The Volcker Rule, Then and Now

Paul Volcker has long been regarded as a giant in the financial services industry, and with good reason. He was likely most influential during his tenure as Chairman of the Federal Reserve during both the Carter and Reagan administrations, when he played a leading role in bringing down the rampant levels of inflation at the time. A generation later, he returned to the spotlight as chair of the Economic Recovery Advisory Board, a post he retained until early in 2011. His storied history also includes stints with the New York Fed and the Treasury Department, along with senior posts in the private sector at institutions such as what was then Chase Manhattan and investment banking firm Wolfensohn & Co.

In 2014, his name will probably be in the headlines again quite a bit, even if he personally doesn’t say much. That’s because right before Christmas, the American Bankers Association (ABA) announced plans to file a lawsuit challenging key portions of what is generally known as the Volcker Rule, a set of regulations that prevents many banks from speculatively trading with their deposits.

There are many interesting aspects to this developing imbroglio, not the least of which is that the ABA is leading the fight on behalf of smaller institutions, which it says are already concerned over possible repercussions. The harm to these vulnerable companies is described as “real, imminent, and irreparable.”

Of course, no one expects the challenge to end there. Some of the issues covered by the Volcker Rule, such as collateralized debt obligations (CDOs)—which are widely blamed for helping stoke the financial crisis of the last decade—are deeply embedded in the business practices of much larger corporations. If the new rules are not amended, it’s easy to see how many of these Fortune 100 conglomerates might throw themselves into the legal fray.

For the record, it’s far from clear exactly how these regulations will affect the industry, and it’s a matter of interpretation whether the Volcker Rule even prohibits banks from holding CDOs. However, many observers insist that it does exactly that, and some auditors are saying that without further guidance from the Fed (along with the FDIC and the Office of the Comptroller of the Currency, both of which are also named in the potential lawsuit), banks would be well advised write down CDOs, even if it means taking a hit to the balance sheet.

The regulations and potential lawsuits, while new, are in no way a surprise. There’s been intense lobbying behind the scenes for a long time now, but it was only in December that five federal agencies approved the final rule. That’s still left plenty of room for loopholes, hence the ongoing concerns and legal challenges. Besides, banks still have a solid six months to drop the questionable assets from their portfolios, and can subsequently apply for an extension. In other words, these are early skirmishes that help set the stage for more sustained assaults.

There’s also a broader question here that deserves attention. To many, Volcker represents a different breed of financial services veteran, a point he demonstrated during his appearance before a British parliamentary commission a year ago. “The economic and social value of much of the trading and innovative financial engineering is questionable,” he stated forcefully, adding that without regulation banks will inevitably intertwine trades for their own accounts with their retail businesses—a toxic brew by any definition. In this and other appearances, Mr. Volcker has voiced criticism of new financial instruments that disrupted long-held industry processes and practices.

As we noted on this blog at the time, those are exactly the characteristics that sustain and nourish the technology industry. Is there are way for the disruptive innovation of the tech world to be balanced with the stability required in financial services? As these legal challenges play out, we might get some interesting answers to that question.

Online Banking: Glory or Gloom?

TSB Bank just announced that less than a month from today, it will close its Frankleigh Park branch.

For readers who might be unfamiliar with those names, TSB is a locally owned full-service bank, and Frankleigh Park is a suburb of New Plymouth, in the western North Island of New Zealand. The most recent figures indicate a population of less than 4,000. The given reason for the branch’s closure is simple: It reflects the global shift to “self-service banking,” where people do more things online. In particular, consumers are using mobile devices in increasing numbers to conduct financial transactions.

Going to the other extreme, consider ICICI Bank, the second-largest private sector financial institution in the world’s second-most populous nation, India. “More than one third of our transactions take place through Internet, making it the second most used medium,” Chief Executive and Managing Director Chanda Kochhar, just announced. “With the increase in Internet usage, it may also grow to occupy the No. 1 position.”

She further noted that mobile phones and tablets are growing at over 100% every year, compared to only 20% in desktops, and that has prompted the company to launch an array of new services, including electronic ‘branches’ that conduct operations around the clock, ‘tablet-based’ banking offerings that ease account opening, and enhanced POS terminals that facilitate every transaction. In the spirit of ‘democratization’—helping consumers without personal access to technology still enjoy its benefits—the company already has 25 electronic branches in 18 locations around the country.

If those seem like extreme examples, take a look at KB Kookmin Bank of South Korea. It launched KB Star Bank, a service optimized for smartphones, in April 2010, and the results seem to have surpassed all expectations. The service had I million subscribers in barely a year, passed 3 million the next year, and was up to 4 million by June of this year.

So where is the United States in all this? The most recent survey by the American Bankers Association reported in September of 2011 that 62% of all bank customers preferred online banking, a rise from 36% the previous year. The real news back then was that, for the first time, a clear majority, 55%, of bank customers over the age of 55 professed a preference for online banking over any other method. That represented a very sharp spike over 2010, when only 20% had the same opinion.

Let’s acknowledge that pretty much any Internet report or survey is nothing more than a snapshot. Online adoption or activity is a fast-moving target, and today’s hot trend is tomorrow’s dinosaur. Obviously, online banking in general and mobile banking in particular are not some niche trends—they represent a massive change in customer behavior, and they’ve evolved faster than most trends that came before. But what does that actually mean?

The most fascinating perspective we can draw from all this is not what’s happening now, but what will happen next year, and the year after that. In that vein, here are some questions that need answers.

First, earlier this year, some banks announced that they were actually constructing new retail outlets. Looking ahead, how many bank branches will we see being closed down over the next few years? Could we see trends following certain patterns—for example, conglomerates shutting down local branches while community banks take their place?

Next, it’s apparent that online banking doesn’t respect demographic or regional boundaries—the trend is being adopted everywhere from Iowa to India, and by Gen-Xers and senior citizens. In developing countries, Internet cafes are being replaced by boutique electronic banks that enable non-tech-savvy people to do everything they would with a PC or a smartphone. The easier the access, the thinking goes, the more the business. If that’s the case, will innovation-minded banks draw business away from institutions that have spent decades building trust?

And finally: If two years from now your bank hasn’t closed any branches and has the same mix of face-to-face and online banking it currently has, is it doing things right? Or is it facing eventual disaster?

American Bankers Association Survey: Online Banking on the Rise

The American Bankers Association released its annual survey last week, revealing that online banking is on the rise, while mobile banking has slowed in the last year. The most surprising statistic from this year’s survey is rise of online banking amongst baby boomers. For the first time, 57 percent of banking customers 55 and older said they prefer to bank online versus at a bank branch or via an ATM. This is up from 20 percent 2010, a significant gain amongst the baby boomer population.

Other interesting survey statistics include:

  • Among all adults, 62 percent said that they like online banking best, up from 36 percent last year
  • Only 1 percent of adults said that they liked mobile banking best, down from 3 percent last year
  • With younger consumers, ages 16 to 34, only 4 percent said that they preferred mobile banking to other methods
  • Telephone and banking by mail are losing popularity. Only 3 percent said that they prefer telephone banking, and only 6 percent said that they prefer mail banking

Are these statistics in-line with your customer/member base? Do you think the popularity of mobile banking is on the decline? Let us know in the comments section below, or Tweet @Bankingdotcom.

Debit, Check or Cash?

The American Bankers Association recently published a whitepaper on the benefits of debit cards versus alternative methods of payment, titled “Debit Cards Cost Less, Provide More.” The paper discusses how debit cards are not only more time efficient in comparison to checks or cash, but save businesses money. While some may believe cash is a quicker method of payment than debit cards, businesses can process a debit card transaction faster than making change for a $20 bill.

According to the whitepaper, “Fast food restaurants such as McDonald’s see the benefits of debit cards: a customer can place an order, use their card and finish the transaction in less than five seconds. On the other hand, cash can take as long as 8 to 10 seconds.” When time is of the essence, each transaction affects the bottom line and a mere 8 to 10 seconds adds up for a business on a daily basis.

Other reasons merchants prefer debit cards? Consumers generally spend more money. Without the restriction of cash, a consumer can spend more money. The whitepaper goes onto cite, “In comparing debit sales to other payment methods, debit cards increase individual sales by as much as 20-30 percent at fast food restaurants and 10 percent at Big Box Discount stores.”

Are your members using debit cards more frequently than cash or checks? What do you think of the shift towards a cashless wallet? Let us know in the comments section below.