Between classes, you decide that you need an injection of caffeine to help you remain awake in your afternoon Game Theory lecture. You walk briskly to the café and order your noisette. When it comes time to pay, you take out your iPhone and hold it to the point-of-sale system, quickly and conveniently purchasing your beverage via Apple Pay, without the direct usage of any cash or card. As you sip your stimulant, you remember that it’s the first of the month and your propriétaire is expecting his monthly rent. Not wanting to further damage your already strained relationship with him, you open up the Hello bank! app on your aforementioned iPhone and transfer the payment seamlessly by simply entering his mobile number. With a few minutes more to kill before class, you check in on the performance of the savings you sensibly set aside from your last internship by similarly accessing the app of Marie Quantier, an up-and-coming robo-advisor.
Does this short anecdote resonate with you? If it doesn’t, it may well soon as it is doing so with increasingly more consumers, and disproportionately with Millennials such as yourself. But if we were to rewind the clock by less than two decades, this story would read as science fiction. Rather, the coffee would likely have been purchased in cash, which would have been withdrawn from your local bank branch. The payment to the propriétaire would have been via cheque (drawn on your account at that very same branch). Moreover, any savings assessment would have taken place upon receipt of your physical monthly or annual statement—and, by the way, your savings were probably managed by that same bank as well.
These two tales illustrate the striking contrast between the retail banking sector of old and new. But more importantly for us economists at TSE, they highlight how competitive dynamics within this sector have and are continuing to undergo immense change. Consumer preferences in banking services are changing—hastened further by the Global Financial Crisis—and new (and old) firms are responding in kind.
Historically, consumers had a personal relationship with their banker—indeed, our parents and grandparents would have consumed nearly 100% of their banking needs at their primary banking institution[1]. As a result, banks competed heavily on geographic distribution (i.e. accessing customers through local branches was paramount)[2]. Another important characteristic of the legacy retail banking industry was that of high switching costs[3]. As a single bank had a near monopoly on all of a consumer’s banking needs (deposit/savings accounts, mortgages, etc.), consumers required large incentives to even consider changing their bank, not to mention the close relationship cultivated with their personal banker over the years. Taken together, this likely led to some form of “bargains-then-ripoffs” pricing[4], with banks competing aggressively to acquire new customers so as to benefit from higher revenue later on, once a consumer had committed to a particular bank.
Today, this relationship is quickly becoming obsolete. As consumers become more tech-savvy, they become more comfortable performing banking transactions online or by mobile. In fact, over 50% of Europeans have used internet banking services in the past year[5], while 62% of Americans primarily bank digitally[6]. As a result, the need for a physical footprint is becoming less relevant—or in economics parlance, consumers receive less utility from location preferences than they once did. Indeed, the number of bank branches has continued to decline steadily since the Recession, down 5% in the US[7] and a staggering 20% in Europe[8].
Further compounding this change is the precarious financial situation that many households and individuals have found themselves in following the Financial Crisis. For instance, the ongoing deterioration of the middle class coupled with Millennials’ continued penchant for avocado toast[9] has led consumers to be more price-conscious in their banking needs. Nearly 40% of Europeans have changed or are planning to change their main bank and 43% of those planning to have cited price as the primary factor in their decision.[10] Needless to say, successful banks ought to focus on pricing more competitively.
Not surprisingly, a number of new entrants have moved into a sector that has long been dominated by the same firms for hundreds of years. In France alone, new banks without any branches, such as Compte-Nickel and N26, have stepped in to serve this changing consumer base. Despite lacking recognizable brands and enormous marketing budgets, these new competitors have been able to successfully challenge incumbents given their low fixed operating costs (i.e. few employees and physical locations) and technological nimbleness (i.e. no need to consider existing clients/systems).
Given these colossal changes, where does that leave legacy retail banks, such as BNP or Crédit Agricole? The answer largely depends on how they adapt their businesses to the changing preferences of the consumer. The previous chart illustrates that banks are already beginning to rationalize their physical footprint, but are they doing so at a sufficiently fast pace? Furthermore, can these banks successfully leverage the massive amounts of customer data that they have accumulated to provide better, more personalized services, possibly increasing customer loyalty, and with it, switching costs? Can incumbents provide the ease and competitive prices being offered by the slew of neobanks? I believe it is safe to predict that banking, particularly for our generation, is likely to become more competitive and customer-centric for the first time in decades, thanks to the plethora of new entrants utilizing technology to revolutionize retail banking.
by Greg Cohen
[1] BearingPoint. Ongoing: Restructuring of Retail Banking. 2011.
[2] PwC. Retail Banking 2020: Evolution or Revolution? 2014.
[3] Accenture. Banking on Value: Rewards, Robo-Advice and Relevance. 2016.
[4] Mark Armstrong and Robert H. Porter. Handbook of Industrial Organization. North-Holland, 2007.
[5] Eurostat. ICT usage in households and by individuals. 2017.
[6] Bank of America. Trends in Consumer Mobility Report. 2016.
[7] Federal Deposit Insurance Corporation. Commercial Banks – Historical Statistics on Banking. 2016.
[8] European Central Bank. Banking Structural Financial Indicators. 2017.
[9] Calfas, Jennifer (2017): Millionaire to Millennials: Stop Buying Avocado Toast If You Want to Buy a Home, Time Inc. http://time.com/money/4778942/avocados-millennials-home-buying/
[10] Ernst & Young. Understanding customer behavior in retail banking: The impact of the credit crisis across Europe. 2010.
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