A comparative analysis of the US and EU retail banking markets - Wsbi

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The report adds: “although it bought its way to the top rank, it now grows mainly by opening new branches”, and also quotes Kerry Killinger, WaMu Chief Executive, as saying that “when it started doing this about five years ago, no one thought branching made much sense. Among big banks the fashion then was to steer customers towards the telephone and the internet. Branches were old hat.” WaMu, according to the report, planned to open 250 branches in 2004. The report also quotes Todd Thomson, Chief Financial Officer of Citigroup, as saying: “What we understand is that stores are good,” and “People like to go to a real physical presence. It feels safe. It feels solid.” Bank One's head of retail banking, Charles Scharf, is also quoted as saying that his bank has been adding branches for the first time in five years. In another part of the report, it gives cross-selling as the reason why Bank One has spent so much on opening new branches, refurbishing old ones and adding 1,000 ‘relationship bankers’. The report also mentions the case of Commerce Bank in the US, which has grown at an annual rate of 30% in like-for-like (organic) sales in the last two years, and has opened 179 outlets in the last five years, with plans to have 700 branches by 2009. 6.4.1.2 Complementary channels An important innovation which had a powerful impact on retail banking in the US in the 1990’s was the Automated Teller Machine (ATM). The number of ATM’s in the US increased considerably from 1997 to 2003: by 125% (see table R in table annex). Being a relatively new invention in the history of banking (ATMs were first introduced in the mid 70’s), it’s not possible to directly compare growth in ATMs and growth in branches, although the continued increase in bank branches suggests that ATM’s haven’t replaced branches so much as to complement them (for growth in ATMs in the US, see table AF in the table annex). Another recent innovation in retail banking has been internet banking. The estimated number of internet banking users in the US (2002 figures) varies from 17 million (eMarketer) to 30 million (Fulcrum analytics), with trade associations such as the American Bankers Association calculating some 20 million users, corresponding to about 15% market penetration 377 . The Pew Internet & American Life Project 378 has reported that 32% of all American internet users have used online banking. The advantages cited by consumers include convenience, cost savings, time saving, better control over finances, privacy and the ability to access more information 379 . Looking to the future, internet banking is expected to grow: one study of online banking traffic forecasts that the adoption of online banking in the US will increase from 4% to 6% annually, reaching 50% of banking households by 2007 380 . To take individual bank examples of internet banking use, as of 2002, Bank of America had 15 million active checking accounts, 4 million of which were accessed on a regular basis via the internet. The bank has experienced an increase in the amount of bills paid online of 50% between 2001 and 2002, to 1.3 million account holders. Similarly, Wells Fargo had approximately 9.9 million checking accounts in 2002, 3.3 million of which were regularly assessed online. Further, research conducted by Wells Fargo revealed that account holders who bank online had a 50% lower attrition rate, typically held higher balances and saw significantly higher growth in their balances than traditional customers. In other words, these were better, long term customers whose business easily paid a handsome return on the bank’s web site development expenses 381 . Such examples are in fact representative of what has become the principle model of internet banking, and which is commonly referred to as the “click and mortar” model which combines a transactional internet site with the traditional brick-and-mortar bank offices and/or ATM networks 382 . 377 “Internet Banking Update”, C. Goldfinger, European Commission’s Financial Internet Working Group, September 2002. 378 The Pew Internet & American Life Project produces reports that explore the impact of the internet on families, communities, work and home, daily life, education, health care, and civic and political life. The Project aims to be an authoritative source on the evolution of the internet through collection of data and analysis of real-world developments as they affect the virtual world. 379 “Major trends in the financial services industry”, Plunkett Research Ltd, 2004. 380 “Major trends in the financial services industry”, Plunkett Research Ltd, 2004. 381 “Major trends in the financial services industry”, Plunkett Research Ltd, 2004. 382 “The past, present and probable future for community banks”, R. De Young, W.C. Hunter, G.F. Udell, Journal of Financial Services Research, 2004. 140
In its most extreme form, there are a relatively small number of internet-only banks that offer their services exclusively on the internet. As of July 2002 there were just 20 such internet-only operations in the US. Approximately another dozen internet-only institutions have failed, been acquired or have voluntarily liquidated, and in addition several large banks integrated their internet-only units into the main bank after poor stand-alone performance 383 . The prevailing view is that online banking is unlikely to replace the bank branch as the main means of conducting retail banking business. Instead, what has been suggested is that the most successful banks will be those that take full advantage of the stability of traditional, branch based operations in combination with the growing popularity of internet-based banking services 384 . Such a strategy commonly entails the following: - Integration of bank branches, call centres and internet-based offerings to consumers, providing choices of place and method of banking services. - Communication of a seamless brand identity and level of service throughout branches, ATMs and web sites. - A broad offering of fee-generating services and products that are presented and positioned in a coordinated manner that will satisfy a customer’s need for time-saving convenience and thorough service and follow-through. This would also suggest that the internet is more an opportunity, rather than a threat, to relationship banking. For instance, there have been suggestions that thanks to the internet, large banks, mutual funds, and brokerage companies can now seek deposits in smaller communities without having a physical branch or office there. This would mean that in such communities, relationship banks such as community banks could lose some deposit customers because the lower costs of online companies allow them to offer more favourable rates. Community banks could also lose other customers who prefer the convenience of online banking 385 . However, a more optimistic view is that relationship banking, along with bank branching, will always be highly valued by a certain proportion of banking customers, especially in certain customer segments such as small business lending. The opportunity is therefore there for banks such as community banks to use the internet to offer greater convenience and choice of financial service to their customers, while continuing to provide person-toperson contact through brick-and mortar offices. 6.4.2 Europe 6.4.2.1 The bank branch As already reported in the economic section of this study, the total number of credit institutions operating in the European Union has fallen considerably in recent years, with numbers declining by 41% between 1985 and 2003. Parallel to this fall however, Europe experienced a slight increase in bank branches, from 173,152 branches in 1985 to 186,009 in 2003, an increase of 7.4%. The equivalent increase in bank branches between 1995 and 2003 is less than 1% (see table in the economic comparison for the evolution of the number of bank branches in the EU, per Member State). On a per capita basis, there were 495 branches per 1 million inhabitants in 1995 in compared to 485 in 2003 (see table D in table annex). A number of surveys have assessed the importance of the branch in European retail banking. One 2005 branch banking survey 386 reveals that 70% of retail financial sales come via branches in Western Europe. Another survey 387 conducted in 2004 revealed that 79% of customers in 6 European countries (UK, Germany, Spain, Netherlands, Denmark and Switzerland) still prefer to buy current and savings account products from a branch rather than from other sales channels, and also that 78% prefer the branch for purchasing mortgages and 60% for life insurance. In addition, the preference for the branch doesn’t seem to be eroding with time. A survey conducted in 2001 388 already revealed that almost 80% of European consumers state that a personal visit to a branch is their preferred method for dealing with banking products. 383 “The past, present and probable future for community banks”, R. De Young, W.C. Hunter, G.F. Udell, Journal of Financial Services Research, 2004. 384 “Major trends in the financial services industry”, Plunkett Research Ltd, 2004. 385 “The role of Community Banks in the US Economy”, Federal Reserve Bank of Kansas City, 2003. 386 “Branch banking in Western Europe 2005”, Lafferty, 2005. 387 2004 branch banking survey of 600 European banking customers by Booz Allen Hamilton. 388 Datamonitor, Impact 2001 Survey. 141
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September 2006 RESEARCH A COMPARATI
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IE UK FR BE NL LU DK DE SE CZ AT SL
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The following WSBI/ESBG committees
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4 Regulation and supervision compar
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6.5 Issues of competition in retail
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To finish, if we had to pick from a
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In the US, credit institutions have
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Following the same logic, the EU co
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In that context, it is tempting to
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3. INSTITUTIONAL COMPARISON 3.1 Sec
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The market share of the US banking
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FDIC-insured commercial banks are i
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The subsidiary stock institution is
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Regulatory reform over the past thi
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State credit unions were first exem
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There has however been much effort
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3.2.2.2.2.2 Ownership and corporate
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Hermann Schulze-Delitzsch and Fried
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In contrast, building societies in
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The commitment of savings banks is
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4. REGULATION AND SUPERVISION COMPA
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In addition, for regulations define
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The European Parliament has to be k
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In fact, it should be mentioned her
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As far as coordination at the feder
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Despite the trend towards the estab
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Another important factor in the cho
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In the European Union, contrary to
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Although younger than CESR, both CE
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4.2.5.1.1.1.1 Limitation of the geo
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4.2.5.1.1.3 Recent trend: regulatio
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Another important common feature be
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The best execution rule was first m
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4.3.2.2.4 National Market System ru
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The ISD set a basis for the develop
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Best execution rules exist in both
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The decline of savings institutions
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Relative to population, the Europea
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5.2.2 Size of credit institutions 5
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5.2.2.2 European Union In Europe, t
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5.2.3 Concentration and consolidati
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5.2.3.2 European Union Average CR5
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In terms of the nature of consolida
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