SPURspectives

I’m frequently asked when banks will stop building branches. Will it ever end? Well, we certainly hope not, but you have to wonder. My father started selling banking equipment around 1969 for Mosler Safe Company. He now owns his own company called Oppliger Banking Systems that sells and services equipment that banks use: drive-up systems, ATMs, alarms, video, vaults, etc. For years, people would ask him the same question - when will branch expansion ever end? Will it even slow down? Fundamentally, there hasn’t been much of a reason for branch expansion to slow. ATMs are even considered branches by some states depending on their functionality (deposit taking vs. cash only).

During all the years my Father has been selling banking equipment, nothing has caused such a dramatic shift that will significantly and permanently change the face of banking as the web. And, as I recall, banking went kicking and screaming into an Internet obsessed world. Does anyone remember telephone banking? Right. Trust me, there are still some banks that think indoor plumbing is just a fad. Financial Institutions (FI’s), especially banks, are notoriously slow to adopt anything new. It’s most likely due to the conservative nature of banking itself. While there are certainly some leaders, no one would accuse any bank of being leading edge when it comes to the deployment of new ideas in technology. The question that burns on my mind more than that of branch expansion is larger than that: what does retail banking look like in 20 years? Does it have branches? Does it have tellers? Does it need any face-to-face interaction at all? And most importantly, what value does it add? That’s right. What value does the bank of the future add? Banks are fighting for face time with customers. Let’s face it, no one really wants to walk into a branch anymore. At the very most, we’re willing to drive our cars to the bank if we need to make a deposit, but for the most part many of us have our financial lives fairly automated. Direct deposit. Internet banking. Online bill-pay. Who needs a branch?

There are three primary types of functions banks perform:

* Retail Banking
* Lending
* Commercial Banking

Retail Banking refers to the servicing of individuals who need to cash or deposit checks or perform other individual transactions. In the world of self-service, how is the FI providing any value? Does retail banking become a commodity? That’s strike one for the physical bank branch.

Lending can generally be divided into commercial and residential. Although FI’s have really gotten sharp on creating new revenue sources (think fees), they still make most of their money through lending. I don’t know about you, but when was the last time you set foot in a bank to fill out a loan application? Let me ask you this: if you were choosing from 5 banks to place your mortgage loan and 2 required you to come in and fill out an application, assuming all rates were equal, which banks would you cross off your list? My last three houses were all purchased and financed without ever seeing anyone from my bank other than to deliver the signed documents. Mortgage applications are completed online or printed and faxed. And no one does auto financing through a bank anymore - the auto makers own that market. Credit Unions maybe, but not many banks are interested in auto lending. Why would they be? In general, they can’t compete. That’s strike two.

Commercial Banking refers to the servicing of commercial clients, which largely falls into the retail banking function in terms of making deposits. They make money by loaning the money you deposit to people who want to borrow money. Commercial customers still need to take deposits to the bank branch on a daily basis. From fast food and retail chains to small and medium sized businesses - they all drive to the bank every day to make their deposit. But hang on. What about that self-service thing? That’s right, the FI’s are answering the need of commercial self-service through things like remote capture and business-oriented online banking. Remote capture is a nifty little service where the bank supplies you with a small check scanner. All your checks are scanned in and transmitted electronically to your bank for deposit. The physical check never goes to the bank at all. Even for loans, loan reviews and renewals, our banker comes to us. That’s getting really close to strike 3 for the bank branch.

If you can open an account online, manage your account online, have your paycheck deposited electronically, get cash at any ATM (or use a debit card same as cash), pay your bills online, apply for loans online, easily compare rates for loans, CDs, savings accounts, money market accounts and lines of credit, explain to me again why my bank needs to spend a bunch of money on building branches?

For customers less than 30 years old, Internet Banking, online bill pay and mobile banking ARE the bank.

So, why haven’t the financial institutions caught on? Well, in part I would say that everyone is not like me. There is still a contingent of folks who apparently have excess time on their hands and don’t mind paying $4.00 a gallon for gas to drive to the bank and walk in to chat with the tellers. I also suspect that owning lease property is a big part of many banks’ revenue models. Another big part of the equation is public perception. Banks cannot lend money unless they attract deposits. I suspect it’s easier to attract deposits if you have brick and mortar all over the place. Right now at least, people might not trust an “online” bank nearly as much as the Bank of America that they see on every street corner. I’m suggesting that the perception factor will change. Trust can and will be earned in other ways in the future. Reputation, online communities, social networking, word of mouth, government ratings, published reviews, published audits, etc.

With that said, I can see an eventual trend towards the commoditization of banking services. In reality, it already has already happened. The margins on lending are pretty slim. However, I think as time moves forward, the <30 crowd doesn’t care as much about a branch. They’re already shopping for rates online, looking for loans online, finding the best credit card online, etc. They have no need for a branch and not much need for a banker. If that’s the less than 30 demographic, can you imagine what the less than 20 demo looks like? Trust me, it’s self-service until death do us part.

As electronic bill presentment and payment (called EBPP) become more and more widely accepted and instituted, even commercial businesses will have little or no reason to visit a physical branch unless perhaps they deal with a lot of cash, in which case they will probably use a courier.

What FI’s need to look at is the financial performance of a branch over time. I suspect that performance will decrease nearly on a straight line right past break-even and keep on going. The bank of the future caters to its retail and commercial businesses by offering an outstanding suite of online tools and the proper support and ongoing development to close the loop creating a best-of-all-worlds scenario for both retail and commercial customers. This might mean having an extensive ATM network, or at least reimbursing customers for $X of transaction fees each month.

The real question of course is, how DO banks and credit unions compete in the future? How do they differentiate themselves when no one cares about the physical branch any more? I think it has everything to do with their online applications coupled with ease of doing business.

What do you think? What does your future bank look like? What does it do? How does your bank appeal to you when there are literally thousands of choices and geography is no longer a factor?

Tags: bank, banking, commercial banking, credit union, future bank, lending, online bank, scott oppliger