Can Retail Banks Learn From Retail Stores?

by: John M. Mason

Are retail stores are starting to catch on? Check out the front-page article in the Wall Street Journal: ""As Shoppers Skip the Mall, Stores Search for Fresh Lures"

The "deeper malaise" facing retail stores these days is that:

"a long-term change in shopper habits has reduced store traffic-perhaps permanently-and shifted pricing power away from malls and big-box retailers.

Consumers' rush to e-commerce is a challenge that brick-and-mortar retailers have wrestled with for years. Across a number of retailers, their defensive strategies don't seem to be panning out."

The latest results should re-enforce the message: "Retailers got only about half the holiday traffic in 2013 as they did just three years earlier…." The use of e-commerce is growing and, if anything, it is going to speed up…not lessen. For one, the existing society is becoming more comfortable with the use of the Internet and they can only become more so as they achieve a greater familiarity with how it can be used.

And, as the younger people in America grow up, the individuals that are helping to make the use of the Internet ubiquitous, e-commerce is going to become more and more the way to do business. This trend, I believe, applies to retail banking as well as retail shopping. I have attempted to discuss this in posts that I have written over the past five years. My latest effort was yesterday.

The movement towards electronic banking will also pick up speed as the public does more and more of its 'business" on-line. And, the banks don't have to deal with the logistical problems that retailers face in that the "products" the banks sell are not physical, as are the "products" that the retailers sell. After all, money is nothing more than information and information is nothing more than 0s and 1s.

However, as the banks move more and more toward an electronic presence, two things will happen. First, retail banking will become more and more of a commodity business. The net interest margins that the banks will earn on "traditional" banking business in the future will fall and economies of scale in electronic banking will limit the number of players that can exist in such an environment.

Second, branch banking, as we know it, will change dramatically. For one, there will need to be fewer branches and the branches that will exist will not be there primarily to handle ordinary transaction-type business.

Although some banks have begun to "rationalize" their branching operations, many still plough ahead with aggressive branching programs.

Listen to what is happening to the retailers according to the Wall Street Journal article.

"Home Depot Inc. cut back on new store openings in favor of shifting that investment toward online operations. Meanwhile, Sears Holdings Corp., Gap Inc., and others have closed hundreds of stores over the past couple of years.

On Wednesday, J. C. Penney said it planned to close 33 under-performing stores and trim 2,000 positions to focus on locations that generate the strongest profits.

Macy's Inc., which last week announced plans to close five stores and lay off 2,500 employees, said store closures weren't caused by traffic declines. But the shift is causing the department store chain to rethink its brick-and-mortar stores to make them more productive by serving online sales."

My bet is that this is just the tip of the iceberg. So, when are the banks going to change?

Let me use the example of the ATM. When banks began putting in ATMs in the late 1960s, the feeling was that people would rush to use these machines because of they were convenient and did not have lines of people waiting to get to them as they did inside branches where there were just bank tellers. Many felt that this would end the branch system.

However, the "older folk" did not use the machines as much as the bankers thought they might. They liked the "old" way of doing business … they liked coming into a branch and seeing someone they knew.

Younger people did use the ATM and the growth in the use of ATMs came from this cohort. More and more of the "older folk" did come to use ATMs but it took a relatively long time for these people to really become comfortable with this innovation.

The movement into electronic banking will take the same path. And, as this younger generation grows in wealth and influence, the move will take over the financial world.

The smart banks, I believe, are building up this customer base right now. Not only has this cohort been using computer-based tools in games and communication for years, they also are into on-line buying…and on-line education.

In terms of this latter development, notice how even the slow-to-change academic world is now moving to the on-line provision of teaching. Several years ago I served on a task force looking into the prospects of the virtual university. Members of this task force estimated that by around 2007, the students entering this major university would be more computer-literate than the faculty of the university. And, these are the young people that bankers are going to have to appeal to for their business.

The "older folk" will come along incrementally.

Today, I have just concentrated on the retail side of banking. But, I believe that the investment banking side of banking is moving in this direction as well. And, the investment banking side will also be rapidly expanding its use of Internet operations. As it does so, it too will become more and more like a commodity business. Not in the next three years or so … but after that I would expect major changes to take place. Investment banking is nothing more than a world of data, which is just information.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.