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How far from today will consumer banking shift?

Slice of banking at intersection of conflicting trends
May 13, 2011
This article is an online companion to the May 2011 ABA Banking Journal cover story, “#5, and feeling good: Why Richard Davis’ $308 billion ‘community bank’ just might be coming to a corner near you.” You can read that article online on this website or in our digital magazine.
By Steve Cocheo, executive editor

“Financial literacy” is not the stuff of journalists’ daydreams.

Your typical business reporter hears the phrase and thinks: bankers teaching elementary school children about debit cards, or how to budget.

Yet so much of the financial crisis might have been averted had the typical American homeowner had a better understanding of their mortgage. Many consumerist challenges banks face might never have occurred with better-educated consumers with better financial habits.

Financial Literacy’s Bigger Picture:
“Those people who had the financial literacy enough to have good solid asset allocation models—and who stuck with them—have fundamentally recovered from what they lost in the recession. And those that didn’t just got murdered.”

—Richard Hartnack, vice-chairman and head of consumer banking, U.S. Bancorp

Veteran consumer banker Richard Hartnack thinks “financial literacy” connotes an even broader spectrum of issues, far beyond the elementary school classroom and post-crisis post-mortems. The way he sees it, the issue has serious implications for the future of what banking is, and does, for customers.
Understanding financial services
 The word “literacy” tends to imply remediation, bringing the undereducated up to speed. But that sells the concept short.

“My God,” says Hartnack, vice-chairman and head of consumer banking at U.S. Bancorp, “it wasn’t a bunch of village idiots who lost money to Bernie Maddoff, right?”

Continuing, he explains that “to some extent you could say that, at the highest level, financial literacy is having the competence to understand the risks of doing business with different kinds of organizations and selecting different kinds of products and services.”

Examples: Appreciating the differences between regulated and unregulated players. The risks of annuities versus other savings products. The risk of a 30-year fixed-rate mortgage versus a 5-year ARM.

These are all financial literacy issues for Hartnack. He serves on the national board of Operation HOPE, which describes itself as the leading U.S. nonprofit “dedicated to financial literacy and economic empowerment.” The organization gears its assistance to low- and moderate-income families. 

But Hartnack sees the issues as broader than that demographic. As an example, he points out how many investments took a pounding during the height of the crisis, but came back. He sits on the boards of two endowments. Both boards, hewing to their disciplined investment asset allocation plans, held tight.

“Our endowments went way down,” says Hartnack, “but now they’ve come way back. In both cases we have more money now than when we started (less operational costs).”

Not so many American consumers.

“Those people who had the financial literacy enough to have good solid asset allocation models—and who stuck with them—have fundamentally recovered from what they lost in the recession,” says Hartnack. “And those that didn’t just got murdered.”

Hartnack believes that didn’t have to happen. But it did happen, because folks who didn’t know better got burned.



Consumer Credit Usage:
“If you take out bankruptcy and defaults and just look at the amount of credit for people who haven’t been through those personal crises, their total usage of credit has gone down a bit—but not nearly as much as the raw statistics would show you”


“Most middle-class Americans saving for retirement or kids’ college expenses need a good lesson in fundamental asset allocation and how investing works,” says Hartnack. In the absence of such education, what might have been a temporary haircut of 20%-30% in, say, a 401k became a permanent scalping.

“They panicked and went to cash at the bottom of the market,” says Hartnack, “and then they got none of the recovery.”

Where would those folks have picked up such knowledge?

Hartnack thinks it should have come from their bankers and brokers.

“That’s the kind of thing we should be doing for our clients,” he explains. “We have to figure out how to do it efficiently and cost effectively.”
Safe harbor for advisors?
But that’s not the whole challenge. Hartnack explains that risk management—for the bank offering such help—is critical. “There’s a risk that in a downturn, our advice will be turned on its ear, in an attempt to make us responsible for bad news,” says Hartnack.

Giving advice “in a Consumer Financial Protection Bureau world is dangerous on its face,” says Hartnack, at least until a better idea of how the new agency will look at advisory services.

“We believe that, in our role as bankers, we can provide quality advice to people,” says Hartnack, “but not if in giving advice we become responsible for the outcome under all circumstances known and unknown.”

What he wants to see, somehow, are reasonable safe harbors for advice. “Or nobody is going to give anybody advice.”

Hartnack on the road ahead
This is no academic discussion. One of the key roles that those looking ahead at the future of consumer financial services see is transition of the bank branch from a transaction endpoint to a sales, and finally, advisory hub.



Consumer Banking Competitiveness:
“When you’re a relatively large bank, one of the things you bring to market that a small bank can’t is a very, very full product line. You don’t want to be a big bank with a small bank product line. That won’t work.


In a wide-ranging interview with ABA Banking Journal about retail banking, that began with his views of the changes wrought on consumers and small businesses by the recession—and the changes not really brought about—Hartnack brought a common-sense view to the matter. While U.S. Bancorp is a leading edge provider, as brought out in the Richard Davis profile article in our May 2011 cover story, both bankers evidence a readiness to believe that the more things change, to use the cliché, the more they stay the same.

Hartnack’s duties at U.S. Bancorp encompass metropolitan and community banking; in-store and corporate on-site banking; mortgages; consumer lending; small business banking and finance; and much more.

“Banking ten years from now will not look like anything like banking ten years ago,” predicts Hartnack. “But the basic functions that people have to get done will be the same. How they do it will differ, but not what they do.”

The following edited excerpts from the Hartnack interview cover consumer and small business financial behavior in the recession; serving tomorrow’s retail banking market; the future of bank branches and what they do.

Consumer and Small Business
Borrower Behavior In The Recession

How has the recession changed the behavior of the American consumer and the small business person?

Hartnack: Certainly we are experiencing a definite increase in the propensity to save. We see that in our START [Savings Today and Rewards Tomorrow] account, among other places. The propensity to save is much greater than it was in the first part of this century, in 2000, 2001, and so on. But it’s not yet at the level that it was in the 1980s and 1990s. So, we’re on the road back to where we were. But we’re not saving so much yet that we’re setting records.
Big events do change people’s psyches. Sometimes it’s long term, sometimes it’s short term.

We’re seeing much more caution around buying, through a combination of where we see debit and credit card sales taking place and what consumers are buying and what businesses are buying. What you see is people trading down in product and channel—if they used to buy a Cadillac, now they’re buying a Chevy.
ABABJ: Have you seen any shift in buying local versus buying big box or buying internet?

Hartnack: Clearly internet keeps snagging more sales. There’s an overall trend for the consumer adopting more technology, adopting new devices. They change the way they do things—but in the end they wind up doing the same things, just using a different trail.

If you look at credit card sales, you see more going through the internet and less through the big box retailers. That’s an issue that the retail industry has to sort out.

In our industry, there’s a constant movement from paper and personal to online and over the internet.
ABABJ: In the midst of all this comes the interchange controversy. What impact will the proposed rule have on the trend we’ve just been discussing?

Hartnack: If the Durbin rule went through unchanged, we would see the debit card reduced in importance. But that just moves payments around to other places.

In the end all the payment channels split up the purchasing pie. They don’t really change the purchasing pie very much. It’s just which slice which payment method gets. Coin and currency is a pretty stable category, actually. Checks have gone down a lot because it’s not as convenient as credit and debit. But if the debit card lost some features or increased in price, then the slice of the pie that the debit card has would go down and presumably credit card and check and coin and currency would go up.

Now, regarding the debit card itself, if the rule goes unchanged,  there would be many changes around the edges on debit payments and growth would slow.



What’s the “iPad” of Banking?
“I suspect that the iPad equivalent in banking, over time, will be the systematic collection of people’s financial information and advice in convenient, usable ways delivered online or over mobile technology.”

Banks would have to find ways to spend less to provide the service, to offset the impending loss of revenue. One of the attractive features of debit cards today for merchants is that when that merchant’s customer swipes that debit card, the merchant knows they’re getting paid for what they just sold. That’s a choice that providers of debit service have made in the past and we would probably unmake that choice in a Durbin world. In other words, guaranteed payment might cease to be a feature of the debit card.

Alternatively, merchants and consumers might find that the maximum amount a purchaser could put on a debit card would be reduced. Or debit cards would not be eligible at certain merchants that pose more risk to the provider.
ABABJ: What about usage of credit itself?
Hartnack: If you just look at the gross numbers, consumer credit outstandings across the economy are shrinking. But a big portion of that shrinkage—sadly—is because of chargeoffs. The real voluntary shrinkage in credit outstandings is only a few percentage points.

So it’s certainly not growing—and it was growing like crazy.

But if you take out bankruptcy and defaults and just look at the amount of credit for people who haven’t been through those personal crises, their total usage of credit has gone down a bit—but not nearly as much as the raw statistics would show you. And that drag is offset somewhat by the continuous growth in population and household formations.
ABABJ: Just to be clear, you’re talking about the overall situation, not just U.S. Bank’s experience, correct?

Hartnack: Right. And I’d add that our own experience is very close to the overall experience. We’re actually taking market share in credit card a bit and in small business we’re tracking well ahead of the industry as a whole.
ABABJ: It’s been my impression that the line between consumer and businesses blurred over the years. Some people have become self-employed or consultants, that kind of thing.

Hartnack: It’s always been a bit fuzzy. When it’s a sole proprietor without much capital, you’re really granting credit to that guy when you lend to that company. In our part of the industry we’ve been using consumer credit scoring models to grant smaller lines of credit to very small businesses for many years.

Up until this recession—for nearly 20 years—that line was fuzzy but it really said small businesses behave like consumers and consumers can be credit scored, so let’s credit score the consumer and give him a business loan. Large banks found in this recession that that linkage was a little less fuzzy than we thought. Most of us took losses on our small business lines of credit, and those loss numbers looked a lot more like credit card trends than they looked like business loan trends.

So that says that the consumer who owns a small business, where that small business is basically a one-horse operation, in the end is going to behave like a consumer and less like a business.

By contrast, when you get into somewhat bigger businesses, with employees and deployed capital,  in this recession they behaved a lot more like businesses. And that is to say that we have seen pretty low loss ratios on those portfolios. The amount of difficulty in commercial and industrial lending in this recession was really pretty small.
ABABJ: Have you seen a shift in credit attitude among the small business slice?

Hartnack: We define small business as up to about $10 million in sales. We saw about the same thing as with the consumer. The first reaction was to hunker down, cut expenses, reduce debt. If they didn’t have debt, then they piled up cash.

One of the points we teach our lenders is to always ask business clients about their vehicle fleet, whether it’s a “fleet” of one or 50. And certainly we saw people stretching out the life of their vehicle fleets. Which is a good example of being a lot more careful about buying. Now it’s changing, because you can only put off vehicle purchases for so long. Necessity may overtake caution, because you can’t keep having your delivery or service vehicle in the shop.
ABABJ: In the comeback, do you see the role of a bank like yours to be to lead the local economy? Or more to accommodate the economy as it makes its own movements?

Hartnack: Our role is to enable our business clients to do what they feel is right. You won’t find us pushing loans on people. But what we want to do is make sure that our clients know that when they’re ready to borrow for their business, we’re ready to lend. We’re not an impediment, we’re an enabler.
Serving The Retail Banking
Market Of The Future

ABABJ: What do you consider U.S. Bancorp’s most important current investment for the future of its consumer and small business operation?

Hartnack: Constant investment in our technology platform—that’s probably the single-largest capital investment that we have to make. We need to keep our operations effective and efficient. And we also need to provide technology-based products to our clients so that our product offerings stay right with the best in the business.

When you’re a relatively large bank, one of the things you bring to market that a small bank can’t is a very, very full product line. You don’t want to be a big bank with a small bank product line. That won’t work.
ABABJ: Sometimes consumers don’t know what it was they wanted until you offer it to them. The iPad is a good example.

That’s true. There’s two things here. Sometimes they don’t know what they want. And lots of times they tell you what they want but they don’t really want it.
ABABJ: Is there an “iPad” in banking that hasn’t been devised yet?

Hartnack: Sadly, I’m not the Steve Jobs of banking. There is an “iPad” of banking out there. I don’t personally know what it is.

If I did, I would be shouting over my shoulder at the telephone, “Cocheo,  I’m leaving to go make gazillions of dollars, so finish your interview with Steve Dale [U.S. Bancorp’s communications chief].”

But here’s a thought. I suspect that the iPad equivalent in banking, over time, will be the systematic collection of people’s financial information and advice in convenient, usable ways delivered online or over mobile technology.

This is difficult to do. But you see many providers nibbling at the edges. The PNC Virtual Wallet bites off a piece of it. The Chase Blueprint product, where you try to manage your money in an intelligent way, has another. Our own U.S. Bancorp packaged products are also nibbling at the edges.

But what most consumers need is a clear dashboard of their personal financial circumstances, updated every month, that’s readable, understandable, and operable for change. But the difficulty is that Americans tend to buy financial services from a wide variety of suppliers. So integrating such information is fairly difficult.

Most Americans view all of their financial services purchases as individual actions and they try to optimize each of those decisions using all kinds of different criteria.

Think about it. You optimize your checking account bank. But that is typically based, first, on convenience, and secondly, on brand name. Because price is fundamentally equivalent across the economy.

Credit card, I might look for the best miles card, while someone else might look for free shipping with L. L. Bean.

So you end up with multiple service providers. Even insurance—people have their insurance spread out over two or three providers.

So there’s this Holy Grail of integrating the client’s complex financial circumstances into a meaningful dashboard that comes with quality advice and easy operations. That may be the iPad for our industry.
Future Of The Bank Branch
Isn’t Settled Yet

ABABJ: What about the branch itself? U.S. Bank is still growing its branch system.

Hartnack: Modestly.
ABABJ: How do you see the branch system evolving over the next few years in terms of function, footprint?

Hartnack: This is Rick Hartnack’s view on a question everybody in this industry has tried to answer. Clearly, there’s a couple trends that we know.

First off, face-to-face paper-based operations with tellers in branches are going down. Part of that downward trajectory is because the transaction just isn’t taking place anymore. More direct deposit of more checks means fewer checks to deposit, right? The other thing is that people are depositing more checks using image capture technology either at the ATM or at home.

Even though overall paper transactions are falling, the paper face-to-face transactions are reducing faster because the paper is being taken care of in other channels. So that may or may not change the number of branches, but it will certainly change the number of teller windows and teller transactions per branch substantially over a few years.

So then the question is going to be, do we have the right number of branches in the right spots? Do we need new branches, even though they perform fewer transactions, in new markets where we aren’t? And do we put those in while simultaneously eliminating branches where we have too many locations compared to the demand for service?

Now, that’s the transactional side. But the other interesting factor about branches is that they serve as neighborhood sales locations. And sales per branch are actually going up, at least for us. So that’s kind of an interesting deal: You don’t want to close down the branch because there’s no operations if you’re still doing a nice job opening new relationships and selling new products.

So clearly the evolution is from operations to sales. We all want to make the branches more effective places to engage the client for advice. But no one really has that going on yet. It’s still basically for sales.

The largest proportional commitment in our branching strategy is to in-store and on-site branches and that’s because we’re looking to make sure that we are going to still be seeing people every day to interact with and sell to, even if they’re not walking into our traditional branches.

There are staffing implications. Certainly it means fewer operations people. Whether we have more sales people depends on our success in opening new offices. The mix of our employees moves from the operational side certainly to the platform sales and advice side. That’s not because that side’s growing, necessarily, but because the operations side is shrinking.

And so as you emphasize more advice and sales, it clearly means we’ve got to train our people to be more professional, more knowledgeable, more useful to the client in providing the right product for the right need and advising people.

And our branches are still terribly important to the small business guy, particularly those that handle coin and currency or accept checks or credit cards.

http://www.ababj.com/images/constantcontact/CoverMay2011.jpg This article is an online companion to the May 2011 ABA Banking Journal cover story, “#5, and feeling good: Why Richard Davis’ $308 billion ‘community bank’ just might be coming to a corner near you.” You can read that article online on this website or in our digital magazine.
[This article was posted on May 13, 2011, on the website of ABA Banking Journal, www.ababj.com, and is copyright 2011 by the American Bankers Association.]  
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