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The Road Ends for the Bank Branch

A bank branch in San Francisco’s Financial District is where I started my career back in 2006. The financial services industry was completely different — technology was limited to ATMs and early forms of online banking. Customers flocked to their local branches to open accounts, check balances, take out some cash, and engage in small talk with their favorite teller. With the shift from in-person to digital, this model is completely gone.

Customer foot traffic in banks has been declining in the last 15 years (roughly 10% - 15% annually). The trend towards branchless banking (or new ways to bank) was inevitable. The unknown was the endpoint in which both banks and consumers would be forced to make a change in previous banking behavior, and adjust to what’s next. 2020 is the industry turning point and final farewell to the bank branch framework (as we knew it). Financial institutions need upgrades to digital banking options, optimizing back-office transactions, and reducing in-branch staff. For community, regional, and mega banks with large national footprints, a new strategy for post-COVID banking is necessary to maintain market leadership and deposit volume.

Pre-COVID Banking

Traditional banks offered online banking (then mobile) since the early 2000s as an alternative to reviewing transaction history and balances. Bank customers were encouraged to become familiar with the added services but still come in to visit their local branch as needed. Branch visits (mostly by walk-in customers) were critical revenue drivers for banks.

In the 2010s, the landscape changed as fintech companies launched virtual banks built on the latest innovation, which didn’t require a physical location or direct interaction with bank staff. Legacy institutions added capabilities to mobile services, but still lagged behind these smaller, agile competitors. Clients made less visits to the branch and used supplementary digital services more often to deposit checks, pay bills, and send transfers — however, adoption and usage rates were still low. Banks focused on maintaining a premium customer experience and enhancing the customer loyalty built on banking relationships over the last 40+ years.

For older generations accustomed to weekly branch visits and their favorite banker, there was hesitation in adopting digital channels. Whether it was having to learn something new, preferring a human touch, or concern in technology taking away bank jobs — long-term clients (55+ yrs. old) avoided debit cards, ATMs, and mobile banking altogether. Security was an early objection as this user segment lacked trust in online solutions or apps. Besides those waiting to cash checks, or businesses making cash and coin deposits, these older customers were the ones in line for a teller window.

At the start of this new decade, banks were fully aware of the drop off in customer traffic to branches and urgently focused on optimizing the digital engagement in their online and mobile channels. Larger banks had a lead here as they had invested in technology at increasing rates over the last 10 years, especially JPMorgan Chase (featured in our Deep Dive) who commits about $11B annually. For customers on the fence of making the switch towards digital, the decision would soon be made for them.

The Influence of COVID on the Bank Branch

The last 8 months of 2020 have showcased where both banks and fintech companies stand in the financial services landscape. Financial institutions can no longer rely on branch banking to deliver solid revenue growth and the dynamic customer experience that clients demanded from technology. Fintechs have the agile capabilities to meet banking needs digitally, but lacked the resources and reputation (from the banking side) with government entities in disbursing stimulus payments.

Numerous consumers have tried the transition to online or mobile banking, with the remainder now coerced in this new behavior. Standing in long lines waiting for a teller is an activity to avoid for customers concerned about COVID-19 (especially older clients with health risks). Over half of consumers (recently surveyed by Prosper, from Forbes) don’t see themselves going back to pre-COVID banking behaviors now that they use online / mobile banking. The digital customer experience is seen as on par (or better) than what they receive in their local branch. As reliance on digital channels increases, bank retail locations will either shut down or transform into something completely different.

For regional banks and credit unions, immediately shutting down branches and beefing up technology isn’t a clear, straightforward path. This move can definitely cut down costs over the long-term, but adopting the latest tech stacks by migrating off of legacy infrastructure is a monumental task. It’s not a light switch that can be flipped — it can take years to attempt the transition and additional years to validate success. Digital transformation is an ongoing puzzle for financial institutions with different approaches and models to choose from. Ultimately, a digital offering that fails to deliver what clients need is a huge miss. Agility and prioritizing the customer will be the critical focal points in making this change a long-term win for both sides.

Looking Ahead at the Branch’s Future

Within the next 5 years, financial institutions that have made the leap towards digital transformation will know if they’ve done so successfully based on user engagement and deposit growth. The banks left behind will be those who were too slow to change or made poor decisions misaligned with clients. The financial services industry will reach a level of future parity among all players (fintechs and banks) in mobile user experience (on the front-end) and functionality (back-end infrastructure and processing). Personalization across all marketing channels and devices will be the next frontier for pioneers in banking’s future.

What about this branch footprint that banks built over the last 60 years?

The model must be re-imagined and modified to fulfill the complexity in financial services: advising towards financial goals.

Artificial intelligence continues to make tremendous progress with data analytics towards insights, but consumers make money decisions based on interactions with people (not screens). The bankers and advisers of this decade should be armed with data briefings on their client’s behaviors and perform financial planning towards goals.

In-person meetings at a branch will be completely appointment based, prepared for in advance, and tracked by both the bank and customer. Large banks, such as Bank of America, have gone so far as to remodel branches to maximize offices and conference rooms for client meetings, and reduce space for teller transactions — this includes a subtle change in name from banking center or branches to advisory center.

How about in-branch transactions with tellers?

The majority of banking transactions have migrated over to automated channels (such as ATMs and virtual tellers), which include cashing checks, and requesting money orders or cashier’s checks. The remaining types of transactions that require tellers (such as business merchant activity, or large cash deposit/withdrawals) will be possible only at select branches and at specific times. The general sentiment for customers now is that the previous branch model of multiple tellers and bankers being readily available is gone. By the end of 2020, customers will make the final adjustment towards this correction in the banking industry.

The Outlook for Retail Banking

Overall, both large banks and community-based credit unions are expected to remain key players in financial services — maintaining their current base of customers over the next decade. As much traction and growth that fintech companies have gained since 2010, the pillars of trust and reputation still rank high for most consumers in the US. However, the indicators are pointing to urgent changes that banks need to make with technology, resources, strategy, and staffing in order to stay relevant. Falling behind on digital options, using legacy processes and infrastructure, and operating underutilized branches will lead to future failure and a customer exodus of deposits and accounts.

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