Analysts are bearing down on major banks, saying that their retail entities are shrinking. This is absolutely the wrong way to look at it as liquid markets such as FX, centralization, technology and electronic trading are the future
The cacophonous hysteria which is emanating from the media in New York today, inferring that the end of an international empire of banking giants is nigh just because some retail banking branches are on the chopping block is an interesting lesson in how modernity and corporate focus is being completely misunderstood.
Citigroup and HSBC, two of the largest interbank FX dealers in the world, are apparently ridding themselves of a sizable proportion of their retail customers and closing down high street branches, with Citigoup having intentionally waved goodbye to 69 million customers on its retail side since 2007.
Britain’s financial giant HSBC removed 1,600 U.S. locations, including its subprime-lending business, and closed more than 500 branches in the United Kingdom, and Citigroup has sold or shut more than 1,300 U.S. branches in the past decade, including its consumer-lending network, to concentrate on major cities.
Again, does this really matter?
What is difficult to comprehend here is not the actual figures involved or the corporate decision to reduce the number of retail outlets, downsize human resources, and move the focus away from resource and service-hungry retail banking but why this is being regarded as a negative matter.
Retail banking in its traditional format, via branches, is expensive and somewhat obsolete. It costs a fortune to rent or purchase premises, is time consuming and human-resource hungry and when considering the core business which is taking deposits from customers to lend out to other retail customers at small amounts and low interest, is a very marginal business indeed.
Compare that to the interbank electronic trading which is conducted by the same firms – both leaders in this industry, with number 1 FX dealer Citigroup processing 16.3% of all global FX electronic order flow for the entire world from one office in Canary Wharf, with no network of branches needed for this activity, and HSBC being the largest corporate FX dealer in the world, and its overall market share being 5.4% making it the 7th largest handler of FX order flow in the world, all conducted from its Canary Wharf site.
Between the two banks, over a fifth of the daily $5.5 trillion notional volume is being handled and processed.
This is the real core business of these banks, not retail banking with physical branches, which has become a dinosaur.
In 2015, Citigroup had just 812 operational branches, whereas in pre-financial crisis 2007, the firm had 2,183 branches operational.
When looking at the divisions that it is no longer concentrating on, it is high risk and low profitability efforts such as sub prime lending.
FX is a liquid and highly profitable business with very low operating costs for a large bank. There is no need for a branch network, and no need for customer facing facilities to deal with small accounts which have low interest or to provide small, high risk loans.
Despite the high risk category that Citigroup places the extension of credit to OTC derivatives firms, the bank having stated this year that it expects a 56% default rate on OTC derivatives credit, this perspective itself creating a counterparty credit risk issue for prime of prime brokerages and subsequently the entire FX industry in that it is becoming very difficult to gain credit, the banks would still rather focus on the much more profitable electronic trading sector than high street retail banking.
As I said last week, and will reiterate, whilst London leads the way in terms of financial technology, institutional trading and, well, sheer genius, the rest of the nation’s traditional financial sector serviced by the very same banks, is a wax candle by comparison.
London’s banking sector is plate glass, ultra-modern and handles 49% of all interbank Tier 1 FX order flow for the entire world. Citi and HSBC along with the other London banks work closely with prime of prime brokerages which then provide via ever-evolving and often in house technology, aggregated liquidity feeds to the astute and urbane brokerages of the City.
The retail, non-London centric, customer-facing mainstay of the exact same banks that handle, with great levels of sophistication and technological advancement, retail customers with ordinary products such as mortgages, current accounts and business banking facilities.
I conducted some research into the dichotomy between the electronic trading mainstays of London and New York for interbank dealers, and the retail entities of the same banks just two weeks ago in provincial England.
The dichotomy is so vast and the gulf is so wide, that even though these retail outlets are part of the same companies that we all hold in such high esteem, they are unrecognizable as part of a modern financial markets structure.
My findings were somewhat astonishing
In modern banking in many nations, a simple task can be performed over the counter, within just a few minutes as long as the relevant customer documents are presented but not in England’s high street branches.
You want to open a business account with a major, multi-billion pound British bank? Be prepared to wait up to three weeks to make a physical appointment with a business manager.
HSBC, which is a giant with electronic trading presence in London, Hong Kong and mainland China, has retail branches on every street in every town, the length and breadth of the land. I made research to see what is needed to open a simple business account, with no credit facilities. It is nigh on impossible.
Instead of being greeted with an experienced staff member who can explain how this very straight forward, everyday task can be carried out, I was confronted with “we don’t, we can’t, it isn’t” and many other negatives. The representative, who had very little knowledge of business banking, explained that any applicant needs to see a business manager, who only visits the branch once a week.
This pattern proliferates across many rival banks. RBS and Barclays, both vast institutions, Barclays being the world’s 4th largest FX dealer with 8.45% of global FX market share, were equally negative and operated a similar manual system in which an actual account manager needs to visit in order to conduct an application, a process that could take several weeks.
This is not only completely outmoded practice, as many banks in many modern nations with developed financial markets and technology sectors will be able to conduct this simple procedure on the spot, with the client walking away with an account number and internet banking log in credentials, but it is also very expensive for both the customer and the bank itself.
Customers, especially those with businesses, have to spend almost a day going to an appointment, which could be several weeks after inception of their business, which is a day lost, and a day lost for a senior executive is expensive.
This is also expensive for banks. Banks do not make the majority of their profit from retail current and business accounts, however the practice of form-filling in branches with human resources, and having to make appointments for a business manager that travels between branches in a company car, whilst not seeing customers during the traveling period, is a massive cost, and is resource and time hungry.
Thus retail banking in its traditional form is a legacy industry, which is why it is surprising that any analysts with a modicum of experience or common sense find this downsizing of retail business and concentration on centralized institutional electronic business to be anything newsworthy.
Citigroup’s corporate focus bears this out.
Ten years ago in 2006, Citigroup’s retail consumer banking made up 55% of its entire profits – despite the fact that even back then it was the world’s largest FX dealer. today, it is 38% of the bank’s entire profit.
Corporate and investment banking, part of which encompasses the bank trading desks of Canary Wharf, accounted for 33% of profit in 2006 but today represents 56%.
HSBC has gone down a similar path. Corporate and investment banking at HSBC now accounts for 75% of the entire business’s profit, whereas it was just 53% 10 years ago and the bank has scaled back its retail banking in that it now accounts for 23% of profit whereas 10 years ago it was 42%.
So no more 100% mortgages, low interest loans and risky pre-financial crisis retail business which cost the banks a fortune.
Instead, the centralizing of retail and small business banking onto online accounts with no branch and a central call center is gradually taking the place of branches.
Corn Street in Bristol, one of the world’s very first commodity trading and financial markets centers – its name coming from the corn trading stones in the City’s merchant era was home to some of the world’s largest retail and commercial banks. Today they are mostly fashionable bars and pubs, with evocative names such as “The Corn Exchange”, “The Commercial Rooms” or “The Old Bank” but it is clear that a glass of locally brewed Butcombe beer is more profitable than a low interest current account, ironically served to Bristol’s financial markets executives whose business is now conducted completely electronically.
In the same city, Hargreaves Lansdown, a £6 billion company, is a case in point. Hargreaves Lansdown has no branches at all, yet it is the UK’s largest financial services firm, providing clients with the Vantage platform, a proprietary technology which allows customers to manage their entire portfolio from one platform, including FX trading and CFDs via HL Markets, the firm’s white label solution from IG Group.
In the 1980s, Hargreaves Lansdown was a small independent pensions and life assurance brokerage in Clifton, which referred business to insurance firms and large banks in their retail business. Now the tables have turned.
The future for the large banks is investment banking, investment in Fintech such as blockchain technology that automates previously resource hungry activities such as ledger, and electronic trading, largely FX, by providing Tier 1 feeds to prime of prime brokerages.
Quite clearly, the Millennials will wonder what a branch of a bank is. They will never have to be confronted by dejected staff who know that the dinosaur effect has set in.
Instead they will manage their retail banking online, and probably frequent what used to be a bank branch during evenings out to enjoy nouvelle cuisine and cocktails served on the counter which was once a bank teller’s desk, before returning to their positions the next day in electronic markets or FinTech development.
How the times are changing…
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