Exposure to increased regulation and choosy customers not interested in one-stop shopping for insurance and banking are likely among the reasons why State Farm is exiting the banking business, according to industry economist.
State Farm announced last week that U.S. Bank will take over its existing deposits and credit card accounts. A spokesperson said State Farm Bank hopes to reassign as many of the 1,300 banking employees as possible. That includes 975 in Bloomington.
When State Farm’s bank opened 20 years ago, the industry buzz was all about convergence and one-stop shopping for customers. Banks, investment houses, and insurance companies all competed to start new lines of business in the hope they could serve customers and grow the business with cross-platform products.
“One-stop shopping has never really produced quite the synergies that seemed to be promised in the first place,” said Steven Weisbart, senior vice president and chief economist at the Insurance Information Institute, an industry-funded think tank. “Some companies did better than others. But as an overriding principal, disappointing is probably a good term. Not necessarily a failure. But it certainly did not identify a boost in market share or operational savings or almost anything you’d expect going in.”
Today, insurance companies are trying to crack the code for reaching millennials. They’re also facing increased competition from insurtech startups.
“The insurance industry has been—maybe like many others—slow to figure out what it is that people under 35 want to use as ways to interact,” Weisbart said.
He added: “The carryover of brand was generally thought by consumers not to be all that useful. People like to make their own choices. And so choosing an insurance company and choosing a bank, you might not necessarily want that sitting on your doorstep. In the aggregate, it’s not a frequent success.”
Another shift was the passage of the Dodd-Frank Act in the wake of the Great Recession, leading to additional regulation of banks, Weisbart said. So companies weren’t seeing the types of results they expected, while facing more regulation for doing so, he said.
“What’s brought it back to a question is the onset of the possibility of a major global recession, with its concomitant strains on the financial system. And once the financial system is strained, then regulators get all hot and bothered, and all of the unpleasant follow-on activities of that kind that maybe managements are not eager to undergo.”
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