Published September 24, 2012
Phonographs, typewriters and rotary telephones are relics of a bygone age. Bruce Dalgaard, professor of economics and Asian studies at St. Olaf College and also a visiting professor at Carleton College, believes paper checks and debit cards may soon join those items on the scrapheap of history.
Dalgaard says checks are "simply too expensive" to last for much longer. He adds that the United States is "way behind the rest of the world" in recognizing this fact. In the future, shoppers likely will use transaction cards to make purchases, Dalgaard says.
With the rise of online and mobile banking, are bank branches on their way out? How has technology changed the business in recent years?
We need to differentiate between bank branches and small local/regional banks. No question, technology is allowing and cost factors are requiring large regional/national banks to scrutinize branch banks. I expect the number to decline. That's branches, not local/regional banks.
Some years ago, The Wall Street Journal ran an op-ed piece. The thrust of the piece was that banking -- not the financial industry in general, but banking -- would most likely follow the trend in the brewery business. Concentration through M and A, or mergers and acquisitions, has resulted in a handful of large, national brands. At the same time, small microbreweries were emerging and have continued to do so.
Look for the same thing to continue to happen in banking. I expect we'll see lots of local/regional banks -- for lack of a better term, I'll call them boutique banks -- which cater to local customers. Just like the microbreweries, we'll see the full price spectrum -- high-end smaller banks that provide quality service and a wide range of products, and low-end smaller banks that are more bare-bones and offer limited services. These banks will compete effectively with large banks, serving a particular segment of the market.
Why are fewer banks offering free checking these days? Is it linked to the regulatory changes of the last few years, or is it something else?
Checks are on their way out; they are simply too expensive. We're way behind the rest of the world in this regard. Look for more and more transaction-based fees for those using debit cards. Consumers will shift to loading money onto transaction cards, some specific to retailers and others more generic.
Could you elaborate more on your statement that we are behind the rest of the world in regard to fewer banks offering free checking accounts?
They simply do not have checking-type accounts. Recent visits to Germany and Norway revealed how most Europeans have a point-of-sale card. Some are the equivalent of our debit cards, and some are loaded with cash. Merchants like these because the transaction fee is lower. I get funny looks when I use a credit card.
More advanced would be Japan. All transportation modes use a single card that has cash loaded on it. The same card is now replacing credit and debit cards for major retail outlets.
What's frustrating for the U.S. consumer is that banks are reducing "free" checking but not moving very quickly to alternatives. Sure, one can pay bills online or have funds automatically withdrawn from an account, but why doesn't something like this work for all point-of-sale transactions? Think about the fees and interest payments with our system. (It's a) major source of revenue for commercial banks.
With the new banking reform measures known as Basel III coming through the pipeline and implementation of Dodd-Frank Act regulations on the financial industry, are we seeing the last of 'too big to fail'? Is the Federal Deposit Insurance Corp., or FDIC, really prepared to 'unwind' a JPMorgan or Bank of America?
Last of "too big to fail"? Yes, but not in the near future. There's no will in Congress to deal with financial reform. This won't change after the election. (There will) probably (be a) slow erosion of the dominant bank position, such as returning the firewall between (the) consumer and investment banking.
Are American banks at risk from the financial turmoil in Europe?
Financial markets are connected. Look at how many institutions were affected by the collapse of Iceland's banks. Of course American banks are at risk. How much? That, of course, depends on their exposure. The attitude in (Washington) D.C., that the banking "fire is on the other side of the river" -- (or) ocean, in this case -- is extremely shortsighted.
What has the 'London Whale' incident taught us about the limits of banking regulation?
Regulation is always fighting the last war. Financial innovation moves much faster than supervisory power. Bank regulation is limited, but this doesn't mean it is futile.
We would like to thank Bruce Dalgaard, professor of economics and Asian studies and Benedict distinguished visiting professor of economics at Carleton College in Northfield, Minn., for his insights. Questions for this interview were contributed by Claes Bell, senior banking analyst/writer for Bankrate.com.