Five Key Questions about Retail Banking's Future

The future of retail banking has rarely been murkier — and predicting it has rarely been more important for banks.

The economy and new regulations have made it increasingly difficult for banks to turn a profit from the old bread-and-butter business of taking deposits and lending money. At the same time, competition for this business is mounting. In recent weeks, banks of all sizes have tried to rethink their branch strategy, their staffing costs, their technology offerings and their alternate sources of consumer banking revenue.

"New regulation and … low interest rates have forced a change in the profit model for retail banks," Bill Demchak, the president and soon-to-be next chief executive of PNC Financial Services Group (PNC), told analysts earlier this month.

"In the new normal, we need to look at all of our customer relationships to improve profitability by cross-selling our diverse product mix, increasing share of wallet and where appropriate, redefining the fair value exchange with our customers. Think about that in the retail space as repricing retail," he added.

Demchak will be one of several senior executives gathering in Carlsbad, Calif., this week for SourceMedia's annual Best Practices in Retail Financial Services Symposium. He will be joined by Wells Fargo (WFC) CEO John Stumpf, JPMorgan Chase (JPM) Consumer Banking CEO Ryan McInerney and Zions Bancorp (ZION) CEO Harris Simmons, among several other leaders. Some of those executives are also be attending the Consumer Bankers Association's annual conference, which began Monday.

At both gatherings, senior retail executives are wrestling with many of the thorniest questions facing bankers today. Here are five questions they should ask.

1. How many branches should we close?

Banks including Citigroup (NYSE:C), PNC and SunTrust Banks (STI) are accelerating their branch closures, as they try to cut costs and rethink how to best compete for deposits. Demchak last week said PNC plans to close 200 branches, or 6.5% of its domestic network, during 2013. SunTrust, which closed 43 branches last year, is pruning back even more; CEO William Rogers said last week that the bank will close another 40 branches this quarter and is planning future cutbacks.

At Citigroup, CEO Michael Corbat in December announced plans to close 84 branches, including 44 in the United States, as part of a broader restructuring effort. He said last week that he is prepared to generally cut back even more if necessary: "If we don't execute on our plan, we'll not be afraid to take further actions to restructure the business," he told investors at a conference.

2. How many new branches should we build?

Even as some banks close some brick-and-mortar locations, they are building others elsewhere. JPMorgan Chase last month laid out its plans to reposition its branch network, closing some offices but ultimately increasing its net number of branches by about 100 annually, or 2%, over the next two years. Many of those branches will be devoted to selling affluent customers either mortgages or wealth-management services; McInerney told investors and reporters at the company's investor day that JPMorgan Chase already does business with 80% of affluent U.S. households, and that it wants to continue building branches close to where such wealthy customers live.

"We realize that how customers are using banks is changing," he said.

3. How many more people should we lay off?

JPMorgan Chase last month became the latest industry player to announce a sweeping round of layoffs; the country's largest banking company will eliminate some 17,000 jobs over the next two years, as it scales down its mortgage servicing operations and rethinks staffing levels in its consumer bank unit. Citigroup in December announced 11,000 layoffs, and other banks are also cutting back.

Some layoffs are stemming from branch closures or improved technology, which to some extent can replace human tellers. Mortgage divisions are tightening their belts; as the refinance boom tapers off and the worst of the foreclosure crisis eases, many banks are cutting back on their servicing staffs. In February, Wells Fargo (WFC) decided to terminate a mortgage joint venture with Edward Jones, and eliminated 210 jobs as it closed a related office.

4. How much revenue can we get from offering mobile and online technology?

Banks large and small are racing to offer their customers mobile banking, smartphone apps, tablet apps and services including mobile deposit  of checks and bill payment. Bank of America (BAC), JPMorgan and other large banks have said the increasing popularity of these services helps them cut costs while increasing customer satisfaction.

"We're now seeing customers choose to deposit checks using mobile technology 10,000 times a day, which saves us about $3.88 per transaction versus a deposit at the teller window. It is millions of dollars a year in difference," PNC's Demchak said last week.

Some bankers are looking at mobile technology as an opportunity to do more than just cut costs. U.S. Bancorp (USB) already charges 50 cents per mobile check deposit, and last week Demchak publicly mulled bringing in more revenue by instituting a similar fee at PNC.

"If I charged you some money for that, 25 cents, would you still do it rather than go stand in a teller line? I would," he said. "We are in a mind-set where we did it for convenience to save costs and we didn't think about the mind-set that we're providing a value-added service to consumers, and that's a change inside of retail that we and the rest of the industry need to focus on as we go through this emerging technology and what we are providing to consumers that they value. We need to focus on that going forward."

5. What are the future sources of revenue?

Cutting costs is not enough; banks also need to offset the low margins they are making from traditional lending and the regulations that have cut into some traditional sources of fee income, including debit and credit card fees. Many banks are pinning their hopes on commercial and industrial lending. At banks with $20 billion or less in assets, C&I loans grew 3% from the third quarter and 9% from a year earlier, to $346 billion at Dec. 31, according to the Federal Deposit Insurance Corp. 

Some banks have a rosier outlook on other types of loan growth; Regions Financial (RF) said last week that it is expecting single-digit growth in credit cards, indirect auto lending and C&I lending to upper middle market companies. But more aggressive lending can also expose banks to bigger risks, and some industry members, including U.S. Bancorp CEO Richard Davis, are warning about "not entirely rational" price competition for those loans.

Bigger banks also have to worry about increasing competition for wealthy customers' asset-management business, as companies from JPMorgan Chase to Wells Fargo to PNC try to get a bigger slice of their customers' fee-generating business.