The Future of Banking
By Kate Stalter
Fewer banks and branches, but more wearables? Convenience and mobile tech are driving this industry’s evolution.
While the number of brick-and-mortar banks is on the decline, mobile banking capabilities are soaring.
When Fifth Third Bancorp said recently that it would close 100 branches and sell properties intended for branches, the Cincinnati-based bank was candid about the reason.
In a statement, Fifth Third CEO Kevin Kabat said, “Consumer demographics and our customers’ preferred channels of banking are undergoing significant changes. Technology continues to impact our service delivery and revenue generation tactics and strategies.”
Fewer Americans are setting foot in bank branches these days, opting to conduct transactions with mobile apps or ATMs. New companies, like Moven, only offer mobile and ATM access, but provide debit cards, account linking and an easy way to send money to friends.
Consumers’ views of banking are changing fast, with fewer people seeing the value of visiting a bank branch. In its 2015 North America Consumer Digital Banking Survey, which included more than 4,000 adults in the U.S. and Canada, consulting and technology management firm Accenture found that 81 percent of consumers said they would not switch banks if their local branch closed. Only two years ago, that number was 48 percent.
In addition, 38 percent said good online banking services were the top reason for staying with a bank. That came in ahead of locations and low fees, both being named as the top reason 28 percent of the time.
Here are some banking-industry changes consumers are likely to see in the next few years:
Fewer branches. “Branch traffic is falling, and banks will have to figure out how to adapt to that,” says Wayne Busch, managing director for banking at Accenture.
The Fifth Third branch closures, which the bank expects to complete by mid-2016, may be an early sign of what’s ahead. “That’s just one small piece in a very big story that’s unfolding,” says Jason O’Donnell, chief investment officer at the Bluestone Financial Institutions Fund in Wayne, Pennsylvania. The fund focuses on small and midsize community banks.
“You’re going to see a lot fewer branches, and huge consolidations, with fewer banks. The branches that we will have will look and feel very different. In another five or 10 years, the average branch size will be 50 percent smaller than the branch sizes we see now, and we’ll see more use of kiosks and other technologies,” O’Donnell says.
Fewer banks. Smaller community banks are facing headwinds as the industry races to implement new technologies. At the same time, megabanks are dealing with increased regulation and the yearly Federal Reserve stress tests.
That may leave regional banks, perched between the tiniest and the largest institutions, in a good position.
Although the pace of bank consolidation slowed for several years after the financial crisis, Busch and O’Donnell both expect mergers and acquisitions to pick up in the coming years.
Some smaller banks may become acquisition targets because of their particular niche. “A real change is that a variety of different organizations are competing not to be Bank of America or Chase, but to pursue one or two segments of value,” Busch says.
O’Donnell notes that smaller banks may get rolled into midsize banks. Those mergers and acquisitions will give the midsize banks increased capabilities to take market share from larger firms, O’Donnell predicts. “There will be a ‘middling’ of the industry, with a lot fewer banks. The acquisition pace has picked up considerably over the last several quarters. As consumers, one of the benefits is that we’ll get better service in a bunch of ways,” he says.
“True community banks, with under $500 million in assets, are dead banks walking,” O’Donnell adds. “Some of this regulation has actually pushed its way down to these tiny banks.”
That’s hurt small banks’ profitability. “The beneficiaries are the guys in the middle. They’re big enough to absorb some of these extra regulatory expenses, but small enough that they don’t have to worry about the federal government suing them every other month,” he says.
More online and mobile options. It’s no surprise that millennials are driving the move toward mobile banking apps. However, even baby boomers are gravitating toward technology and away from branches. A 2013 Gallup study of more than 1,000 adults found that 71 percent of boomers use online banking weekly, essentially the same usage as younger consumers.
But banking technology is rapidly evolving beyond the desktop. Andres Wolberg-Stok, Citi’s head of emerging platforms and services, calls wearables “the bleeding edge” of technology that lets banks forge closer customer relationships. In addition, he says, customers are better able to monitor their accounts. Citi’s Apple Watch app debuted on the day the timepiece hit the market.
“Getting a ping on your wrist every time your credit card is used – that’s really powerful. It just gives you this sense of total control, of being constantly in the know and of trusting that there will never be a surprise because you see every transaction go through,” he says. “These types of experiences redefine what a bank or credit card client expects as the new normal. It pushes the barriers and creates all sorts of new possibilities.”
O’Donnell says the continued evolution in mobile banking will be driven by convenience. “That’s a big factor. People see banking as inconvenient,” he says.
He sees increased usage of third-party apps that interface with traditional banks. Popmoney, which allows a user to send money to another person’s bank account, and Picture Pay, which lets users pay bills by taking pictures of them with their smartphone, are among those he cites.
Better customer experience. Banks will have to adapt their offerings to be more customer-focused, Busch says. The differentiator will not be the services themselves, but the way they are bundled and presented to customers.
“A checking account is a checking account and a mortgage is a mortgage,” he says. However, he points out the example of USAA, a banking and insurance company serving current and former military personnel and their families. USAA’s website features a prominent offer for a service that helps its customers find the best deals on new or used cars. “They’re trying to adapt around real customer needs,” Busch says.
That way of bundling financial services differs from the traditional method. “Banks historically thought about bundling like, ‘We’ll give you a checking account, a debit card, a credit card, line of credit. If we do all those things, we’ll have a share of your wallet, and we’ll give you a discount. That’s thinking about it from the bank’s perspective versus the customer’s perspective,” Busch says.
“The customer is interested in a certain outcome, whether it’s buying a car or a house, and the experience is different for a recent grad or someone who’s changing jobs mid-career or moving to a new city,” he adds. “The competitive difference will be whether banks can shape products around the real customer interests.”
That focus on customer experience will extend to new technologies, Wolberg-Stok says. When developing the Mobile Lite app for the Apple Watch, Citi was cognizant that boomers don’t see as well as their millennial kids. Before the actual watch was available, Citi’s developers printed out 3-D renderings to determine how the app would look and feel.
“If we felt like some of us needed longer arms to bring the screen printouts into focus, it was back to the drawing board. That’s how we made sure the app would be usable across age ranges,” Wolberg-Stok says. “Accessibility is just about ease of use for a broader population, and it matters very much.”
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