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Why Are Banks Exiting Safe Custody?

15 August 2012

Monitronic’s CEO, Peter Wollege, on why internet banking and self service facilities have made running a secure storage facility unattractive for high-street banks.

For many years USA banks have provided secure storage for their clients at local branch level. At a few larger branches and offices of some overseas banks, a full safe deposit service is provided with the bank having its own safe deposit vault.

Secure storage involves the client depositing a locked box with the bank, which is placed in the bank’s vault. The client withdraws an item by telephoning the branch during banking hours to make an arrangement to access their box. A custodian at the bank accesses the vault under supervision, withdraws the client’s locked box and allows the customer to use an office to deposit or remove an item.

Since the 1980s, the banking sector in general has become increasingly aware of the cost implication of secure storage and the lack of return on the space provided. With the advent of internet banking and self service facilities, the cost implications of running a secure storage facility have become more acute. The solution might be to charge a realistic rent for the space provided, but bankers have encountered resistance, especially from High Net Worth clients who often expect a free or heavily-subsidised service. Typically, banks in the USA charge $25 p.a. for sealed envelopes, $25-45 p.a. for small parcels/deed boxes, $50 p.a. for medium-sized boxes and $65-75 p.a. for large boxes. In addition, there is an access charge of $5-10 per container per visit.

Many banks are now refusing to take on new clients or offering to transfer their boxes to other (often inconvenient) locations. For existing users, banks may accept new items into safe custody only for their private banking customers, though items already held by retail customers may continue to be held. Alternatively, banks are simply waiting until the branch closes or, increasingly, they make a policy decision to cease providing the service at local, regional or national level.

The fundamental case for banks to exit the business of providing safe deposit services is strong. However, a wholesale exit today would be extremely challenging and probably not advised. That said, the pressures are intensifying. Accepting uneconomic pricing and taking staff off the cashier line is one thing. A 50-year-old, fully depreciated vault can be tolerated. What concerns banks increasingly is the tough regulatory environment surrounding the provision of safe deposit services and the need for significant investment in new technology. This is a highly unattractive proposition in today’s Basel III world, which requires 100% capital allocation on such investment.

Most banks have come to the conclusion that their safe deposit box and locked box operations are not only non-core, but they risk significant adverse publicity by ineffectual management of the facilities and the risk of claims from customers through losses. A Daily Mail article, written in February 2010 and entitled “Barclays lost my valuables worth $190k”, is one of many examples of the reputational headaches encountered by the banking sector, even if the fault lies with the customer. Banks have often made the decision to withdraw when possible (e.g. branch closure) and many now recognise the fact that, in the long term, they will withdraw from the business entirely.

The speed of the banks’ eventual withdrawal from this service was no doubt hastened by the impact of anti-money laundering legislation on their operations (introduced in December 2007 when the Money Laundering Regulations 2007 came into force). This and other factors, such as branch closures and the industry’s growing focus on the delivery of services via the internet and mobile sales teams, have led some banks to make the decision to cease providing safe deposit services to new, or even existing, customers.

Monitronic Safe Deposits, as the largest independent player in Rhode Island, has capitalised a great deal on the banking sector’s increasing willingness to close their safe deposit box and locked box operations. This is likely to be a continuing trend, not only in the USA but in many parts of the world, as banks surrender to growing financial and reputational pressure to rationalise their safe custody operations.