Executive Summary: The consumer’s appetite and attitude is undergoing significant and perhaps fundamental shifts. Banks needs to be very sensitive to the changes that are occurring and position themselves as the consumer’s advocate rather than enemy.
Monday’s Financial Times presented a story headlined: “Smart shopping set to change the retail landscape.” While financial services are not mentioned, the implications of the story may be very significant for our industry, particularly banks.
The Smart Shopper Rules
The story begins by recounting the low foot traffic in a recently opened JC Penney’s in NYC and quoting Penney’s CEO in reaction: “Consumers are acting rationally…They are paying down their debt, they are spending for things they need. And for the more discretionary thing, they are being more cautious.” The CEO of Wal-Mart underscored the change in consumer attitudes: “The ‘smart’ shopper, the customer that really looks at price and value and quality…this is something that will be with us for a long, long time.” The consumer appears to want simplicity and value in their retail purchases.
How does the consumer shift impact banking? We think in ways both direct and indirect. Bluntly stated, in recent years many banks, big and small, were relying on the not-very-smart consumer or at the minimum a consumer whom they could shepherd into a product that better fit the needs of the bank rather than the customer. For example, free checking initially was a valid offer but within a short time many banks exploited the product to generate overdraft fees from financially ignorant consumers. Similarly, the media has been detailing stories concerning how consumers are being exploited by banks that manage their debit card businesses to snag the customer for as many overdraft fees as possible. (For example, the $4 Starbucks purchase that lead to a $30 fee.)
The proposed consumer protection regulations are a response to the perception (right or wrong) of banks taking advantage of uninformed consumers. There can be no doubt that banks will find themselves pushed to reduce fees and margins on a number of historically attractive products such as credit cards.
At the same time, the banks risk being abandoned by the smart shopper and, thereby, become increasingly reliant on a higher risk customer. The same FT article includes a comment by a Moody’s executive that synthesizes the situation facing many banks: “In times of economic stress, borrowers with the means pay off their card debts, leaving behind a pool of borrowers with less financial flexibility and more debt.” The “Smart” borrowers are paying off or reducing outstandings while others fall into the trap of higher loan balances: “Most credit card issuers also reported the proportion of borrowers who had fallen into the subprime category had risen as struggling borrowers’ credit scores had been eroded by late payments and high debts.” This issue is hardly centered on credit cards only; we are seeing similar findings in the broader consumer debt market and, unsurprisingly, mortgages as well.
How should banks proactively address the smart shopper “movement”? Tuesday’s USA Today has two stories that suggest what to do and what not to do. To start with the positive, consider the article titles: “Something new: A credit card on consumers’ side.” The article focuses on a Chase card offer, Blueprint, that “allows consumers to avoid paying interest on everyday purchases — such as groceries — even while accumulating interest on other purchases. Other features allow borrowers to track spending and create payment plans to whittle down debt.” The article includes praise for the offer from a consumer activist organization as well as the frank admission from a Chase spoke person that his industry has not always “been that transparent and clear in terms of the interest consumers pay.”
Contrast that article with the one above it on the same page, titled “Homeowners end up worse after help.” Basically, the article suggests that many who request mortgage modifications “are instead winding up with higher monthly payments and larger debts on their homes.” While many banks would argue with its tone and accuracy, nonetheless, it portrays much of the industry as out-of-synch with the needs of consumers and, unfortunately puts banks on the defensive…yet again.
Required Response
Banks need to understand the degree to which they are in the dog house with the consumer. By the way, increasingly, this includes the community bank as well as the larger players. Community and regional banks have allowed themselves to be lumped in with the biggest players and, as their commercial real estate portfolios worsen, their ability to differentiate themselves may be decreasing.
The negative stories cited above (as well as hundreds of others that have appeared in the past year) fuel the flames of populism, and populist initiatives can destroy the attractiveness of the banking industry.
The banking industry will require years to restore the trust that has eroded and, yes, the community banks do have an advantage in doing so. However, up to now it has been banks like Chase, US Bancorp and a handful of others that are trying to position themselves as listening to the “smart shopper.”
Concluding Thought
No banker doubts that the competitive environment over the next five years will be dramatically more difficult than in the past. The number of moving pieces (macro economy, regulations, and capital requirements, among them) will increase in number and complexity. However, banks cannot lose sight of the lynchpin of their future, the customer. Players that can distinguish themselves today, when concern and volatility are so high, are positioning themselves to be the growth leaders in the years ahead.