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August 4, 2014

Tired Old Branches Vs. Cool Technology

Posted by Rajashekara V. Maiya (View Profile | View All Posts) at 7:43 AM

Rise of online banking sees decline of physical bank branches in the UK [Source: https://www.youtube.com/watch?v=6c8nLrJaEXU]

It doesn't take a veteran banking analyst to predict the winner of the contest described in this column's title. Commercial banks, especially in the West, are saddled with a lot of real estate. Their branches are vestiges of how customers connected to their banks in the old days. They would stand in line and wait (and wait and wait) to speak with a teller who was behind a foot of bulletproof glass.

I, for one, am not lamenting the waning of the commercial bank branch. Given that the alternative is a lot of cool technology, more bank branches are going to be gone with the wind and few, if any, customers are going to take notice. They'll be too busy using their tablets and smartphones to open accounts, make deposits, wire cash, and apply for loans. Don't take my word for it. The chief executive officer of one of the world's largest financial services institutions, Bank of America, recently predicted that more physical branches would be closing under BofA's brand name because customers are realizing they carry a bank branch in their pockets.

According to Juniper Research, we're about to encounter a global explosion of online banking. In just five years from now, about one-third of the planet's adult population will conduct their personal banking over their mobile devices. Less than half that amount do so today.

Sometimes necessity is the mother of invention. A low interest rate environment is currently squeezing banks where it hurts. So they're looking for ways to streamline how they do business. The other main way they make money is to charge fees for various services. But customers have grown weary of what some see as an endless barrage of fees just for having an account with a particular bank. So if a bank keeps its overhead low by maintaining as few branches as possible and introduces more ways to bank electronically, you're going to see a rise in customer satisfaction.

The banks that are leading the way tend to be in the emerging markets. For whatever reason - and I can think of several - Western banks have enjoyed the status quo of maintaining plenty of physical branches. One of the reasons the West has lagged behind in the electronic banking revolution is that having physical real estate in every community used to be a sign of prestige and trustworthiness. You wanted to know your local bankers in the same way you got to know your barber or your grocer. But global banks swallowed up all the local firms, so there isn't a compelling reason anymore to have a branch on every street corner.

The bank customer has also changed habits, thanks mostly to the influences of other sectors. Because retail has been so out in front of digital commerce, consumers expect other institutions to be as well. Then there's legacy technology. Western banks have a lot of it, so turning on a dime isn't as easy as you'd think. It's one reason why the most nimble banks are not in the West - their customers can communicate with them on their mobile telephones. And then use those phones to conduct basic banking services as well.

Of course, banks are still wrestling with what other businesses do every day: whether, for example, to offer app versions of web services. And trying to determine the security risks associated with offering such services. Digital might become the undisputed king of banking, but it doesn't mean organizations have worked out all of the security risks so far.

Still, you're probably going to see bank executives point more of their organizations' equity towards technology development than you will finding high-traffic spots for new branches. Cool technology is how financial services firms will distinguish themselves in the same way banks used the physical convenience of multiple branches to outdo smaller rivals.

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