THE FIRST-MOVERS DISADVANTAGE IN BANKING

Banks get into trouble for innovating too much, not too little.

On April 29, 1906, The New York Times dedicated an entire page to an innovation that promised to transform banking. The innovation was “without precedent in business methods,” noted the paper, “but has been long in demand.”

It was the world’s first twenty-four hour bank.

“Banking hours will stretch from twelve noon to twelve noon,” the Times continued, “and the merchant who thinks it won't make any difference, except to his financial convenience, had better think again.”

“So long as a bank is open the merchant will work; so long as the merchant works he'll make money so that, with a bank open all night, the New Yorker's ambition will be like the forever postponed achievement of the man who started out to find the end of the world — he'll keep on traveling.”

The Day & Night Bank would almost certainly later parlay this slight advantage into a broader and more durable competitive moat, it was believed at the time. So other identically named institutions sprung up across the country. Little Rock, Arkansas; Huntington, West Virginia; Memphis and Knoxville, Tennessee. Within a decade most cities had one of their own.

This wasn’t the only innovation attributed to the Day & Night Bank. It was a pioneer of armored cars, as well, which were used to collect late-night deposits. The driver would go out with the safe locked. He has a number of steel boxes which he delivers empty to the customers. The customer puts their money into the box, locks it and watches as the armored car drives off with the money.

Yet, despite Day & Night Bank’s obvious customer-centric bend, it would take more than brilliance to deliver a durable competitive advantage in the context of banking. On June 15, 1910, the bank rolled out a shorter schedule of business hours. It would open at eight in the morning and close at midnight.

“A close watch had been kept on the amount of business done after the regular banking hours, running from nine to three o'clock,” reported the Times in 1910. “The officers and directors of the bank had come to the conclusion that there is so little demand on the bank after midnight that they have decided to close at that hour.”

Six months later, on January 11, 1911, the Day & Night Bank was acquired by the Harriman National Bank, which would fail twenty-two years later in the Great Depression. The other Day & Night Banks scattered across the country would eventually follow suit.

There is much talk these days of the need to “innovate or die.” But the exact opposite holds true over time, as the annals of banking history bulge with stories of banks that paid the ultimate price for innovation. 

Franklin National Bank was the leading bank on Long Island for decades. It was considered one of the most innovative financial institutions back them, as well. It’s credited with the drive-up window, junior savings accounts, the bank credit card and others.

But again, any sort of first-mover advantage would prove illusory in Franklin National’s case.  Instead of becoming a leading credit car bank, Franklin National failed in 1974, the biggest failure up until that point, when it was the fourteenth biggest bank in the country.

Similarly, if there was a first-mover advantage in banking, then the long-defunct First Interstate Bank, which was founded by A.P. Giannini around the turn of the century, would have built the first nationwide branch network. It was one of just a handful of bank holding companies that had the power to buy banks in neighboring states, not to mention the lax branch banking laws in California.

One can say the same about the Consumers’ Savings Bank of Worcester, Massachusetts. It debuted the first interest-bearing checking account for savings banks back in the 1970s and seemed positioned to exploit its lead. Yet, it was ultimately acquired years later by the Bank of New England, which then failed.

The same is true in the case of Union Bank, the father of the one-bank holding company. Far from being the first financial supermarket, it was spun off from its holding company a few years after it opened and was later acquired and traded between a pair of European banks before it was finally subsumed into U.S. Bancorp.

There is an almost limitless number of examples. If a first-mover advantage determined fate in banking, NetBank would be the leading internet banks instead of a long-cold corpse; First Union Bank would be the most technologically savvy bank in the country, not just one of many legacy pieces of Wells Fargo. And the same would be true of Zions Bank in Utah.

In short, while this contradicts conventional wisdom, it seems like the only advantage earned by banks on the bleeding edge of innovation is a disadvantage, as banks tend to get into trouble is when they commit too much time and effort to innovation, not too little.