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The banking industry is one of the most powerful industries around. It helps the wheels of our economy -- and day-to-day lives -- turn in so many ways, after all. Given the bailouts doled out in 2008, it's also obviously considered essential enough to save because of the fact that it's dug deep into every aspect of our economic survival.
Then again, like many powerful industries, doesn't its hugeness -- and arrogance -- render it ripe for disruption? Maybe that disruption's already begun.
Is a dinosaur takedown in progress?
Big financial companies like Citigroup (NYSE: C ) and JPMorgan Chase (NYSE: JPM ) apparently remembered the milk of human kindness during Hurricane Sandy, making humane moves like waiving overdraft fees and eliminating out-of-network ATM charges for affected customers.
That's one small step, but the truth is, the litany of fees and charges inflicted on banking customers has been a sore subject for quite some time. For an industry that has automated many of its processes -- how often do you interact with bank tellers these days, for example? -- there certainly are a lot of fees for what should be the honor of safeguarding your money, and precious few rewards.
We all know industries get disrupted; think of the recording industry's powerful heyday and its positioning now. However, it's not always easy to see it coming, even if it's perfectly clear in the rear-view mirror.
Contemplating the reasons industries get disrupted certainly could bring us face-to-face with the banking industry. Many industries are disrupted when they become so big, powerful, and complacent that they start alienating or even downright abusing their life blood: their customers. These disgruntled consumers are just waiting for other options, and eventually, those options come around.
Pay it forward
Indeed, some disruptive companies have already sprung up to try to attract customers who feel like they've been mugged by traditional banks.
Quite some time ago, eBay (Nasdaq: EBAY ) shook things up with its PayPal product, which is now simply taken for granted as a popular and legitimate alternative means to pay for e-commerce transactions.
Here and now, though, the market for alternative financial products has grown, and new companies and products are taking up the charge. Green Dot Corp. provides all kinds of pre-paid, reloadable debit cards that help consumers avoid traditional banking products. Its motto on its website: "Big Banks, No Thanks."
It boasts no overdraft fees, no credit checks, and more than 20,000 ATMs where users can withdraw cash without a fee. Of course, some fees do apply, but Green Dot prides itself on "no hidden fees." For example, there's a $4.95 original purchase fee, a monthly charge if certain requirements aren't met, and for those who don't have direct deposit, a $4.95 charge to load money onto the card at a retailer.
Even more formidable, perhaps, is Bluebird. On its website, it boasts, "Loaded with features. Not fees." And unfortunately for Green Dot, although Bluebird also boasts "no hidden fees," its fee structure actually is far more minimal, with no monthly or annual fees. Further, the $1 charge to deposit money is even waived if the transaction is conducted at Wal-Mart, for example.
Interestingly, Bluebird is an American Express (NYSE: AXP ) product, and American Express' reputation is tied closely to affluent consumers. However, American Express and Wal-Mart (NYSE: WMT ) have teamed up to push Bluebird in Wal-Mart stores, and television ads for the service show the companies are pushing it hard as another alternative to traditional checking accounts.
Although some could argue these products are aimed at lower-income folks who can't engage in traditional banking, that seriously might be too simplified a view when it comes to the banking industry.
Emerging alternative products may not surprising given the environment a year ago. On the heels of Occupy Wall Street, a movement called "Bank Transfer Day" emerged for Nov. 5, 2011. In February, J.D. Power & Associates did report that customers of large, regional, and mid-sized banks actually were defecting at a higher rate due to frustration over factors like fees and poor customer service. According to a survey, 9.6% of customers said they had switched to a new banking provider within the last year, compared to 8.7% and 7.7% in the previous two respective years.
The main beneficiaries at that time were credit unions and smaller banks, which experienced an average increase of 10.3% in the acquisition of new customers, versus 8.1% a year earlier.
In March, the National Credit Union Administration reported that credit unions added 1.3 million members in 2011, hitting a record 91.8 million.
Big is not beautiful
I believe there are plenty of reasons to avoid investing in big banking stocks. The most gigantic financial companies have become extremely complex, which should stymie anyone who wants to invest in entities they can easily understand. The pesky too-big-to-fail issue also hasn't lent a sense that the biggest industry players are trustworthy, sound, or even ethical, and hubris is through the roof.
Obviously, a hefty thread of dissatisfaction has opened up options for those who are tired of feeling abused and constantly pick-pocketed by nickel-and-diming-to-death fees. Perhaps the big financial institutions can reverse some of the ill will they've built up, but clearly, companies that are launching disruptive alternative products must believe the attempts might be "too little, too late."
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