Debating access

Northwestern Financial Review, Oct 18, 1997 by Feldman, Ron

An analysis of new delivery channels for retail banking services, and how they will affect consumer access

Will new delivery channels for retail banking services decrease access for some consumers? That's a question regulators and community activists have been wondering about.

Only a Rip Van Winkle slumber could shield a banker from the conventional diagnosis of business challenges and the prescription for the future. The standard analysis often begins by arguing that only a small percentage of retail customers - Deloitte & Touche put the number at 35 percent at one bank are profitable on a fully costed basis. This result is due in part to the high expense of the traditional branch network.

Many consultants then note that nonbank firms have successfully offered cheap substitutes for retail products. Assets of money market mutual funds, for example, equaled nearly 150 percent of banks' checkable deposits in the first quarter of 1997 up from 80 percent in 1994. As a result, the traditional retail bank must migrate customers to less expensive distribution channels, the argument goes, in order to survive. A bank can reportedly reduce costs nearly 90 percent by shifting customers from tellers to phones. The future, therefore, will involve more call centers, smaller in-store branches/kiosks, electronic means of payments and computer-based banking. And, to some degree this change has already occurred (see graph on the next page).

But, even the hibernating banker would recognize familiar concerns about consumer access to banking services expressed by community groups, regulators and policymakers. Whereas traditionally, questions regarding access have focused on branch location and low-cost checking, now they center on the availability of services in a high-tech retail banking environment. Comptroller of the Currency Eugene Ludwig argued, for example, that, "It's important for us to consider in what ways these [electronic payment] products can have an impact - for better or worse on access to financial services for low- and moderate-income people or people without a banking relationship. We need to ensure wide consumer access to electronic money systems."

Representatives of consumer groups such as the Consumers Union have concluded that regulators need to ensure that the implementation of technology does not have an exclusionary effect or disparate impact, and that bankers use the new technologies to expand service access at affordable prices.

Some concern about access is inevitable and may be appropriate. Certainly, some new distribution channels, such as home computer banking, could be too expensive for some consumers. But, many nontraditional methods for conducting retail transactions, such as phone banking, represent lower-cost options with the potential to increase consumer access to banking services.

Consumer Access To Banking Offices

Many reviews have found a decrease in the number of branches in areas with concentrations of minority and/or lowerincome households over the last 10 to 15 years, especially after mergers. But, these studies by themselves cannot support generalizations about branch location or explain changes in the geographic distribution of branches.

Researchers with the Federal Reserve Board of Governors have recently published results from a new database analysis that provides insight into the nationwide location of bank offices from 1975 to 1995 (Federal Reserve Bulletin, September 1997). They found that reductions in bank offices from 1985 to 1995 took place in areas with the lowest growth in population; mergers took place in areas with the highest number of banking offices per capita. Fed researchers concluded that branch reductions were consistent with efforts to reduce excess capacity.

Branches per capita have fallen in low-income areas and risen in higher income areas. But, this reduction reflected a convergence in the number of branches per capita across all income groups. Low-income areas initially had the highest number of branches per capita. Moreover, the decline in banking offices per capita in low-income regions, particularly in central cities, resulted from branch reductions in areas with concentrations of businesses rather than residences. New Delivery Channels

Data on the physical location of branches sheds some light on past and current access to banking offices. Advances in retail banking technology offers consumers new alternatives, and, thus naturally, renew queries about access. Call centers, smaller, in-store branches, electronic forms of payment, but probably not computer-based banking, have the potential for increasing consumer access to banking services in the short term.

Call Centers. Banks have made greater use of phone centers with automated response systems to interact with their retail customers. These systems have the advantage of 24hour-a-day accessibility for consumers, without requiring a local office, and offer almost all the same services of a branch while yielding significant cost savings to the banks.