Friday, October 29, 2010

(No.122) Banks: rediscovering the past

In September I spoke to a conference of ife insurance brokers held at the Crowbush Resort on Prince Edward Island. The meeting was organized by the MGA firm Younker and Kelly. The column below is derived from that presentation.


Sometimes, in financial services as in life, what's thought to be old is new again. By the 1990s Canada's big banks were looking to shed many of their 'bricks and mortar' branches, not adding more; how old-fashioned branches were in the digital age. Fashionable and trendy business wisdom (and we all know how flawless that is) represented bank branch retailing as the way of the past.

Banks saw the future clearly: they wanted customer use of branches and tellers to be sharply reduced so they could cut their costs and increase their already bloated profits. Indeed they were anxious for their Canadian retail customers, the backbone then as now of their profitability, to pay more and steadily higher fees for the privilege of serving themselves at bank ATMs as well as online.

Today one can see the fundamental shift in that conventional wisdom. While banks still love their ATM fees -- even more than ever -- they have realized that their branches are not only important but a gold mine generating lots of luscious income from (for example) sales of asset products by branch staff (commissioned and otherwise).

The big banks have been adding branches to their extensive national networks and are treating them more like retail sales outlets than ever before. Fifteen years ago or so 70% of the big banks' business was corporate; today it is more like 70% retail. And bank profits continue to set records.

But while many bank customers use online banking to pay their bills and the like, it turns out -- as TD Canada Trust has the led the way in demonstrating (up to and including opening bank branches on Sundays) -- that branch networks are more important to profits than ever in marketing financial products and services to consumers, including those who are already a bank's customers as well as those who are not.

Can one conclude that banks have actually learned more about the value of person-to-person distribution tied to actual service when it comes to distributing financial products which the majority of their customers will not take the initiative to purchase from them online? This is of course a fact of financial services life that many executives in the life insurance business (although, sadly, far from all) have never forgotten.

Finally, I cannot pass by the opportunity to rehearse a point I have made before in these columns as well as in speeches. The praise heaped upon the big Canadian banks and their senior managements for the banks' admirable performance (i.e., comparative record of safety) during the international financial crisis really belongs mostly to the sort of strong Canadian federal banking regulation (about which Canadian bank executives have actually complained) and to strong federal regulators who enforced the rules whether the banks liked it or not.

These were the factors that had most to do with preventing the Canadian banks from following some or much of what their peers in the U.S., the U.K. and elsewhere did. Even so it is interesting that the big Canadian banks in the 3 years 2007 through 2009 wrote off an estimated $21.5 billion they would otherwise have recorded as profit because of their exposure to bets they made largely on American investments that blew up.


Alastair Rickard