Financial Institutions

Banks | Regulations, lack of trust challenge banks

Banks earned profits, but not affection.

Financially stressed Americans and Europeans resented an industry with a short memory. Having been rescued by public funds, the banks seemed unwilling to extend credit to a public and small businesses in need of financial help.

The Occupy Wall Street movement galvanized this disenchantment. But consumers didn’t abandon their banks, mostly because switching seemed more painful than staying. In fact, when Occupy Wall Street planned a bank transfer day for November 2011, few people participated.

Consumer complacency ended with a social media rebellion sparked by the Bank of America announcement of a new five-dollar fee each month that a customer used a debit card. The bank reversed its position after a few days of online criticism. Wells Fargo and Chase also backed away from similar plans.

The fees were to compensate for revenue streams lost to stricter regulations. As certain transactions became less profitable, the banks invested little in new product innovation and focused instead on service delivery systems, such as online and mobile banking. Exposure to Eurozone debt required UK and Continental European banks to prudently increase their capital reserves, which reduced funds available for lending.

Many banks turned their attention to more affluent customers and greater ROI potential. The banks offered incentives, such as banking relationship managers, to these so-called “high value,” mass affluent customers. But even affluent customers remained skeptical of the advice received from financial institutions.

Seeking profit opportunities, US banks prepared to reenter the business that fomented the financial crisis - mortgages. The move coincided with a new US government home refinancing program.

Challenging environment brought mixed results

Within this challenging environment, only a few brands appreciated in value. Wells Fargo completed the acquisition of Wachovia in a systematic way that helped retain exiting customers and acquire new ones. The complicated merging of the two banks took place over 18 months. It featured clear customer communication and ultimately combined the service orientation of Wachovia with the technological expertise of Wells Fargo. In addition, Wells Fargo emphasized investment services that appealed to higher value customers.

Commonwealth Bank of Australia benefited from its proximity to fastgrowth Asian markets. Specifically, the brand invested substantially to improve technology and productivity and expand in Indonesia, China and Vietnam. In contrast, US Bank benefitted from expansion closer to home with the acquisition of a New Mexico regional bank in 2011. In January 2012, US Bank entered an agreement to buy a medium-size Tennessee bank. These banks also were less exposed to products that precipitated the financial crisis. This conservative approach also characterized RBC.

HSBC shifted away from the tagline “World’s Local Bank,” as a strategy. Instead, based on its strong presence in both developed and developing markets, HSBC is intent on being a commercial world bank, a facilitator and beneficiary of world trade and globalization. It is honing its focus on Asia and gradually quitting markets where it lacks scale. HSBC pulled back from retail banking in the US and Russia in 2011, and plans to quit Japan and South Korea in 2012.

TD acquired Commerce bank, which enjoyed a reputation for strong service and convenience. Capital One prepared to acquire ING Direct, in an effort to combine a well-established online banking presence with retail presence. Although Chase and Citi enjoyed strong financial results, they continued to suffer reputational fallout from the banking crisis, as did the major investment banks.

Slowed BRIC momentum impacted brands

Russia’s Sberbank enjoyed the results of an ongoing roll out of new brand prototypes that are more targeted to specific customers and much more customer friendly than the Sovietera versions they replaced. Sberbank expanded its footprint into Central and Eastern Europe with the acquisition of Volksbank International.

As the rate of growth slowed somewhat in the BRIC countries, banks no longer could depend on those economies to balance difficulties in Europe or North America. And global interconnectedness exposed banks to new dynamics, such as reduced export of commodities from Brazil because of lower demand from China.

Economic dynamics and currency fluctuations impacted Itaú, Brazil’s largest bank, as well as Spain’s Santander. Latin America generates over 50 percent of the Santander’s profit; Brazil alone accounts for 28 percent. The sovereign debt crises of Spain and Portugal also affected Santander’s results.

The Chinese banks continued to look abroad for expansion. During 2011, ICBC, the country’s largest bank, received a license to open in Mumbai. At the same time, India’s ICICI experienced higher credit costs, which moderated profit growth.

Next generation, new opportunities

The banks needed new opportunities, but few sufficiently prepared for the next generation of customers who may reject traditional banking services in favor of transactions performed instantaneously and with a mobile device. In an approach successfully pioneered by Chase, some banks began to accept checks photographed with a mobile device and emailed for deposit using special security codes.

Technology opened the possibility of new competition from outside the financial industry. Google, telecoms and retailers, such as Walmart and Target, attempted to develop mobile payment systems. China Mobile invested almost $800 million in 2011 to set up a unit called China Mobile Finance. The move followed the purchase of a bank in 2010.

Mobile payments have become popular in parts of Africa without extensive banking infrastructure. But the concern that personal data is vulnerable to interception by Near Field Communications so far has inhibited public acceptance of mobile payments in North American and Europe.

While extensive legacy technology slowed the ability of banks to integrate their full offerings in consumer-friendly ways, non-traditional financial firms, such Mint in the US and Spain’s Tú Cuentas, already aggregated diverse personal financial records into easy-to use dashboards.

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