Nov 15, 2008

Does your Bank have a Broken Business Model?

It seems that everything is moving online these days. Your communication moved online quite a few years ago, morphing from your old letter writing days into your emailing days. Commerce came online quite quickly too and instead of flicking through books at your local store, you went and looked online for them. Music has gone that way too, your news articles and your TV programmes are now online and your banks have been there for a while.

In a lot of these cases, those commercial entities have also retained a bricks and mortar presence on the high street too, for those people who want to walk into a branch, speak to a real person and see and feel cash in the hand.

Personally, I'm not one of these people. Back in 2001 I changed my bank from a traditional high street bank to a totally virtual one. That's right, it had no branches.

Reasons for Change

Which way?
Photo: mamchenkov

When I look back on that now, I think I was a bit of a pioneer. I know that every single bank in the world has an online facility but back then, doing it solely online was a bit unique.

But the thing is, I didn't switch banks because I wanted to be online but because my old bank was most annoying. They did things I didn't want them too, they annoyed me whenever I spoke to them and they charged me through the nose for all kinds of minuscule actions.

To me, it seemed like they thought I was the privileged one to be banking with them. Of course, I begged to differ and when the time was right (I'd paid my Graduate Loan off) I changed banks.

The Advantages of Living in the Virtual World

When I started looking for a new place to bank, I was immediately surprised at how little the purely on-line banks charged for their services. I was also happy to see that my normal, everyday current account, would be earning interest at a massive 5%! In comparison to other bricks and mortar banks, this seemed like lunacy (for them) but since it was loaded to my advantage I took the opportunity without so much of a second's thinking time.

By this stage, I'd realised that by doing everything online, or via phone, they were able to run their business at a lower cost to them and therefore at a lower cost to their customers. It was also very refreshing that whenever I spoke to anyone on the phone, I was made to feel good about being a customer, good about myself and they knew who the most important person in that relationship was.

Fast Forward Six Years

After a change of country, I also had to change bank. This wasn't something I wanted since I was very happy with my virtual bank but obviously it was a necessity due to my change of location.

I went with a traditional bank but that didn't last long. Whenever I wanted to transfer money from NZ to the UK it ended up being a labour intensive and very stressful time. It seemed like it would have been easier to organise a trip to the moon (for me and my cat) than for the tellers to fill in the form correctly.

I also felt like the staff were a little too inquisitive to the tune of being intrusive rather than helpful. I guess I just wanted a personal account manager and not a friend. I want my relationship with my bank to be warm but not too personal. Don't ask me why - I guess I just see that business is business.

After two years, I switched to what seemed like a more clued up and modern bank. So far I have been really happy with the service I have received from them but times-they-are-a-changin'.

The Broken Business Model

Recently, I have had to speak to my account manager on a number of occasions, mostly because my fixed mortgage is up at the end of November and I will need to renew at some stage. Of course, this means I have been doing my homework and looking online to see what the current mortgage rates are from all the banks in NZ.

It turns out that my bank's mortgage rate was quite a bit higher than one of the other banks and I told my account manager this. It wasn't just a small bit lower but at the time almost a percentage point lower!

It is no surprise that this other bank, the one with the lower mortgage rates, is mostly online too (and leverages the NZ Post Shops for any physical transactions).

As soon as I had told me current account manager that I was thinking of moving my mortgage to the online bank, my first thought was that he would say something along the lines of "Well, we can't compete with that" since it was completely obvious that was the case. Instead, he proceeded to tell me how they looked after their customers more and that they gave out better advice than those on-line type banks. That they had more personal contact (which I don't necessarily see as an advantage). Also the fact that running a branch costs them $100,000 a year!

Whoa there. Say that again! I felt like saying "Actually, it doesn't cost you $100,000 a year, it actually costs ME lots of MY money each year." And with that statement I decided there and then to leave my current bank.

Unfortunately for him (and me) my old account manager left his bank and went to work for what will eventually be my new one. Add to this the fact that my new account manager is one of the most annoying people in the world ... let's just say that I shall be moving due to many different reasons.

But one reason stands head and shoulders above everything else.

Saving Me More Money

At my new bank, I shall be saving more of my own money that I work very hard for. Here's a very quick list of advantages and I'm sure it's not a complete one:

  • the interest on my mortgage will be much lower
  • I have no 'relationship' fees
  • there will be no transaction fees (same with the old one)
  • no charges for having a credit card
  • the interest on my credit card (not that this concerns me) is lower - just in case
  • any savings accounts I have will earn extra interest

Due to these reasons, I shall be changing from the broken business model that is the high street bank to a purely online one. The cost of running a virtual bank is much less than a traditional one and therefore, I get to see more of those savings in my own account. My baseline will be increased due to this one decision and each and every month, I will get to keep more of my money.

It is considered difficult to change bank but in all honesty, it's no worse than changing job or even buying a car. It is important to me that I get a good and honest relationship with my bank, I want it geared towards me rather than them and I want to enjoy whomever it is I talk to about my finances. I have found that my relationship with any new bank is immediately successful since they're just happy I'm switching over, especially so because I came to them.

In conclusion, I shall be changing banks for the fourth time in 10 years during the next few months and I know that this one will be better for me in many more ways than each of the last two banks.

Are you happy with your current bank or are you thinking of switching? What would stop you from changing even if you weren't happy?


apieceofwood said...

I've been with my current (totally online) bank for about 8 years and although I nearly changed once or twice, i can't fault them or their services. I don't get charged for anything, customer service is always great and they are really flexible.

I agree it's a hassle to change banks, but the process is easier than it used to be, but it would have to be a super deal to make me change at the moment!

Betty's Only said...

The banks that I use are not virtual. I need to refinance my mortgages to a 15 year instead of 30, but my credit scores needs to be much higher. When I do refinance it will be with a bank that offers a decent interest rate.

I am learning and building to achieve financial freedom. I may bumb my head from time to time, but overall I am doing great.

Betty's Only

retire-at-40 said...


Sounds like you're happy with your bank, which is always good. You're right, it is a hassle to change banks but it's not as hard as people think - they should try it before presuming :-)

@betty's only:
Sounds like you're having a good journey on your way to financial freedom. I hope the refinance goes well.

James said...

My wife and I have been with ANZ, Kiwibank and finally BankDirect (online only bank, subsidiary of ASB)- couldn't be happier. They have consistently low interest rates on credit cards, the _best_ online banking experience I've seen so far, and you still get an "account manager" with just a transaction account.

Just found your blog by way of GetRichSlowly- enjoying the kiwi perspective! I'm a native of California but been over here (Wellington) for nearly two years. My wife has been here for the last twenty plus years.

Happy holidays!

Jack said...

Ha. Funnily enough, as a kiwi expat in the UK, we ended up with FirstDirect as no other bank would actually lend to us (when we bought our house in 2000, I didn't have permanent residence in the UK). Worked out very nicely for all concerned, and we even still have our FD accounts three years after moving home (no transaction fees, so why close them?).

We found a mortgage broker quite helpful - although Kiwibank committed to giving the lowest mortgage rate over a 6-year period (the mean time for ownership of a particular property, apparently), we ended up going with Westpac as they kicked in $750 for legal fees and the rates differential between them and kiwibank was minimal. So as in everything, it's worth shopping around.