October, 2008: the global financial crisis led major banks to make acquisitions in an effort to shore up deposits and stave off systemic collapse. Wells Fargo aquired Wachovia; Bank of America acquired Merrill Lynch and Countrywide; J.P. Morgan acquired Bear Stearns and Washington Mutual. In addition, some floundering banks were sold off in pieces post-crash, creating a hodgepodge of disintegrated banking structures.
The industry has changed a lot since 2008. Millennials are forgoing brick-and-mortar banking for online options. The rise of fintech has accelerated the adoption of digital banking — drastically cutting fees and encroaching on big bank income, revenues, and profits. As this landscape continues to evolve, we wondered, “What strategies are top retail banks using to generate revenue?”
Here’s what we found.
The Rise of Complex Banking Structures: How Can the Public Tell How Banks Generate Revenue?
The major components of the Glass-Steagall Act were repealed in 1999, and scholars continue to debate the impact of that decision. While we may never know the repeal’s true effects on the Global Financial Crisis of 2008, it is certainly clear that banking structures have since become more complex.
Every GSifi bank is structured differently. We can judge strategic success by comparing bottom lines, revenues, and equity prices. However, reporting the success of single service lines (or lines within retail banking specifically) has become more difficult to dissect. The blending of previously separate business units with complex products makes it hard to tell (at least for the general public) which strategies and products are working, and which ones are falling short. Annual reports and SEC disclosures provide some basic insights even though specifics are opaque.
We took a look at four of the top ten U.S. banks and attempted to extract their basic strategies for generating income and revenue. We derived statistics and some text analysis from each company's reports. Here's what we found.
1. Bank of America
2015 - $83.4B
2014 - $85.1B
2013 - $89.8 B
2015 - $15.89 B
2014 - $4.83 B
2013 - $11.43 B
Bank of America is organized into six segments: consumer banking, global wealth and investment management, global banking, global markets, legacy assets & servicing, and all other. Consumer banking includes deposits, Merrill Edge, and small business client management. Consumer lending includes consumer and small business credit card, debit card, consumer vehicle lending, and home loans. Deposit products include traditional savings accounts, money market savings accounts, CDs and IRAs, noninterest - and interest-bearing checking accounts, as well as investment accounts and products. Deposits generate fees, including account service fees, non-sufficient funds fees, overdraft charges and ATM fees, as well as investment and brokerage fees from Merrill Edge accounts.
2015 Growth Highlights:
• Grew core loan balances by $75 billion and deposit balances by $78 billion.
• Issued nearly 5 million new credit cards and saw consumer spending on credit cards rise 4 percent.
• Funded $70 billion in residential home loans (helped 260,000 families buy or refinance a home).
• Within the consumer banking and wealth management businesses, deposits grew by $64 billion, or 8 percent, from 2014.
• In 2015, this included increasing our environmental business initiative to $125 billion — one of the largest commitments to finance new energy.
2014 – $77.2B
2013 – $76.7B
2015 – $17.2B
2014 – $7.3B
2013 – $13.7B
Citibank retail bank services focus in checking and savings accounts, loans, wealth management advice and small business services. Citi is the world's largest credit card issuer, with more than 138 million accounts. Citi retail services revenues of $6.4 billion have stayed consistent. Retail banking revenues increased 6% from the prior year to $5.2 billion, reflecting continued loan and deposit growth and improved deposit spreads. CitiCorp, a division of CitiGroup offers services in North America, Latin America, Asia and EMEA.
2015 Growth Highlights:
• Partnered with Visa to be the exclusive issuer of co-branded Costco credit card (50 million members).
• The mortgage business originated $29.5 billion in new loans in 2015.
• Citi worked with Android Pay, Apple Pay and Samsung Pay to make mobile payment solutions available to U.S. customers and teamed with MasterCard to expand global acceptance of the Citi MasterPass digital wallet.
• Citi announced our $100 billion Sustainable Progress initiative, furthering our long-term commitment to lend, invest and facilitate financial solutions to reduce the impact of climate change.
• Established a new unit called Citi FinTech, focusing innovation in borrowing, payments, investments, and security.
3. Wells Fargo
2015 – $86.1B
2014 - $84.3B
2015 – $22.9B
2014 - $23.1B
2013 - $21.9B
Wells Fargo generated $86.1 billion in revenue in 2015. Total loans finished 2015 at $916.6 billion, up 6 percent from 2014, making their loan portfolio the largest among U.S. banks. Trading declined in 2015 and was mostly offset by credit and debit card, mortgage, commercial banking, commercial real estate brokerage, multifamily capital, reinsurance, municipal products, and retail brokerage businesses.
Community banking offers a complete line of diversified financial products and services for consumers and small businesses including checking and savings accounts, credit and debit cards, and auto, student, and small business lending.
2015 Growth Highlights:
• Adding online and mobile services.
• $7B in community development loans.
• $18.8B in new commitments extended to small business customers.
• $15B in environmental investments.
4. Capital One
2015 – $23.4 B
2014 – $22.3 B
2013 – $22.4 B
2015 – $4.1 B
2014 – $4.4 B
2013 – $4.1 B
Capital One is heavily focused on credit cards, consumer banking, and online services (largest online banking institution by deposits). The credit card division consists of domestic consumer and small business card lending and the international card lending businesses in Canada and the United Kingdom. The consumer banking division consists of branch-based lending and deposit gathering activities for consumers and small businesses, national deposit gathering, national auto lending and consumer home loan lending and servicing activities.
2015 Growth Highlights:
• Loans grew 13.2% in 2015 (industry average 3.4%).
• Consumer banking business which includes auto finance, home loans and retail banking delivered at net income of $1.03 billion in 2015.
• Acquired GE Healthcare Finance – a specialty growing market.
• In 2015 Capital One invested in their credit card business and focused in digital. Growth seen in domestic card loan balances, and purchase volumes.
The Bottom Line
From the results, it's clear that retail banking strategies continue shifting to digital. Credit card interest, payments, small loans, deposits, checking, and basic securities trading all contribute significantly to the bottom line. Lending is on the rise, although credit access is still tight. Clean technology is a popular investment initiative across the board.
Individuals will probably stay addicted to credit revolvers as long as lending remains tight. No matter how debts are structured – credit cards, mortgages, revolving lines, etc. – retail banking income and revenue continues to depend on debt servicing for a significant portion of its income. Other non-retail sections of banks provide significant fee and investment income, but these strategies are not as readily available to small and medium sized banks. For now, banks should stick to what they do best: loaning money and collecting interest. While margins for these services are diminishing, banks can recover these margins by improving customer relationships and integrating enhanced digital services into their retail portfolio.
Photo credit: Stephen Douglas