Now that exotic products are out of fashion, the next wave of banking innovation may well come from bread-and-butter staples.
Bankers hoping to distinguish themselves from their competitors will not find much of a market for the quirky but ultimately troubled offerings of the past few years. The pressure to be creative will still be there — manifested through twists on traditional products.
"Right now the banking industry is very focused on the fundamentals: risk control, trying to make sure customer service is good," said Charles Wendel, the president of Financial Institutions Consulting inc. in New York. "But as banks become more confident, they will refocus on innovation, and it'll really come from what the customer wants, more than anything else."
Experts say that banking companies will look to develop reward programs to draw in deposits, and that links between deposits and other products will likely be enhanced. Bankers will also become more inventive about how and where to build branches, and features will be added to automated teller machines to attract the unbanked. Expect wealth management products to be linked more to insurance offerings to offer customers more guaranteed income streams.
And now that Congress has limited credit card companies' ability to raise rates on balances, issuers may develop "value-added" products providing additional benefits to the consumer and higher fees and revenue for issuers, said Frank Barkocy, director of research at Mendon Capital Advisors Corp.
Loan portfolios may be in for a revamp, too. But instead of new kinds of loans, bankers may try offering a wider variety of traditional lending products. James Bradshaw, an analyst at Bridge City Capital LLC in Portland, Ore., said companies burned by residential construction lending would find this particularly attractive.
Already, institutions like the $66 billion-asset Bank of the West in San Francisco are tweaking reward models to entice depositors.
Last month the BNP Paribas SA unit launched its Community Jumpstart Campaign, in which customers get $100 — and encouragement to spend it locally — provided they open a checking account and deposit at least $250 a month using direct deposit. "We didn't want to just give away money, so this lets our customers know how important our local communities are, and it encourages our customers to spend in their communities," said Andy Harmening, Bank of the West senior executive vice president.
He wouldn't say how many new accounts stem from the campaign, except to say the amount was "twice as many as usual."
Aaron Fine, a partner in the retail and business banking practice at Oliver Wyman Group, a New York management consulting unit of Marsh & McLennan Cos., said bankers will further link checking accounts, savings accounts and other products.
One such product is Virtual Wallet, an online account from PNC Financial Service Group Inc. "I think linkages across product types will become stronger, and banks will develop products that focus on helping customers better organize their payments and manage their money," Fine said.
Bankers may build on the capabilities of vendors like Mint Software Inc. that analyze customers' monthly bills and other expenditures to find ways to cut back spending and pay off debt faster, among other suggestions, he said.
But bankers will also likely develop offerings that link deposits to products such as mortgages, to offset monthly payments, Fine said. Such products are popular in England and Australia, but only a few U.S. firms offer them.
The $896 million-asset First PacTrust Bancorp Inc. in Chula Vista, Calif., offers a product that combines a mortgage, a home equity line of credit and checking and savings accounts. The more money the customer puts into the checking account, the larger the reduction in the loan's principal balance and the subsequent monthly finance charge.
"The main advantage to the customer is that it provides flexibility that no other mortgage product does," said Hans Ganz, First PacTrust's chief executive. "It benefits us in that we have a loan product that isn't just a commodity — it's a relationship builder."
First PacTrust began offering the Green Account in 2005. As of March 31, it had $231.5 million of such loans on its books, or about 27% of its total loan portfolio.
On the wealth management side, Sean Cunniff, a research director in brokerage and wealth management services at TowerGroup Inc., an independent research firm owned by MasterCard Inc., said bankers might develop hybrid managed accounts that have an insurance component, so that at least a portion of the customer's monthly income is guaranteed.
"Banks are realizing that people want a guaranteed stream in income, and they're trying to figure out the best way to offer that," Cunniff said.
Tom Brogan, a research director at TowerGroup, said revamps are also likely for branch networks as deposit competition intensifies.
Bankers might put branches in strip malls, grocery stores or Wal-Mart locations, he said. "Right now those are the most likely places for in-store branches, but there's a possibility you'll see them in other big box retailers — it wouldn't surprise me if we see some in Home Depot or a Lowe's."
Branch interiors may change, though don't expect an explosion of cafe models like those used by Umpqua Holdings Corp. or Washington Mutual Inc., Brogan said. (JPMorgan Chase & Co., which bought Wamu's banking operation, is retrofitting or closing the Occasio cafe-style sites.)
Instead, bankers are more likely to add features such as digital signs and videos, including those for use in three-way conversations between a customer, a branch employee and an off-site expert such as a loan officer, he said.
Nicole Sturgill, also a research director at TowerGroup, said banking firms will also add features to ATMs, such as the ability to accept prepaid cards from customers who do not have a checking account, so they can send money to others.
