MONEY Tech

How Square Will Disrupt the Banking Industry

Square reader
Zuma Press—Alamy

The sky is the limit for Square's still-incipient program.

Some industries are riper for disruption than others. And if there was any doubt about the vulnerability of banks, then Square Capital’s announcement that it has now advanced $75 million in financing to small businesses over the last year serves as a not-so-subtle reminder.

To be fair, Square Capital is still in its infancy. While its latest milestone is an achievement, particularly when you consider that Square’s cash-advance service is only a year old, it pales in comparison to the bank industry’s nearly $8 trillion in outstanding loans.

But, as Square has proven in the payments space, disruption by its very nature begins with a small beachhead from which later offenses can be waged.

An industry ripe for disruption

The fact that so many alternatives to traditional banks have flourished in the years since the financial crisis should come as no surprise given the industry’s well-deserved reputation for running roughshod over customers.

Its list of misdeeds is long and growing. Among other things, the nation’s biggest lenders have been accused of:

  • reordering debit-card transactions to maximize overdraft fees
  • fixing ostensibly neutral credit card arbitration hearings
  • illegally foreclosing on thousands, if not millions, of homeowners
  • manipulating bond, energy, currency, and interest rate markets

And those are just the most widely publicized allegations that come to mind. Consumers and small businesses would be excused, in other words, for welcoming any and all assaults on the bank industry’s traditional stranglehold over the nation’s finances.

Just recently, for instance, Wal-Mart WAL-MART STORES INC. WMT 0.16% teamed up with Green Dot Bank GREEN DOT CORP. GDOT -2.76% to offer checking accounts to customers of the retail behemoth, many of whom have been intentionally shut out of the bank industry. Meanwhile, deposits at the nontraditional Bank of the Internet BOFI HLDG INC BOFI -2.05% have increased from $570 million in 2008 to more than $3.2 billion today — a sixfold spike.

The nuts and bolts of Square Capital

It’s in this vein that Square Capital has begun offering select customers of its payments service the opportunity to acquire financing to grow their business. “Because we process our customers’ transactions, we have a unique insight into the growth and momentum of their businesses that allows us to make smart financing decisions,” Square’s Faryl Ury told me.

Source: Square.

The process works like this: Square identifies existing customers with substantial cash flows, reaches out to them, and then offers financing. But instead of charging interest, Square assesses, in essence, a one-time fee equating to between 10% and 14% of the agreed-upon advance.

I say “in essence,” because the deal is actually structured more along the lines of a repurchase transaction, as opposed to a loan. That is, in exchange for the cash advance, the merchant sells Square a portion of heavily discounted future cash flows, which are designed to be paid back over a 10-month period — though, strictly speaking, there is no set duration, as the financing is satisfied via a remittance of a set percentage of ongoing cash receipts.

Here’s how Square explains it:

With Square Capital, businesses sell a specific amount of their future card sales to Square and in return the seller receives a lump sum payment. Businesses automatically pay Square as a set percentage of daily card sales, so they pay more when sales are strong and less if things slow down. Square leverages its data-driven understanding of each business to develop unique offers for businesses with the expectation that sellers will complete their advance in approximately 10 months, although there is no set time frame.

Suffice it to say, this isn’t cheap financing. Using the 10-month duration as a benchmark, that equates to an average effective annual interest rate of roughly 14.5% — this assumes a one-time fee equal to 12% of the advance.

But what it lacks in pricing, it makes up for in efficiency. As Ury explained, merchants don’t have to spend time filling out applications; Square has already preapproved them. Additionally, advances can often be processed the following business day, while bank loans can take weeks if not months to proceed through the application, underwriting, and funding processes.

The net result is that certain small businesses that are among Square’s best customers have a ready and immediately accessible source of financing to grow or otherwise reinvest in their operations. It’s likely for this reason that “[m]ore than a third of merchants who have completed their first Square Capital advance have renewed for a second round of capital to make additional investments in their business,” according to Square.

The scourge of credit risk

The significance of this move to Square itself can’t be overstated, as it exposes the payments company to credit risk — that is, the danger that cash-advance recipients will default on their obligations. This is new territory for Square, and a lack of respect for its perils has been the scourge of countless financial institutions throughout time.

That being said, one thing Square has going in its favor is access to the payments data of its customers. Additionally, with only $75 million in advances to date, it has been able to tightly control who gets access to funding, presumably limiting financing to companies that are patently capable of managing the liability.

Perhaps most importantly, unlike traditional lenders, Square doesn’t have liquidity risk, which is the precipitating cause of failure of most companies in the financial industry. At present, as far as I can discern, Square is financing cash advances with equity and a recent investment from Victory Park Capital, a privately held investment advisor that specializes in credit and private equity investments.

However, the protection afforded by these fail-safes will be diluted as Square grows its portfolio of merchant financing. At a certain point, it will need to supplement its source of funds. When it does so, it doesn’t seem unreasonable to presume that it will gravitate to deposits, which are exceptionally cheap but carry the threat of capital flight.

Growing Square Capital, moreover, means opening its coffers to less qualified customers, thereby increasing the risk of default. Is this a bad thing? Certainly not, as risk is the price of return in the credit industry. But managing the process will require prudence and humility, as even the most sophisticated risk models can’t tame the cyclical nature of credit risk.

For Square, the sky is the limit

Over the last century, the bank industry has been transformed through countless incremental advancements to the way money is allocated between savers and spenders. Square’s foray into financing can be understood in this context.

The sky is the limit for Square’s still-incipient program. The payments business is big and lucrative, but few things promise the magnitude of profits that can be earned by the adroit allocation of other peoples’ money.

MONEY General Electric

The Untold Story Behind GE’s Most Lucrative Business

A General Electric Co. employee examines a component for a gas turbine at the company's factory.
Fabrice Dimier—Bloomberg via Getty Images

GE’s services business should be a big story for investors.

The financial media these days has two stories when it comes to General Electric GENERAL ELECTRIC COMPANY GE 0.39% the one that says GE is downplaying its banking business and the one that shows how GE is returning to its roots by “making stuff” again.

While both storylines are important to GE investors, a separate transformation taking shape inside the world’s seventh-largest company will steal the spotlight in the years to come. The seeds of GE’s next big breakthrough were planted nearly two decades ago, but they’re just now taking root as manufacturing enters a technology- and data-fueled era.

Read on to learn the untold story of GE’s most lucrative business and discover why it’s so important for shareholders to understand.

The one that (almost) got away

The origin of this story dates back to the early 1990s. Jack Welch, also known as “Neutron Jack,” was GE’s CEO, and he was busy making his mark on corporate America.

Quadrupling GE’s market value in roughly 14 years made Welch a superstar in the eyes of everyone from the media to stockholders. To business students around the country, he was the Michael Jordan of their future profession.

Like Jordan, Welch was a fierce competitor, and his unorthodox, assertive style of management took his team to the top: GE became the largest company in the world.

By the mid-1990s, however, this titan of industry faced a dilemma within GE’s walls.

His success to date had rested on strategies that boosted manufacturing efficiency, heightened competition among his managers, and focused strictly on markets in which GE could steamroll the competition. Each had its pros and cons, but the latter strategy specifically began to show signs of obsolescence in the mid-1990s.

This strategy had become known as the “No. 1 or No. 2″ policy at GE. It meant General Electric aimed to dominate the industries in which it operated, or else it would abandon the cause. Anything less than first or second place in market share was simply unacceptable.

As GE grew in size, this all-or-nothing style of thinking caused some serious problems. First off, the incentives were misaligned for GE’s managers. Its own leaders became hyperfocused on maintaining their market position in a given industry instead of thinking about how to expand into a new one. Expansion would mean growing their addressable market, of course, which could bump GE’s rank down a notch or two.

There was absolutely no incentive to grow outside of the box, per se, even if it made sense from a product or customer perspective. To use an analogy, it’s as if a traditional motorcycle manufacturer refused to enter the growing market for off-road dirt bikes because this would grow the arena in which it competed and would mean relinquishing its “No. 1 or No. 2″ position. While this might sound ridiculous, it was a prime example of how GE’s bureaucracy was creating perverse incentives.

And, in the worst-case scenarios, GE managers were given leeway to define their own markets. When this happened, they would often manipulate (read: shrink) their “industry size” in an attempt to look like they had a dominant market presence. Since GE’s underperformers could be shown the door at any moment, this move was a self-preservation no-brainer. But it was highly counterproductive for the company.

At the end of the day, the overriding focus on being first or second prevented managers from tackling new, promising opportunities in which GE might be the underdog at the outset. And the services business was one of these markets.

A “punch in the nose”

At the time, the business of maintaining and servicing heavy industrial equipment was loaded with entrenched players dispersed across the globe. In fact, GE’s potential competitors in this arena numbered in the thousands. One could compare the scenario to a major car manufacturer trying to nudge its way into an auto maintenance industry overpopulated with established, local mechanics.

Taking a backseat to entrenched players — even if it was in the best interests of GE’s customers — was simply unacceptable. It also seemed like small potatoes for a company of GE’s size.

But here was GE selling hundreds of proprietary products like gas turbines that would inevitably need regular maintenance and upgrades. Services might not have seemed glamorous, but it was an area in which GE had a unique and potentially durable advantage.

By 1995, Welch relented; ironically, it was his middle managers who convinced him that this market was too crucial to be overlooked. Welch did an about-face on his long-standing management mantra, and GE began to aggressively pursue services.

In 2000, Welch recalled how the light bulb went off and why he reversed course on services:

Rather than the increasingly limited market opportunity that had come from this number-one or number-two definition that had once served us so well, we now had our eyes widened to the vast opportunity that lay ahead for our product and service offerings. This simple but very big change, this punch in the nose, and our willingness to see it as “the better idea,” was a major factor in our acceleration to double-digit revenue growth rates in the latter half of the ’90s.

Welch’s refusal to set foot in industries in which he couldn’t dominate would be like Michael Jordan refusing to take some lower-percentage perimeter shots. It might make sense for a short stretch of time, but ultimately it underutilized the company’s talent and limited its ability to attack areas where the competition could be outmaneuvered.

The rise of services

Welch called his realization a “punch in the nose,” but he took it in stride. Within three years time, revenue from GE services reached $10 billion, and Welch was singing its praises in his annual letter to shareholders:

The opportunity for growth in product services is unlimited. We have the ability, using high-technology services, to make our customers’ existing assets (e.g., power plants, locomotives, airplanes, factories, hospital equipment and the like) more productive, and by doing so reduce their capital outlays. This growing capability, much of it information technology-based, will enable us to increase our revenues from product services by more than 30% in 1998 — to $13 billion.

What began as a maintenance-focused exercise was unfolding as a productivity-enhancing opportunity for GE customers. And that has continued behind the scenes for the last 15 years. Welch’s successor, Jeff Immelt, has carried the torch.

Under Immelt’s leadership, GE’s services capabilities have evolved and multiplied. Today, GE can actually diagnose problems in the company’s products in advance of a breakdown. For gas turbines and rail locomotives, it’s like a “check engine” light flashing on in your car, but with a real-time response from one of GE’s engineers connected via the industrial Internet.

The probability that a customer will actually have to visit the repair shop is greatly reduced — a big win for around-the-clock energy, airline, or rail operations.

For GE, it’s also a win. Long-term contractual service agreements deepen GE’s relationship with major clients. They enable engineers to better understand how their products are being used in the field, which can, in turn, influence the design process.

It’s also a highly lucrative business.

I’ve compared the equipment-and-services relationship to a razor-and-blade business model. This means the initial sale of GE equipment (the razor) is often accompanied by an even more profitable service relationship (the blade).

The following chart shows how much more profitable services are for General Electric relative to the operating margins of the company as a whole:

Services as reported in third-quarter 2014. Overall business as of 2013 year-end. Source: GE 10-Q, 10-K.

What’s more, services are growing. Once again, this segment is outpacing the rest of GE’s business, making up ground at a company that was hit hard by the financial crisis:

Source: GE's Services and Industrial Internet Presentation on Oct. 9, 2014 and SEC 10-K filings.
Source: GE’s Services and Industrial Internet Presentation on Oct. 9, 2014 and SEC 10-K filings.

Finally, services are scaling across the business. This means it’s starting to make a significant impact on the revenue and earnings of this massive conglomerate.

For instance, from 2011 to 2013, services accounted for 28% of revenue but 40% of earnings on average. Investors can expect services to be an even larger piece of the revenue and earnings pie going forward due to a huge pipeline of work.

Right now, the most important chart for GE investors is one of its $250 billion order backlog. Look at how GE’s backlog has ballooned and transformed from services-light to services-heavy over the past 13 years:

As of 2000 year-end and third-quarter of 2014. Source: GE's 2000 10-K and 2014 Q3 10-Q filing.
As of 2000 year-end and third-quarter of 2014. Source: GE’s 2000 10-K and 2014 Q3 10-Q filing.

What you need to know about the new GE

For investors, it’s important to recognize GE for what it is today.

It’s no longer a bank. In fact, GE expects to derive only 25% of operating earnings from lending by 2016. Lending, too, will be a services-driven business, with GE providing financial expertise — as well as money — to clients in a variety of industries.

It’s no longer an old-school manufacturer, either. Gone are the days of trying to win based on having the absolute lowest costs in the business.

Today, it’s all about enhancing products through services. How can customers reduce downtime? How can real-time data, robots, and connectivity make machines more efficient? Here’s how Immelt put it in a recent presentation on services and GE’s industrial Internet:

[T]his is the new battlefield. This is the new basis for competition. No matter who you invest in, if you are in the industrial space … this is the game of the future.

After two decades in the making, the future has arrived in the form of high-tech services at GE. Although it has generally flown under the radar in the mainstream financial press, the story of services is one that long-term GE investors simply can’t afford to ignore.

TIME Companies

Justice Department Investigating J.P. Morgan Over Foreign Exchange Trading

JPMorgan Holders Led by Chairmen-CEOs to Vote on Dimon's Titles
Victor J. Blue—Bloomberg/Getty Images Pedestrians walk by the offices of JPMorgan Chase & Co. in New York, U.S., on Friday, May 17, 2013.

The criminal investigation is looking at foreign-exchange trading activities and controls

The Department of Justice is leading a criminal investigation into the foreign-exchange trading of J.P. Morgan Chase, the bank announced Monday in a regulatory filing.

Alongside other civil-enforcement regulators, the Justice Department is looking into the bank’s foreign-exchange trading activities and controls related to them, the Wall Street Journal reports.

The bank said it “continues to cooperate with these investigations” but that there is “no assurance that such discussions will result in settlements.”

J.P. Morgan, which is the largest bank in the U.S., estimated that its loses from legal proceedings could top $5.9 billion, as of Sept. 30. Three months earlier, the estimate was $4.6 billion.

[WSJ]

MONEY Banking

Why the Right Bank for You Might Not Be a Bank

Postage stamp printed in USA, dedicated to the 50th Anniversary of Credit Union Act.
Sergey Komarov-Kohl—Alamy

The best place to park your cash might be a credit union—a nonprofit financial cooperative that serves a select population.

MONEY recently released the results of its 2014 Best Banks survey, which awarded 11 banks honors for low fees, high interest rates and other customer-friendly policies. But it’s possible the best place for you to park your cash might not be on that list.

Rather than a bank, you may be better off with credit union—a nonprofit financial cooperative that serves a select population, like workers at a specific company or residents of a certain county.

Credit unions tend to offer better terms than banks. According to WalletHub, they pay an average 0.23% on $10,000 in savings—twice the average of banks in our study—and 73% offer free checking.

Also, credit unions are known for having more personal customer service, owing to the fact that they are owned by members and are often small (some have just one branch).

Because of their size and membership requirements, credit unions weren’t included in MONEY’s survey, but you can use these steps to find yourself a winner:

Look under rocks.

“We’re pretty sure everybody in the country is eligible to join at least one credit union—and probably several,” says Bill Hampel of the Credit Union National Association.

Start at asmarterchoice.org and nerdwallet.com/credit-union. Also check with your town, employer, alma mater, and religious institution. And ask family which ones they belong to.

Do a smell test.

Compare the yields to the averages at MONEY’s best midsize banks—at least 0.15% on checking and 0.56% on savings. (Online banks pay more but don’t offer the comparable personal attention.)

Also find out if the credit union has fee-free accounts, and if not, check the minimum-balance requirements to make sure you’d avoid a maintenance fee.

Get out the ruler.

Small credit unions often have just one branch. But about half belong to the CO-OP network, which offers you -access to more than 5,000 shared branches and almost 30,000 ATMs.

To avoid costly fees when you get cash, see if your best option has its own or partner ATMs near your home and work. If you’ll use teller service, make sure the branch is easily accessible.

Of course, CUNA reports that 88% of credit union members are offered mobile apps and 55% allow check deposits via smartphone—so you might not need a teller after all.

See MONEY’s 2014 list of the Best Banks in America

Try out MONEY’s Bank Matchmaker tool to find the best bank for you

MONEY Banking

Use These Tools to Find the Best Banks and Credit Cards for You

Kissing Piggy Banks
Getty Images

Answer a few simple questions, and we'll help you find a bank that will earn you more and a credit card that will cost you less.

Which bank has the most branches in your neighborhood and the lowest ATM Fees? Which credit card is best to take on your international travels? Check out MONEY’s annual rankings of the Best Banks and Best Credit Cards, and use our new Bank Account Matchmaker and Credit Card Matchmaker tools to find the accounts and plastic that are right for you.

Click here for the Bank Account Matchmaker

Click here for the Credit Card Matchmaker

 

TIME Money

European Commission Fines Banking Cartel $120 Million

US-FINANCE-JP MORGAN-MADOFF-PENALTIES
STAN HONDA—AFP/Getty Images The headquarters of JP Morgan Chase on Park Avenue December 12, 2013 in New York.

JPMorgan will pay the lion's share, followed by UBS and Credit Suisse

The European Commission levied a $120 million fine against JPMorgan, UBS and Credit Suisse on Tuesday, for manipulating key interest rates through an illicit cartel.

JPMorgan incurred the largest fine, $79 million (62 million euro), for fixing the Swiss franc Libor interest rate, Reuters reports. The bank will pay an additional $13 million (10.5 million euro) for participating in a cartel with UBS and Credit Suisse to rig interest rates on derivatives.

UBS and Credit Suisse will pay $16 million and $12 million fines, respectively, though Royal Bank of Scotland escaped sanctions for alerting European regulators to the price fixing scheme.

[Reuters]

TIME apps

People Can Now Pay Each Other Via Twitter in France

BRITAIN-INTERNET-COMPANY-TWITTER
LEON NEAL—AFP/Getty Images The logo of social networking website 'Twitter' is displayed on a computer screen

Digital payments in 140 characters or less

A new digital payment service in France will let people pay each other via Twitter for free.

French banking group BPCE announced details Tuesday about the new app, S-Money, which can be downloaded from iTunes or Google Play and allows users with a French credit card and phone number to link their card information to Twitter to begin making payments to other individuals or organizations and companies that have downloaded the service.

Payments are capped at 250 euros (about $317) for individuals and 500 euros ($635) for charities in times of crowd-funding. Users also have to use a specific format for their payments to be accepted. S-Money has opted for € rather than the written version of euros, for example.

While other digital payment platforms have the option of privacy for payments, all Twitter payments are visible to the public–so discretion is advisable.

TIME Banking

Banking by Another Name

Traditional lenders aren't doing their job. Enter a raft of startups to do it for them

You know credit is tight when the former chair of the Federal Reserve can’t get a mortgage. Ben Bernanke, who isn’t exactly hard up (he reportedly makes at least $200,000 a speech), recently lamented that he wasn’t able to refinance his home because of tight credit conditions. This is an inglorious reminder that the housing recovery is being driven not by first-time home buyers or people who want to trade up but by wealthy people who don’t need a loan. Since most middle-class Americans still hold most of their wealth as equity in their homes, we won’t achieve a sustainable recovery until we fix the housing market.

Banks would say the difficult credit conditions reflect the higher costs of complying with new regulations like Dodd-Frank. There’s some truth to that but not enough to justify turning down nearly any borrower who can’t put down 30% cash on a house. A more accurate explanation is that home-mortgage lending isn’t nearly as profitable as securities trading, which is where big banks still make much of their money these days. And so, hidden in the sluggish housing recovery is another revolution: American banks continue to morph into investment houses in ways that could ultimately put our financial system at risk.

Rather than Bemoan this, I am encouraged by some of the innovative companies trying take advantage of these shifts. A whole new category of nontraditional lenders is springing up to take traditional banking’s place. Nonbank financial firms, a category that includes everything from companies like Detroit-based Quicken Loans to peer-to-peer lenders like the Lending Club, are growing exponentially. (Peer-to-peer lending is the relatively new practice of lending money to unrelated individuals without going through a traditional intermediary like a bank.) This category of nonbank banks is taking up a lot of the slack left by traditional banks in the aftermath of the financial crisis. During the first half of this year, almost a quarter of mortgages made by the top 30 lenders came from nonbank firms, the highest level since the financial crisis began.

Many of these lenders use unconventional metrics to judge how creditworthy borrowers really are. They’re focusing not just on borrowers’ salary and tax returns, which are the basis of most traditional mortgage-lending calculations, but also on their field of work, what kind of degree program they are in or what their potential income trajectory might be.

Such metrics enable these lenders to take on risks that traditional banks now shun. “There’s a misperception out there that millennials don’t want to buy a home,” explains Mike Cagney, CEO of Social Finance, a company that has already done over $1 billion in crowdsourced student-loan refinancing and is now pushing into the online mortgage market. “But the reality is that they don’t have the credit to do it.” Cagney says many of his initial mortgage borrowers mirror the profile of the customers to whom he gives reduced-rate student loans–upwardly mobile young professionals, many with degrees from top schools, who have bright futures in high-income professions but little cash in the bank. Particularly on the coasts, where real estate prices are high, it is nearly impossible for a young person to buy a home with a traditional credit profile.

Of course, it’s not only upwardly mobile future members of the 1% who deserve a break on credit. Research shows that many low-income borrowers with steady jobs are much better credit risks than they look like on paper. One University of North Carolina study found that even poor buyers could be better-than-average credit risks if judged on metrics other than how much cash they have on hand. That’s not to say we should have runaway borrowing as we did in the run-up to 2008, but credit standards are still very tight relative to historical averages.

Nontraditional lending has already shown there is an alternative to the not-very-public-minded banking system we have in place now. That raises the question, Why should big banks whose primary business model is no longer consumer lending be government-insured in the first place? (Many would argue that the bailout guarantee implicit in such insurance was the reason the too-big-to-fail institutions were able to leverage up and cause the subprime crisis in the first place.) Perhaps the safest thing would be for banking as a whole to go back to a model in which institutions simply keep a lot more cash on hand, or have unlimited liability as a hedge against risk taking? Who knows? That might make mortgage lending look good again.

MONEY Financial Planning

Here’s What Millennial Savers Still Haven’t Figured Out

Bank vault door
Lester Lefkowitz—Getty Images

Gen Y is taking saving seriously, a new survey shows. But they still don't know who to trust for financial advice.

The oldest millennials were toddlers in 1984, when a hit movie had even adults asking en masse “Who you gonna call?” Now this younger generation is asking the same question, though over a more real-world dilemma: where to get financial advice.

Millennials mistrust of financial institutions runs deep. One survey found they would rather go to the dentist than talk to a banker. They often turn to peers rather than a professional. One in four don’t trust anyone for sound money counseling, according to new research from Fidelity Investments.

Millennials’ most trusted source, Fidelity found, is their parents. A third look for financial advice at home, where at least they are confident that their own interests will be put first. Yet perhaps sensing that even Mom and Dad, to say nothing of peers, may have limited financial acumen, 39% of millennials say they worry about their financial future at least once a week.

Millennials aren’t necessarily looking for love in all the wrong places. Parents who have struggled with debt and budgets may have a lot of practical advice to offer. The school of hard knocks can be a valuable learning institution. And going it alone has gotten easier with things like auto enrollment and auto escalation of contributions, and defaulting to target-date funds in 401(k) plans.

Still, financial institutions increasingly understand that millennials are the next big wave of consumers and have their own views and needs as it relates to money. Bank branches are being re-envisioned as education centers. Mobile technology has surged front and center. There is a push to create the innovative investments millennials want to help change the world.

Eventually, millennials will build wealth and have to trust someone with their financial plan. They might start with the generally simple but competent information available at work through their 401(k) plan.

Clearly, today’s twentysomethings are taking this savings business seriously. Nearly half have begun saving, Fidelity found. Some 43% participate in a 401(k) plan and 23% have an IRA. Other surveys have found the generation to be even more committed to its financial future.

Transamerica Center for Retirement Studies found that 71% of millennials eligible for a 401(k) plan participate and that 70% of millennials began saving at an average age of 22. By way of comparison, Boomers started saving at an average age of 35. And more than half of millennials in the Fidelity survey said additional saving is a top priority. A lot of Boomers didn’t feel that way until they turned 50. They were too busy calling Ghostbusters.

MONEY Customer Service

3 Industries That Desperately Need Customer Service Makeovers

Chimpanzee on a telephone
Brad Wilson—Getty Images

Comcast is hardly the only company that should be doing some soul searching and commit—not only with words but actions—to making customer service genuinely better.

Because the state of customer service has been bad for so long, and because we’ve heard many times over that some or another big initiative would improve customer service dramatically only to have little or no impact, we’re skeptical about the effectiveness of any broad campaign supposedly crafted to address age-old customer grievances. Nonetheless, it was good to see Comcast’s recent announcement that a long-serving executive named Charlie Herrin had been named as the company’s new senior vice president of customer experience. “Charlie will listen to feedback from customers as well as our employees to make sure we are putting our customers at the center of every decision we make,” a message from Comcast president and CEO Neil Smit explained on Friday.

Read between the lines and it sure looks like Comcast is acknowledging that in the past, customers haven’t exactly been top of mind when it comes to company decisions. That’s no revelation to consumers, of course, who have routinely dinged Comcast for terrible customer service. In 2014, Comcast “won” the annual Worst Company in America competition as voted by Consumerist readers, the second time in recent years it has nabbed that dubious honor.

While it’s unclear what Herrin and Comcast will do to improve customer service, the first step in solving a problem is acknowledging that you have one, which Smit did more squarely when he said, “It may take a few years before we can honestly say that a great customer experience is something we’re known for. But that is our goal and our number one priority … and that’s what we are going to do.” To which the consensus reaction among consumers is … it’s about damn time. Followed by, we’ll believe it when we actually see real,meaningful change.

To be fair, it’s not just Comcast that’s sorely in need of a customer service makeover. Here are three entire business categories that are regularly bashed for not putting customers’ needs first on the agenda.

Pay TV & Internet Providers
Current Comcast competitor and likely merger partner Time Warner Cable is also a regular contender for the worst service title, as are other pay TV-Internet providers including DirecTV and Verizon.

Among the complaints are that there is a lack of true competition in the category, because roughly three-quarters of Americans have exactly one local choice for a high-speed Internet provider. A survey published this summer indicated that more than half of Americans would leave their cable company if they could, and nearly three-quarters said that pay TV providers are predatory and take advantage of the lack of competition. Among the most hated pay TV practices that consumers would love to see changed are promotional rates that are replaced by skyrocketing monthly charges, frustrating and time-consuming run-ins with customer service reps, and bundled packages overloaded with channels and options the customer doesn’t want (let’s add smaller packages and a la carte channel selection, please).

Wireless Providers
The good news for cell phone users is that customer satisfaction is on the rise, increasing 2.6% according to the 2014 American Customer Satisfaction Index (ACSI). The bad news, however, is that while we’re happier with the actual gadgets (from Samsung in particular), satisfaction with the companies providing our cell phone service—including AT&T, Verizon, T-Mobile, and Sprint—remains stagnant and below average.

Plenty of other studies also show just how frustrated and dissatisfied consumers are with wireless providers nowadays. A vote-off at Ranker.com, for example, placed AT&T at the top of the list of “Companies with the Worst Customer Service.” Among the many problems consumers have with wireless providers is that choosing a handset and data-minutes-texting package is absurdly complicated, with countless permutations, obfuscations, and mysterious add-on charges. This past weekend, a New York Times columnist presented a painstaking step-by-step analysis of why the $199 price advertised for the new iPhone 6 is a joke—because by the time fees and monthly upcharges are tacked on, upgrading to the new phone will easily run more than $600.

“Wireless service has always been one of the most complex purchases a human can possibly make,” Eddie Hold, a wireless industry analyst with market research firm NPD Group, summed up in a Consumer Reports story last year. “It’s always been horrific.”

Banks
Number 3 on the Ranker list of companies with the worst customer service, just below AT&T and Time Warner Cable, is Bank of America. Another study, from 24/7 Wall Street, used customer service surveys to put Bank of America in the #1 spot for its Customer Service Hall of Shame, and two other banking institutions, Citigroup and Wells Fargo, are in the top (bottom?) 10. (The study factored in ratings for these institutions’ banking and credit card services.)

What may come as a surprise—a sad and ironic one, at that—is that customer satisfaction with banks is apparently at a record high. The 2014 J.D. Power study on U.S. Retail Banking Satisfaction indicates that big banks and regional banks have made some strides in terms of making customers happier (or less disgusted) with their service, and that overall bank scores are higher than they’ve ever been since the study has been conducted. Yet the J.D. Power study shows there’s a long way to go: The most common reason given for switching banks is poor customer service, and millennials, minorities, and affluent consumers stand out as being particularly dissatisfied with today’s banks.

“Even with record high satisfaction, there are some banks that fall far short in meeting customer needs,” J.D. Power’s Jim Miller said via statement. “It is easy for banks to become complacent. To stay at the top of their game, banks should focus on those customers who are not satisfied. And consumers should keep in mind they have the opportunity to shop banks to find the right combination of services, products and fees to meet their needs.”

What’s your pick for the company with the worst customer service? Tweet us at @MONEY with the hashtag #unhappycustomer. Here’s what readers have already said. Add your nomination, and we may publish your feedback in a future post.

Related:
5 Packages That Could Replace Pay TV As We Know It
How to Pick a Bank

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