Retail Banks Under Assault By Innovation, Regulation

Author

Joe Harpaz, Contributor

May 15, 2015

A split-second screen shot in the newest commercial for the Apple Watch tells you pretty much everything you need to know about the future of retail banking. It’s not a pretty picture for retail bankers.

In the scene, a man buys flowers to apologize to his significant other. To pay for the flowers, he swipes his Apple Watch clad wrist across an Apple Pay-enabled kiosk at the cash register.

The image is brilliant in its simplicity, making the everyday seem sublime thanks to new technology. A few years ago, that same apologetic man would have paid cash for the flowers.  Which means he would have had to go to a bank – or at least an ATM – somewhere along the way. Payment apps – such as Apple Pay, Venmo, Square and dozens of other competitors – have removed the neighborhood bank from the equation.

Perhaps that’s why the number of bank tellers in the U.S. dropped 13.2% to an 11-year low of 527,680 nationwide between 2007 and 2014. It may also have something to do with the fact that just one new bank has opened in the U.S. since 2010. Over the three decades prior to 2010, an average of 100 new banks were opened every year.  The one bank that did manage to buck the trend – Bank of Bird-in-Hand – is based in a rural village in the heart of Amish country.

It’s a staggering reality-check, but those hubs of local commerce that have anchored the Main Streets of America for so long are going the way of the penny arcade and the five and dime.

The culprit: Online tools, mobile banking and payment apps have made it possible for most bank customers to rarely, if ever, set foot in a traditional bank branch. According to the U.S. Federal Reserve’s new survey on consumer use of mobile financial services, the use of mobile banking has increased from 22% of all banking customers in 2011 to 39% in 2011 to 52% in 2014.

It should come as little surprise, then, that 35% of bank executives surveyed by Business Insider and The Economist Intelligence Unit said they believed tech and e-commerce companies such as Amazon and Apple were posing the greatest threat to traditional banks.

Add bank regulation to the mix and the outlook becomes downright bleak for the local bank branch. It’s not an accident that 2010 has become the point of no return for new bank launches.  It’s the same year the Dodd-Frank Act was passed, putting a bevy of new regulations on traditional retail banking and lending.

Bank executives will point to new mortgage lending rules, bank capital requirements and transaction fee limits that came along with Dodd-Frank as the real impediments to growth. And they’re partially correct. The strict regulation of the largest financial institutions has made it possible for smaller, more nimble upstarts operating in entirely different industries to enter the space.

It’s the same phenomenon we’re seeing with Uber in the taxi and limousine business and LegalZoom in the professional services space. The confluence of innovation and regulation is creating perfect storm scenarios that make it possible for scrappy upstarts to upend the status quo in virtually every industry on the planet.

For now, the advantage is tilting toward the upstarts like Fidor Bank, which has just launched a digital-only bank targeting Millennial customers, app developers that have managed to make bill payment a social exercise and device manufacturers who are reinventing the way live our lives. Eventually, regulation will catch up to the start-ups, opening up new windows of opportunity for disruptors.  We’re currently at such a fascinating point in that cycle because it is all unfolding right now.

Who will win? Increasingly, the odds have been on the side of companies who are comfortable dispensing with the traditional way of doing things in favor of finding new ways to make people’s lives easier. Despite the lollipops and the friendly neighborhood bank teller, going to the bank branch has never been a particularly enjoyable experience. Like the post office, the dry cleaners and the gas station, it’s a chore on the way to doing the thing you really wanted to do. Following that logic, expect to see a frenzy of competition in the coming months as traditional banking institutions step up their games to compete with the upstarts on convenience. Their future may depend on it.

This article was written by Joe Harpaz from Forbes and was legally licensed through the NewsCred publisher network.


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