Back to the Future of Banking

 Author’s Note: Gonzo readers,

through a secret time machine I built in my garage with an old DeLorean, I was able to get a backward-compatible PDF copy of a college paper from a student 20 years into the future. I hope you find it as interesting as I did.

“Understanding the Decline and Demise of the Banking Industry”

Prepared by Tessa Johnson
(registered Fourth Life avatar #2243564)

Banking and Finance 101 Term Paper
Google Virtual University
July 20, 2027

This term paper outlines a historical review of the banking industry and examines the underlying causes behind the turbulent past 20 years that led up to the Financial and Wealth Services Industry Act of 2024. This act has essentially eliminated “banking” as a distinct industry in the United States.

Looking back at banking 20 years ago, it is clear that this industry became entrapped in “legacy” issues that resulted in slow action, poor risk decisions and ultimately massive consolation during a time of innovation and change in the our economy.

“Banks,” as they were known back in the first decade of this century, acted primarily as financial intermediaries. They took in money from depositors and lent it out to borrowers. While it had been clear for many decades that the intermediary role of bankers was fast being squeezed, few executives in the industry were able to grasp the impact of Internet technology and increased entrepreneurial competition in the early part of this century. In addition, historians indicate that the banking industry’s long-established reputation for trust began to erode substantially over the past 20 years as more desperate efforts to maintain profit growth resulted in products, pricing and policies that ultimately were blatantly against the interest of consumers.

There were four major causes that led to the banking industry’s problems:

Root Cause #1: A difficult quarterly profit focus
Back in 2007, jokes were often made that stock analysts and investors essentially ran the banks. Pressure on bank executives (nervous from a very heavy-handed historical regulation known as Sarbanes Oxley) was intense and sometimes debilitating. Because of this pressure, banks essentially began making “withdrawals” from the goodwill and trust they had built with customers for a century in America. More and more, they began to introduce products and services that used fine print and a lack of consumer knowledge to make money in the name of “convenience.” These included:

• Overdraft privilege checking fees, which hit an amazing $17 billion in 2007
• Credit card fees and penalty fees, which were constantly changing and difficult to track
• Exotic mortgage products that resulted in many customers buying into expensive products that ultimately increased bankruptcies during the post-Bush recession of 2009.

The post-Bush recession also witnessed the increased credit risk and dependency that the banking industry had built on commercial real estate lending. Economists now indicate that the pricing of these loans was much too low for the risk and losses that were ultimately realized. Like the airline industry with unprofitable ticket sales, banks had essentially murdered each other with irrational pricing competition, but no one could “blink” and stop this growth due to constant earnings pressures. Massive M&A activity occurred from 2009 to 2012, knocking the total number of banks down a remarkable 24%.

Root Cause #2: Widespread commoditization without strategic adjustments
By 2007, it should have become obviously clear to bankers that the financial industry was fast-moving from a bunch of similar-looking “generalists” to highly specialized and fiercely competitive specialists. Back then, successful examples such as Capital One, ING Direct, USAA and Countrywide should have made bankers realize that strategic focus was the new table stakes for survival. Excerpts from strategic plans in this period, however, indicate that bank management was still trying to target all customer segments, all product lines and all delivery approaches. Quotes from this period in business are somewhat comical as bankers write that they aspire to be “best in class,” “high performance” and “customer driven,” but none of the historical strategic plans seem to include what any of these terms actually meant. It should be noted that some companies such as wealth player Northern Trust, institutional heavyweight Mellon, Asian powerhouse East/West Financial and technology infrastructure leaders such as Metavante, Fiserv and First American understood that this shift to specialization was occurring in the industry. Today, all Google University students are familiar with and active users of the Internet-based, highly collaborative FINANCIAL MATRIX that drives most financial services activity across the network of specialists. To think that one company attempted to control the entire financial supply chain is hard to grasp in our time.

Root Cause #3: An inability to invest and innovate
Twenty years ago, there was a famous banking conference called the BAI RDS (the author was unable to uncover what these acronyms mean today). At this conference in 2005, Harvard strategist Michael Porter warned the industry about excessive “me-too-ism.” A year later, this BAI group emphasized the theme of innovation. Unfortunately, it does not appear that these warnings were heeded by bankers. As opposed to developing new niches, products or approaches to delivery, bankers continued to generate plans that talked about being “best in class.” References to books in this period such as Good to Great and Blue Ocean were quite common, but again it does not appear that these books inspired any new actions from banks. Both the budgets and staff time for research and development was very limited. Instead of focusing on new, cool things for customers, banks were obsessive at the time about a trend called “Sales Culture.” In a massive miscalculation, the embattled banking industry thought the cure for competitive ills was to somehow force employees to force their customers to use things they didn’t need or want. By 2011, it was clear that the harshness of this approach resulted in higher employee and customer attrition without demonstrable improvements to revenue.

Meanwhile, new Web 2.0 companies and financial innovators began to position themselves against banks as more simple and valued options. Whether one looks at peer-to-peer lending markets, virtual communities or consumer “value bureaus,” new players began to reveal that banks were not always objective in their advice, fair in their pricing nor valued in their service. By 2010, the oldest of the Generation Y demographic was 30 and fast becoming mainstream financial customers. The active use of the remote iBanking and iPayment services, and increased scrutiny of banks’ true value proposition started a long and consistent decline in share for banks.

Root Cause #4: A “hollowing out” of skills and knowledge
The final cause of the banking industry’s demise can be traced to a clear lack of value for human capital. It appears that the industry was spending more money on the maintenance of its computer equipment than on the training and development of its people. While the banking industry once had a golden era of corporate training programs to build a broad working knowledge of all bank functions, these programs waned to near extinction by the early 21st century. Instead, banks created a revolving door of trying to steal talent from each other, only bidding up the price for the same skills and talent. While banks confidently declared they were morphing into “financial advisors,” no clear strategies were implemented to increase the skills, accountabilities and pay of the individuals who were expected to actually have this knowledge. Somehow, bankers wished an untrained staffer making $27,000 and no financial incentives would miraculously become a shrewd financial advisor. A comic pulled from this era indicates that customers often felt as if the branch staff at banks had been given lobotomies based upon the limited knowledge and authority demonstrated in these encounters. Today, it is widely accepted that knowledge creates competitiveness in the Financial and Wealth industry. Unfortunately, the banking industry discovered this reality too late.

Could the Inevitable have been avoided?
While historical documents indicate that bankers believe external factors such as regulation, the economy and unfair competition led to the industry demise, a case can be made that the risk-averse banking industry failed to recognize the greatest risk of all: strategic risk – the risk that new competitors will change the rules and decimate the value of your franchise. Historians and FINANCIAL MATRIX strategists today indicate there were many bold steps that bank executives could have taken to stem and even turn around these negative events:

• They could have better focused their strategies and developed more well-defined business models. This would involve answering the hard questions about target customer segments, lead products, and delivery/marketing approaches that would truly differentiate the institution. Even if this could not happen overnight, banks could have been more aggressive in birthing a portfolio of new niche businesses to ultimately replace their legacy revenue.
• They could have leveraged better efficiencies in commodity products and services to invest in new innovations and growth efforts. Banks were not aggressive enough on making the basic commodity activities more efficient so they could, in effect, fund investments in innovation. They also proved to be poor at collaborating to make strategic investments in areas such as payments. The ultimate integration of payments with the telecom and Internet industries meant banks lost their hold on a critical part of their franchise.
• They could have moved their performance with information technology beyond a risk-averse “lowest common denominator” level. Banks at this time spent billions on information technology, but they failed to generate appropriate returns on this investment. Dysfunctional and sometimes dishonest relationships between banks and vendors stifled the ability to innovate in areas such as Web delivery, process improvement, relationship management and payments.
• They could have better emphasized and appreciated that the knowledge, skills and performance of their employees was critically important to survival. Some innovative players had the courage to drive training, certification, career pathing and incentive performance management aggressively through their organizations, but there were only a few who made this change.
• They could have focused on doing much more for customers than extracting profit and selling them things they didn’t want or need. One historian known only on the matrix as the “Gonzo-ian” observes that somewhere along the way, bankers lost their focus on helping customers do well with their money. The upstanding citizens and sincere, wise group of professionals somehow lost their edge, their sense of adventure and in some cases their hearts for the customers that made the franchises. The change wasn’t intentional and clearly pressures influenced this, but as the Gonzo historian has observed, it’s unfortunate this had to happen.

Still trying to target all customer segments, all product lines and all delivery approaches?

It may be time to reevaluate your strategic plan.

Cornerstone Advisors has provided numerous financial institutions with the objective guidance necessary to make intelligent, informed strategic decisions. Our vast experience will help you devise and implement a strategic plan with measurable results.

Contact us to get started on a strategically competitive future.