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The One Key Question About Retail Banking's Future

A Snarketing post by Ron Shevlin, Director of Research at Cornerstone Advisors

In connection with its Retail Banking conference, American Banker ran an article titled Five Key Questions about Retail Banking’s Future which included the following questions:

1. How many branches should we close?
2. How many new branches should we build?
3. How many more people should we lay off?
4. How much revenue can we get from offering mobile and online technology?
5. What are the future sources of revenue?

My take: An OK list. But not in the right order. And if you put them in the right order, there’s really only one key question about retail banking’s future, because the answers to the others are all dependent on the answer to the one key question.


So what’s the one key question? Simply: What are the future sources of revenue?

A bank can’t determine how many branches it should open/close, or how many people to let go, until it has a clear vision and strategy for how it’s going to generate revenue. Specifically, what (products and services), where (geographically), and from whom (customer segments).

Closing/opening branches and/or letting people go before developing that vision/strategy is pure stupidity, and the board should fire any CEO that does the former before the latter.


But I’m still not sure that a lot of banks are asking the right question.

As the article states, when it comes to future revenue sources, “many banks are pinning their hopes on commercial and industrial lending. At banks with $20 billion or less in assets, C&I loans grew 3% from the third quarter and 9% from a year earlier. Some banks have a rosier outlook on other types of loan growth; Regions Financial (RF) said last week that it is expecting single-digit growth in credit cards, indirect auto lending and C&I lending to upper middle market companies.”

Huh? C&I loans? I thought we were talking about retail banking?

Here’s the challenge that the majority of banks face in a nutshell:


The majority of banks (and credit unions for that matter) aren’t generating enough revenue from enough non-interest sources of revenue.

Financial services execs are locked into a narrow view of what their sources of NII are.

In a study done by Filene Research Institute last year, three of the top five most important sources of NII to credit unions were checking account fees, mortgage closing costs, and out-of-network ATM fees. I can’t imagine that those aren’t in the top 5 list of bank execs, as well.

Yet, when asked to rank sources of NII by the value they provide to credit union members, only one — mortgage closing costs — was in the top 10 list of value-added services. And CU execs must’ve been smoking to think that people think that mortgage closing costs “add value.”


I know that there a lot of people in the industry who will say “mobile is the key to the future of banking” or that “innovation is crucial to the success of banking.”

Yeah, whatever. 

As far as I’m concerned, mobile is nothing more than an access mechanism. Just one more way of connecting. If  banks and credit unions want to charge customers/members for accessing their accounts using a mobile device, good luck. That doesn’t add a lot of value to the product (account) itself, and I don’t many FIs will get far with that tactic.

The successful banks and credit unions of the future will be those that generate new sources of revenue that consumers are willing to pay for. Tacking on additional fees to existing products, or dreaming up new penalties or usage/inactivity fees is a dead end. 

And if you don’t answer the question of what those sources of revenue are going to be, you’re going to end up closing a lot more branches, and firing a lot more people, than you thought you would.

Ron ShevlinRon Shevlin is Director of Research at Cornerstone Advisors. Get a copy of his best-selling book, Smarter Bank: Why Money Management is More Important Than Money Movement. And don't forget to follow him on Twitter at @rshevlin.

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  1. Brian Gunn says:

    Great article Ron. Definitely agree.

  2. Spot on as usual.

    The average bank is losing money on CDs and fixed deposit accounts right now because of low interest margin and spreads. In a sustained low interest rate environment I don’t see any other option than charging fees for low margin checking account relationships. The other problem is that as customer experience improvements are made, switching accounts and the opportunity to cherry pick mortgages, credit cards, etc is made easier, stickiness and therefore cross-sell and up-sell revenue will reduce.

    Abandoning low margin checking relationships (such as BofA tried a couple of years ago) is only a short strategy, and not going to lead to a revenue fix. The challenge is a fundamental one around acquisition of good revenue. The funnel for customer acquisition and the margin on product must force another look at NII and customer relationships in general.

  3. Spot on, Ron. Well said. I would add that the narrow view of what NII is and can be is why innovation really is “crucial to the success of banking”, even if some just use it an expected sound byte.

  4. JP: Thanks for the comment. If you take a look at the report that Filene published last year, there’s actually a pretty decent list of NII sources that credit union execs look for (and I’d assume the list isn’t very different on the bank side). So when you say “narrow” I don’t think “short”. But the fees are narrow from the perspective that they’re mostly add-ons to existing products and services.

    FI marketers have to find new sources of revenue, which I know you’ll be discussing in your session at the BI conference next week. Hope you’ll blog about it.

  5. Thanks for commenting, Brett. Totally agree that there is little option other than charging fees for low margin checking account relationships. The bigger challenge, as I see it, is aligning cost and value.

    People will pay for stuff that they perceive to get value from. It may take some good marketing from the industry to demonstrate and communicate that value, but it can be done.

    The “value” being marketed today is suspect (again, in my opinion). Maybe I’m wrong, but I really don’t think that “Do business with us because we don’t chain our pens to the counter” is a particularly compelling value statement for a lot of consumers.

  6. For a long, long time, banks used to be ranked by asset size. (Even today, I read an article which said ICICI Bank is India’s 2nd largest bank because it has so-and-so amount of assets). You got to cut them a little slack because, compared to most other industries, revenue became the primary metric of performance in banking relatively recently. With the kind of furore that BankAm faced over its debit card fee, I’m not sure how feasible checking out fee is, let alone place it in the top 3 sources of NII. While I agree with much of what you say about mobile as access mechanism, I’m curious to know your thoughts around Mobile RDC for the Consumer and SMB segments: While it doesn’t add value to the underlying product – namely, checking account – Mobile RDC can bring about savings in travel time and costs and could therefore justify nominal fees.

  7. Ketharaman: Mobile RDC is an interesting topic. Many FIs here seem to be having success charging for it. There’s a clear convenience factor. Long term, though, I wonder if fees for mobile RDC will stand up.

    First off, one large FI here says the volume of mobile RDC they’re seeing is driving HUGE reductions in cost. If that’s true — and scalable — then it might be more economically profitable for a bank to give away mobile RDC in order to drive up the volume and reap the cost savings.

    Second, as mobile access — and functionality — becomes more important, and banks look to generate more revenue through fees, then FIs might need to start prioritizing which mobile services they charge for. If something else comes along with a greater value proposition for consumers, it might pay for them to give away mobile RDC. There’s only so much nickel-and-diming that an FI can get away with.

  8. @RonS: TY for highlighting the cost-saving angle for Mobile RDC and how that alone can justify banks giving it away for free. However, there’s a school of thought – to which I subscribe, BTW – that says that anything given away free has no value. Banks subscribing to that view might want to charge a nominal fee for Mobile RDC, justify it based on convenience and cost savings for customer, and still enjoy huge cost savings. It’s very rarely that a product comes along that lends itself to this kind of “have your cake and eat it too” positioning. Talking about nickel-and-diming, in a highly B2C industry like banking, won’t many banking charges fit that category (e.g. overdraft protection fee)? With the arrival of SaaS, I now see nickel-and-dime charges cropping up in the software industry: I recently paid GBP 4.95 for a year’s subscription of a certain social media archiving software. So, I think nickel-and-diming is going to increase, not decrease, with time.

  9. The Swiss do this quite well already, good case study…

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