but the gargantuan banks might do well to consider the answer, too. While almost no irresponsible risk-takers except a few Icelandic bankers ended up in jail for their part in 2008’s global collapse, the day of reckoning may be coming—for a different set of reasons—after all.
Small, agile competitors still have an uphill struggle. The US Department of the Treasury made a modest investment in fintech innovation in 2014, with most fintech disruptors left to raise their own capital in a relatively hostile regulatory environment, compared to the UK and China. Sure, some non-partisan watchdogs, such as Americans for Financial Reform, argue the Dodd-Frank legislation that came on the coat-tails of the Great Recession is less onerous to small banks and credit unions than their behemoth brothers. But it’s unlikely anyone will forget how the giants got bailed out ten years ago, while the little guys were left to flounder. Arguably, this works to make big banks look like lumbering weights around society’s neck—look at the growing concern about local governments’ concessions to win over Amazon in its search for a second HQ. Arlington, Texas, was prepared to offer nearly $1 billion in state and local subsidies, while Atlanta and Columbus, Ohio, are reportedly offering more than $2 billion. The general opinion seems to find this is a heavy, and possibly unnecessary, price to pay to support big business.
The fact is, there’s a revolution going on, and big banks look like the court of Louis XVI. The internet didn’t just make digital payments possible; it gave ordinary folks knowledge and abilities, such as day-trading of stocks, previously reserved for the elite financial few. Robo-advisors guiding ordinary folks’ investment decisions, such as Betterment and NerdWallet, are also on the rise. Paypal continues to tout the company’s mission to “democratize financial services,” while pointing out that the US continues to fall behind in fintech innovations, such as making retail payments with a cellphone, now normal elsewhere in the world. It won’t be long before US consumers demand banking technology that’s truly up to date.
If big banks are to survive, the notion of incorporating such innovations and customer demands needs to enter the branding conversation—and fast.
Role models in the niche banking market
They could do worse than turn to large private commercial institutions that cater to niche audiences for an example of how to proceed. Niche banks have to pursue innovation at a faster pace to hold their own against the more staid competition, as well as appeal to a savvier audience. An instructive example is New York’s Signature Bank. With just 27 branches “tucked away in office buildings,” Signature’s diligent attention to courting business customers, paired with soft innovations in management and employee autonomy, has led Crain’s to herald it “New York’s most successful bank.”
United Services Automobile Association has taken this directive one step further by parlaying a customer-first outlook into tangible innovations in banking technologies. For example, USAA was the very first to unveil mobile depositing in 2009 (an innovation the recently shaken establishment scrambled to meet) and has recently continued this inventive streak by unveiling robust, varied biometric verification for iPhone users.
This steadfast commitment to its customers is consistently credited for USAA’s nearly perfect consumer satisfaction ratings. In one of many laudatory columns, the Harvard Business Review identified the source of the bank’s success: “USAA has proven itself to be a technology leader—not because the company is obsessed with technology, but because it is obsessed with customers.” Making USAA’s example an even more poignant counterpoint compared to the big four banks is how the upstart achieves its innovation without conventional branches.
In a rapidly evolving financial marketplace, only one thing is clear: “too big to fail” is simply not a good branding profile. Banks need to demonstrate a commitment, not just to technological innovation, but to the new consumer landscape in order to justify their market position. Big banks might take solace in the fact that they are too big to fail, but unless they reorient themselves toward consumers and double-down on technological progress, their branding will remain hopelessly hidebound. As a result, they may prove too big to succeed.