The digital age is about disruption. Our favorite narrative is of the hero entrepreneur who turns an industry on its head, rising to the top amongst old competitors that were too slow to adapt.
And then there’s retail banking, an industry that has largely not been penetrated by new tech startups, and is still dominated by long-standing companies. In fact, the average age of the 10 largest banks in the US is 156 years1. These ancient organizations, such as Bank of America, have proven they can evolve alongside technology, and their ability to do so effectively has kept the dinosaurs not just alive but thriving.
While home banking products have been around since the 1980s, Americans have been slow to adapt online banking, with adoption rates trailing nearly a decade behind the use of the internet as a whole. So, in 1994, Bank of America was slightly ahead of the game when they launched their bankofamerica.com website, allowing users to check real time account balances and transfer funds internally between accounts on a 24/7 basis2.
Despite this progress, Bank of America may have been threatened in 1999 with the introduction of the US’s first “online only” bank, offering lower fees and high-yield accounts with a lack of physical overhead3. However, “online only” proved to be slow in their growth, likely due to the reduced convenience for withdrawals, deposits, and perceived security threats4,5. By offering online services early, Bank of America was able to hedge the risk posed by these new competitors by offering the same online capability with the added benefit of physical branches when needed.
There shouldn’t be any surprise that the next wave of innovation in banking has been centered around the smart phone. Bank of America (along with many competitors) offers apps for its customers providing the same services available through traditional online banking, along with additional features such as depositing checks through photos and card-free ATM integration6. Mobile banking has certainly caught on, as 55% of American
smartphone owners used mobile banking in 2015. This has led to a decrease in in-branch interactions, reducing operational stress on the bank. Interestingly, this trend has also increased the role of ATMs (you still need to get cash somehow), which continue to grow in number alongside mobile users7,8,9.
But who cares about these apps and features? Is Bank of America truly adding value and gaining a competitive advantage with this? The answer is absolutely. Satisfaction with a bank’s mobile platform has been shown to be critical overall customer satisfaction as well as customer retention and growth, specifically in the key segments of the “emerging affluent”, millennials, and minority groups. One advantage of Bank of America’s size is their ability to allocate money toward improving their mobile products, giving them an edge over smaller financial institutions10.
The “Before and After” Picture
OK, so Bank of America has adopted with the times, fostered innovation and all these great things, but how has it affected their bottom line? Unfortunately, the financial crisis of 2008 and subsequently stagnant economy don’t paint a great picture for the banks performance, but there are some signs that this shift toward online banking has had a positive impact. Some indicators are the number of branches operated by the bank, as well as their total deposits and revenue for consumer banking:7,8,9
As shown above, the bank has been able to reduce its number of branches by nearly 1000 from 2011 to 2015. At the same time, they have seen an increase in total deposits and revenue from deposits. While there are of course many factors at play, Bank of America’s shift toward technology has enabled them to serve more customers with less overhead, leading to a significant improvement in their efficiency ratio11.
While Bank of America and its competitors have so far kept pace with technology, there are continually emerging competitors and threats. Venmo is an app targeting millennials that allow consumers to transfer funds to each other at no fee, and to keep a balance in their account. The company has expanded its capability to include limited B2C consumer payments, and is continuing to grow. Robinhood is another app allowing free stock trading based on a mobile platform. Both of these companies are growing in popularity with the millennials and technologically inclined. If these companies continue to widen their services into the banking world, we may soon see another test of our old banks’ ability to adapt and stay on top.
- US Bank Locations.com. Banks Rated by Total Deposits. from http://www.usbanklocations.com/bank-rank/total-deposits.html
- The birth of mobile banking. (n.d.). Retrieved November 17, 2016, from http://about.bankofamerica.com/en-us/our-story/the-birth-of-mobile-banking.html#fbid=s1KojACDCgG
- Sarreal, R. (2016). History of Online Banking: How Internet Banking Became Mainstream | GOBankingRates. Retrieved November 18, 2016, from https://www.gobankingrates.com/banking/history-online-banking/
- Couch, Karen, and Donna L. Parker. “’Net Interest’ Grows as Banks Rush Online.” Southwest Economy, Federal Reserve Bank of Dallas no. 2 (2000), 1–5. http://dallasfed.org/assets/documents/research/swe/2000/swe0002.pdf
- Crosman, P. (2016). Consumers Use Mobile Banking But Don’t Trust It, with Reason. Retrieved November 17, 2016, from http://www.americanbanker.com/news/bank-technology/consumers-use-mobile-banking-but-dont-trust-it-with-reason-1078891-1.html
- Bank of America. Cardless ATM promo. From http://promo.bankofamerica.com/cardlessatm/
- 2011 Annual Report. (2012). Retrieved November 17, 2016, from http://media.corporate-ir.net/Media_Files/IROL/71/71595/AR2011.pdf
- 2015 Annual Report. (2016). Retrieved November 17, 2016, from http://media.corporate-ir.net/media_files/IROL/71/71595/AR2015.pdf
- Maxfield, J. (2015). Chart: Bank of America Is Closing Branches as Mobile App Users Grow. Retrieved November 17, 2016, from http://www.fool.com/investing/general/2015/10/07/chart-bank-of-america-is-closing-branches-as-mobil.aspx
- Marous, J. (2016). Mobile Banking Drives Satisfaction and Growth. Retrieved November 17, 2016, from https://thefinancialbrand.com/58703/mobile-banking-satisfaction-growth/
- Maxfield, J. (1970). Bank of America’s $7 Billion Question. Retrieved November 18, 2016, from http://www.fool.com/investing/general/2016/05/19/bank-of-americas-7-billion-question.aspx
- United States Internet Users. (n.d.). Retrieved November 18, 2016, from http://www.internetlivestats.com/internet-users/us/
- Online/Mobile Banking Adoption Trends & Demographic Profiles. (2013). Retrieved November 17, 2016, from https://thefinancialbrand.com/32428/pew-research-online-banking-users-demographic-trends/