Banking Has Changed: What Does It Mean For Consumers?
Choosing a bank to meet your financial needs is no easy task, and the banking industry is drastically different than your parent's bank of decades past. It may be surprising, but the financial services industry is one of the biggest spenders on technology. This spending has allowed them to evolve rapidly and offer services beyond making loans and taking in deposits from individuals and businesses. Consolidation has also played a big part in lowering costs for customers, though the need for a personalized, local service will always be in demand. (For a related reading, see Your Banker's 6 Dirty Secrets.)
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Below is an overview of the primary changes that have occurred in the banking industry and the options available to you.
Types of Banks
Despite having one of the oldest business models out there, the banking industry in the United States remains highly fragmented. Merger waves do tend to sweep across the sector and this has created banks with a national presence. These banks are referred to as money center banks and include banking behemoths such as Bank of America, JP Morgan Chase and Wells Fargo. Yet, despite their giant size and ability to snap up smaller rivals, many regional competitors exist, as do local branches that seem to sprout up and feed a constant supply of acquisition candidates.
The Benefits of Going Big
Each of these banking types offers certain advantages. The money center banks are a somewhat recent phenomenon that came from the growing drive to create financial franchises with a national footprint. Technology has played a big part, as it has created the ability for customer bank balances to be transmitted in real-time to disparate locations. A recent study detailed that the financial services industry spends the more on information technology than any other industry. Last year, this amounted to an estimated $500 billion across the globe. As a result, customers didn't have to be tied to a certain bank or state to make deposits or withdrawals.
Online banking is one of the many examples of how technology spending has helped push banking forward. Scale is important in the industry, as it allows fixed costs to be spread over a larger number of locations and customers. Again, money center banks have many scale advantages over regional and local competitors. For the most part, larger banks are best able to keep ATM fees and other transaction costs low.
The advent of internet banking means it is possible for customers to do their banking exclusively online. Deposits can be sent through the mail and withdrawals can be made via competing bank ATMs, with the possibility of having certain ATM fees waived. Since they don't have to maintain physical branches or hire as many employees, online banks can keep costs incredibly low and pass certain savings on to customers. (To learn more, see Online Banks: Lower Costs And Little Sacrifice.)
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The Advantages of Staying Local
Many customers still prefer personalized service or desire the need to transact banking business face-to-face. This can be the primary competitive advantage that a local bank can offer, especially if it is closely involved with the local community and can develop intimate customer relationships from getting to know the locals. This is also true of more rural communities where larger banks are unable to garner the scale or profit levels needed to be sustainable.
A local bank can also be a safer choice if it lends locally. Many banks, especially the regional ones, got caught up in the recent credit crisis by stretching for profits in parts of the country that were far from their headquarters. Banks in slower-growing regions expanded too quickly into parts of Florida and California. They foolishly expanded into high-risk markets they knew too little about and were adversely impacted once the housing bubble deflated. (To learn more, see The Fuel That Fed The Subprime Meltdown.)
Banking Hours No Longer Apply
Increased competitiveness has also forced the industry to evolve. The term "bankers hours" has come to represent the description of an abbreviated working day and it used to be common for a bank to only be open during business hours during weekdays. This was typically 9am to 5am and it didn't include weekends. These days, Saturday operating hours are common, as are days when banks stay open until 8pm to better match the needs of time-strapped consumers. Internet capabilities mean transactions can be entered any time or day, though actual fund movement is still mostly kept to standard weekly business hours.
In addition to improved banking hours, many banks operate in businesses that were not considered traditional banking activities. A traditional bank makes loans to individuals and businesses with the checking and savings deposits it receives from other individuals and businesses. It earns a profit from the spread in interest rates between these two activities, which is also known as a net interest margin.
These days, other fees, or "non-interest income", make up a large percentage of banking revenues. Banks still earn fees from allowing ATM withdrawals, such as from outside customers, and on overdrafts and other account activities. But now they also offer investment advice and provide brokerage accounts or portfolio management services, such as managing mutual funds. Many also sell insurance and earn a commission for providing homeowner and/or life insurance. (For more, check out 7 More Things Your Banker Doesn't Want You To Know.)
The Bottom Line
Overall, banks today are a far cry from the banks that existed 20 years ago or more. The vast majority of branches are now owned and operated by money-center titans or other large regional rivals. These banks offer many advantages and sell services far beyond the traditional loan activities that banks used to only provide.
For the most part, banks now qualify as financial services firms that can provide or facilitate any type of financial transaction that consumers need. At the end of the day, as with any business, those that offer a wide array of services at low costs and with high levels of customer service will be the winners. For a consumer, it takes some legwork to determine who those players are, but it is worth it and the options are as plentiful as they have ever been in the banking industry. For you personally, it basically boils down to whether you value a bank with a local presence, or a larger bank with lower costs and a wider array of services. (For more, see The Evolution Of Banking.)
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