The Decoupling of Banks

Transcription

1 The Decoupling of Banks How Non-Bank Entities will Dictate the Future of Consumer Financial Services Dan Ballen Vice President at Pine Brook Partners

2 About Pine Brook Partners. Founded in 2006, Pine Brook is a New York-based investment firm that provides business building and other equity to new and growing companies, primarily in the energy and financial services sectors. As investors in both traditional banks and innovative payment companies, we are at the cross-section of how banks are adapting to the new consumer financial services environment.

3 Historically, nearly every financial service used by a consumer was the exclusive domain of the retail bank Withdrawal of funds Cash deposits Check cashing Storage of Funds Retail payments Bill payment Money transfer Issuance of credit Banks had exclusive control over the technology, funds and distribution network to provide these services

4 Over time, as innovations have occurred in the financial services industry, the traditional bank s slowly began to lose their grip on the consumer Withdrawal of funds Cash deposits Storage of Funds Check deposits Retail payments Bill payment Money transfer Issuance of credit ATM Networks (1970 s) Online BillPay (1990 s) Decoupled Credit Cards (1980 s) Online Money Transfer (1990 s) But Banks still control the central customer account

5 Is this the future? Withdrawal of funds Cash deposits Check cashing Storage of Funds Retail payments Bill payment Money transfer Issuance of credit Bank as storage facility

6 Today s environment represents the perfect storm for third parties to take over the central consumer financial relationship Smartphones have given consumers more flexibility and functionality than ever before in conducting financial services Regulatory changes, especially the Durbin amendment, have handcuffed the largest banks and put them at an inherent disadvantage to third party competitors Improvements in payment processing and POS technology allow more financial functions to take place outside of the traditional bank branch network The rise of BIN Sponsorship has allowed third-party stored value accounts to benefit from nearly all of the advantages of being a bank depository A number of consumer-oriented companies with better and more sophisticated marketing, technology and product capabilities are entering the space:

7 Which companies are the biggest threat to the traditional banks? Phone carriers the major cell phone carriers, each with a base of million users, have tremendous influence on mobile payments (ISIS making progress) Consumer technology companies perennial innovators Apple and Google already have great brands with strong links to the consumer, both online and through mobile Alternative payment companies Paypal and other money management/transfer businesses already have large customer base and expertise in disaggregating banks Prepaid card companies Strong historic focus on alternative payment channels and methods for the unbanked, now moving to banked demographic Retailers Walmart, 7-11 and other large retailers can exert significant influence and guide consumers to different payment methods; lots of synergies in driving store traffic

8 Non-bank entities have a number of advantages over retail depositories Fewer regulatory requirements Essentially branchless with a lower expense base Empirically consumer-oriented with tremendous marketing expertise Ability to leverage existing brand and consumer touch points Higher profit potential from user data (gives them inherent pricing advantage) Flexible distribution; not tied down to branch network Business models more attuned to innovation Potential to get around Durbin

9 Improved processing and payments technologies have given non-banks new access to the consumer s financial life Cloud-based payment processing payments can be sent and accepted nearly anywhere, especially with the use of smartphones Check Cashing better camera resolution and scanning technology allows consumers to cash a check just by taking a picture with a phone Money transfers abundance of low-fee alternatives to bank and wire transfers; especially person to person Enhanced POS terminals Functionality above and beyond purchase transactions, includes cash withdrawal, deposit, money orders and bill pay Allows distribution of financial services outside of bank branches and into supermarkets, pharmacies, gas stations, etc.

10 BIN Sponsorship has allowed non-bank entities to fully utilize the benefits of a bank Third party companies can now attach a Bank Identification Number (BIN) to their consumer accounts, effectively giving them all of the benefits of a traditional bank account: FDIC Insured Accounts Access to Visa/Mastercard Networks Access to ATM Networks AML/KYC Regulatory Oversight Largest Sponsor Banks:

11 Macro troubles and regulatory reform have pushed people out of the traditional banks The credit crisis led to a large pullout of credit from the subprime and lower-income markets The Durbin amendment led to increased checking account and debit card fees as banks lost revenue from decreased interchange Industry analysts have projected the under/unbanked market to increase to 1 in 3 households within the next few years (most recently, Meredith Whitney in WSJ) Cable TV Analogy? Cord Cutters are most advanced

12 Biggest Threat: Decoupled Debit Providers Model #1: Bank-like Prepaid Card Accounts Consumers use a separate, distinct debit account with open loop payment abilities Mimic all of the features of a traditional banking account (including overdraft) Low-cost, branchless model Marketing-oriented firms with strong online and mobile presence Ability to independently strike deals with retail/financial/distribution partners to enhance product offering and benefits Typically use Bank Sponsors with less than $10B in assets, receive higher interchange revenue than traditional banks per card

13 Biggest Threat: Decoupled Debit Providers Model #2: Independent Debit Card Managers Independently branded debit cards that use ACH rails to instantly debit money from existing consumer bank accounts Third Party Debit Card Sub $10B Asset Bank ACH Consumer s Primary Checking Account Linked Accounts Circumvents Durbin and can use higher interchange to offer better rewards Funds for payment Merchant Interchange Consumer s Primary Bank

14 Biggest Threat: Decoupled Debit Providers Model 3: Merchant-Branded Closed Loop Debit Cards Consumers use a rewards payment card at specific retailers that debits funds directly from the consumer s primary bank account Merchant s save money on interchange Can offer small rewards per transaction Builds customer loyalty Model best used for highfrequency retail outlets, i.e. gas companies and supermarkets Merchant Rewards Card Merchant Funds for payment ACH Linked Accounts Consumer s Primary Checking Account Consumer s Primary Bank

15 Consequence #1: Loss of the marginal bank customer Low-balance customers who historically would have faced a large, detrimental lifestyle shift by dropping their bank account now face fewer (or zero) negative consequences in the financial system Prepaid cards, third-party debit cards and smartphones bank accounts can provide immediate load, save and spend capabilities, even with online purchases May pay fewer fees by leaving the banking system Customer base is more attracted to better rewards and convenience than higher interest rates Cable television analogy cord cutters

16 Consequence #2: The Continued Death of the Retail Bank Branch From 2006 to 2010, there was a 25% decline in monthly transactions conducted at bank branches, trend should be the same for the next four years. Novantas research Banking industry not immune to the same trends that have hit the movie and book industry (Amazon and Netflix) Now 35% of US Banking customers have gone virtual and are no longer using branches for daily transactions CUNA March, 2012 United Kingdom is the future - # of Bank Branches halved since 1990 as consumer-oriented companies took over fin serv Smartphones bigger threat than the internet as they are inherently mobile and can be used in POS and outside of the home

17 Consequence #3: Decline in Retail Fee Revenue Banks are still likely to hold the largest portion of a consumer s cash balances, but will act mostly as storage accounts with third-parties managing all of the consumer s financial services Consumer financial services activity is what banks thrive on for fee income Interchange Overdraft Money Orders Bill Pay Remittance Cashier s checks Banks lose the ability to cross-sell other services when the real financial services relationship is owned by another party, could have far-ranging consequences on lending, mortgages, investment accounts, etc.

18 What Can Banks Do to Hold On to the Consumer? Dedicate the resources to become leaders, not followers, in financial technological innovation; especially in mobile Most bank smartphone apps are clunky and inefficient Remote check deposit is a perfect example Leverage the bank s inherent branding advantage in trust and security over third parties; very important to the consumer Strike more distribution and marketing partnerships with established consumer brands; stop relying on the bank branch network Learn to work together in creating industry standards there should have been an ISIS-like organization five years ago for the banks

19 Contact Information Dan Ballen (212)