It’s a tough time to be a retail bank right now. Banks are facing an onslaught of a sluggish economy, increased regulation, lower profits, undifferentiated products and lackluster customer demand. The result has been a renewed focus on cost reduction with bank layoffs, branch closings and questioning the very existence of the branch. A recent WSJ article highlighted the state of affairs:
U.S. banks and thrifts shut 2,267 branches in 2012, according to SNL Financial. That put the U.S. bank-branch count at 93,000, according to AlixPartners, the lowest tally since 2007. The firm expects the figure to drop to 80,000 over the next decade, putting the total closer in line with 2000 levels.
Banks are floundering to make up for lost fee income and increasingly can’t support the costs of operating a branch. They are turning to innovative technologies to try and transform the branch. The article goes on to quote PNC’s president:
Each time a PNC customer deposits a check by snapping a picture on a mobile phone, that saves the bank $3.88 per transaction compared with a deposit at a teller window, Mr. Demchak told investors.
So why aren’t banks shutting down all of their branches? It turns out that customers still want a personal touch when it comes to banking. The model highlighted in J.D. Power’s retail banking survey is “not pushing customers out of the branch, but rather providing tools that make it easier to conduct their banking business when and where it is convenient for them.” This hit home during a conversation I had with a bank executive on a recent flight. His bank has over $100B in assets and over a 1K branches. 75% of his new customers still open accounts in branches. His online and mobile offerings are growing rapidly, but mainly for servicing functions such as checking account balances and verifying paid bills. Banks are experimenting with new models to offset the cost challenges including advanced ATMs to replace tellers and sharing locations with retailers such as grocery chains.
So where’s the innovation?
- Core Technology: There’s significant technological change happening within banks. SaaS and cloud-driven platforms are bringing new online account opening, mobile banking, personal financial management, bill payment and loan origination products to banks. There are many companies playing in various segments here including Intuit, FIS, Jack Henry, Fiserv, Q2, Yodlee, D+H, and Andera (my firm is a current investor) and SmartyPig. Banks also themselves aren’t sitting idle. RBS is spending $1B to improve their branch experience.
- Customer Engagement: Banks have historically horrendous relationships with their customers. New entrants such as Simple, PerkStreet and Moven are vastly improving the customer experience by engaging customers directly online and via mobile devices. They are catering to the next generation, tech-savvy consumer and are what Anthemis calls “digitally native banks“. Technically these companies are not banks — most partner with banks such as Bancorp. Core technology providers such as Andera take a different approach and are arming the banks with tools to improve the customer experience. Targeting customers based on online and mobile activity is another promising area of opportunity.
- Unbundling of the Bank: This is the most disruptive category in my view. Andy Weissman has written about this in the past. The idea is that a bank is nothing more than a set of a capabilities and those capabilities don’t need to reside inside a bank. Operating costs and margins can be disrupted by new business models. Companies such as Lending Club, Xoom, Wonga and Zestcash and Dwolla are great examples.
- Digital Currencies: Banks and other financial institutions store our money and other valuable goods so why don’t they do the same for digital currencies such as Bitcoin? We are scratching the surface with Bitcoin and it’s safe to say banks, financial institutions and their future equivalents will find a way to participate. Flexcoin is a startup trying to solve this problem.