Much of retail banking was once founded upon a single principle: personal relationships. With bricks and mortar branches on every Main Street – and friendly managers waiting by the door – transactions were powered over small talk and cups of coffee.
This world is under threat. With lockdowns forcing thousands of banks to shut their doors, and the digital revolution moving services online, it sometimes feels like traditional banking is vanishing before our eyes.
It is a trend accelerated, rather than created by the pandemic. According to one survey, well before terms such as “lateral flow” and “contact tracing” entered the public lexicon, more than 4,400 US branches closed their doors between 2017 and 2020.
Competition from fintechs is forcing banks, especially mid-tiers, to sharpen their own offerings. From faster services to personalised experiences, incumbents must learn how to pursue customer engagement and increase service levels at the same time as adapting the ways in which they leverage their physical infrastructure. The days of the high street bank are not necessarily numbered. Between local knowledge and immediate support, physical banks should retain importance, but for different reasons and services.
Well before the pandemic, Jonathan Donahue was getting increasingly frustrated with aspects of traditional banking. He recounts trying to open debit card accounts for his young daughters – and coming up against a wall of bureaucracy. “The person behind the counter just didn’t know what to do,” recalls Donahue, a vice president and client partner at WNS Global Services. “We had to get the manager in – it was just a terrible experience.”
More to the point, start-ups, with their slick UXs and instant engagement, frequently offer far better services than their plodding legacy cousins. This is increasingly clear in the statistics: in late 2020, the seven leading American challenger banks had roughly 40m users, a 40% increase from 2019.
Of course, emphasises Donahue, these developments put serious pressure on traditional institutions to adapt. “They have to keep up with the customer experiences that technology-oriented firms are developing,” he says. “If they don’t, they’re going to go out of business.”
That’s especially clear in an age of shuttered branches. In the context of significant consolidation and M&A activity, with mass closures the order of the day, and younger users enthusiastic about remote banking, Rohit Jaswal, head of ops at WNS, argues that “CIOs need to embrace new practices and digital transformation”.
And while this is true for all banking incumbents, pressure is arguably fiercest on mid-tiers. Lacking the wealth and resources of a Bank of America or a J.P Morgan, these institutions risk being swept aside unless they can serve evolving customer needs and emerging operations pressures.
Of course, it’s easy for a mid-tier bank to support digitalisation in theory. But what does that mean in practice? A good place to start is personnel.
It’ll always be hard to convince ambitious tech wizards to abandon Silicon Valley for provincial hubs such as Charlotte or Minneapolis. But by investing in technology innovation centres – Donahue cites M&T Bank’s work in Buffalo as a prime example – institutions can give tech talent an incentive to move and a platform to create.
When it comes to the technology itself, banks have plenty of options to compete with fintechs. One obvious example is automating time-consuming admin, but digitalisation can help in more sophisticated ways too.
Complex algorithms offer advice on where people should invest, for instance, while AI can also spot potential KYC and AML problems. Naturally, taking humans out of the equation can speed up transactions and save resources too.
More broadly, even middling banks can create apps that sparkle just as brightly as their upstart rivals. TIAA Bank, founded in 1918 and based in Jacksonville, boasts an app that lets customers open an account in just five minutes.
But the competition for top talent to drive digital transformation is huge, with larger incumbents having to pay compensation at the level of Google and Facebook – expenditure mid-tier banks simply can’t match. For institutions without the resources to develop such strategies in-house, getting support from external experts is invaluable.
“We can be a great partner to transform their processes,” says Donahue. “We’re willing to take on challenges that require more than just cookie-cutter solutions – creating customised solutions for our client, leveraging the breadth and depth of our skills across global operations.”
Balancing digital with physical
In short, digitisation isn’t simply a lifeboat for mid-tiers in a sea of fintechs – it can fundamentally transform a legacy institution for the long term.
All the same, it’d be wrong to imply that this brave new world is one where physical banking vanishes completely. If nothing else, this is reflected in the numbers. Though thousands of branches have closed recently, around 1,000 opened in the US in 2020.
This is easy to understand. Though disembodied fintechs can teach legacy banks much, preserving a local footprint is still deeply beneficial. To explain what he means, Donahue offers another anecdote. After trying to refinance his mortgage with a major national bank, the valuation he received was far lower than expected: they simply didn’t understand his local area.
“That’s a competitive advantage for local branches, local community banks and credit unions,” Donahue adds, emphasising that while fintechs may eventually be able to compete at the neighbourhood level, that day has yet to dawn.
Preserving the personal touch is valuable elsewhere too. Though technology can flag many AML infringements, for example, false positives are always a danger and need a real human being to catch.
In short, creating genuinely proactive and engaged customer service is ultimately impractical via ones and zeros alone.
For that reason, traditional branch banking is likely to survive – and adapt. Many tasks may be siphoned off to the cloud. But Donahue suggests surviving high street banks will become “service centres”, where complex mortgage or retirement deals are done just as they always were: face-to-face and with a strong handshake at the end.