Banks of the Future

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Photo: ING Direct by Newtone

Banks of tomorrow will look very different from the ones we’re familiar with today. In fact, they might not look like anything at all—since, along with our music, photos, and emails, they’ll likely live in the cloud.

Just as we are trading shopping malls and big box retailers for e-commerce and same-day delivery, we’ll be doing most of our banking in the future online, more often than not, through our mobile phones.

This evolution is already underway. A third of Americans haven’t visited their bank branch in the last six months (ATM visits notwithstanding), according to a recent Bankrate survey.

That’s because more and more people now bank on their phones around the world, particularly in regions that leapfrogged credit card technology all together like Africa.

Source: Mobilized

The result? Half of US bank branches will be obsolete by 2020, according to a Jones Lang LaSalle study.

As customer needs shift and technology evolves, banks are faced with an identity crisis, concluded a KPMG report (pdf) published earlier this year titled “Industry at a Pivot Point.”

“Banks must switch from a business strategy anchored in defense—selling businesses, reducing headcount, and offshoring, in order to cut costs—to one centered on offense that is all about selling products and services that meet customer demands and needs,” said Brian Stephens, national leader of the Banking and Capital Markets practice at KPMG LLP, in the report. “The banks that embrace change and systematically transform themselves to become more customer-centric will achieve a competitive advantage in the marketplace.”

For banks, it’s also a long overdue wake up call. As we reported in March, Millennials are apathetic about the industry as a whole and have little faith that the industry’s biggest players have the wherewithal to adapt.

three-year study by Viacom’s brand consulting division Scratch revealed that those born between 1981 and 2000 overwhelmingly believe banks have the highest risk of disruption—likely from outside the industry.

All top four banks were among the ten least favorite brands of the 10,000 respondents. Over two-thirds think that in five years, the way they access money and pay for things will be totally different and a third predict we won’t need banks at all. There’s also little faith that the incumbents have the wherewithal to evolve. Over half are counting on tech startups to overhaul the system.

Millennial Disruption Index
Source: Millennial Disruption Index

This so-called “pivot point,” then, is really a way for enterprising banks to differentiate themselves, says Mike Baxter, head of Bain & Companies Americas Financial Services practice. “Some banks are becoming innovative companies that deliver technology faster,” said Mike Baxter told CNBC. “Other banks are stuck in the mud.”

Part of this rebranding effort begins in the lobby, according to the CNBC report:

Instead, banks will become community hubs, said Tim Greenhalgh, chief creative officer at the global design firm FITCH. “Society needs more community,” he added. “Starbucks isn’t enough. Why can’t a bank be more like an art gallery or media space?” Old bank design that includes a cup of coffee is dead, he said. “People want a bank that feels more like a retailer.”

“Banking giants like Bank of America and Citigroup are working to overhaul branches with the goal of more closely resembling an Apple store, where employees holding tablets and other high-tech gadgets tend to customers,” reported the New York Times.

“Customers are not abandoning the branches, but they are looking for different things when they come in,” William Sheley, Chase’s head of branch and A.T.M. innovation, told the Times.

Sheley’s assertion was confirmed by a new study by Bancography on bank closures following the financial crisis. The conclusion? Physical coverage is still a key factor for new and existing business.

JPMorgan Chase outlined their re-imagining of bank branches in a presentation earlier this year.

Of course, others are taking the reinvention of banking to its logical conclusion: into the cloud. Take Germany’s Fidor Bank, which recently becamethe first bank to integrate the Ripple protocol. Rather than have its customers meet at the local branch, they hang out online through web platforms and social media, according to a recent industry report by Accenture, titled: “How banking got agile.”

Banking. Just another mundane task, like doing the shopping or going through the mail. Right?

Not necessarily. Imagine being able to play online games—virtual currency trading, for example—or crowd-fund pet projects, all while checking the status of your bank account. Or consider being able to log on through Facebook Connect and letting Facebook “likes” determine the interest rate on your accounts—the more different customers who “like” the rate, the higher it goes.

Germany’s Fidor Bank offers all this—and plenty of practical financial services besides. Its customers can discuss their requirements and share ideas via chat rooms, for instance, with the bank’s specialist advisors, who are always on hand to offer help. Fidor has no sales staff. It relies on its online community to recommend it to others and also propose product innovations—hence Fidor’s description of its clients’ experience with the institution as “banking with friends.”

There’s a lot more to Fidor than friends having fun, however. The Munich-based, online-only institution has attracted people who lost confidence in mainstream finance during the downturn and now demand a different banking experience—more personalized, more engaging and more responsive to their everyday interests. Fidor is fulfilling those needs by leveraging the new digital technologies—social media, in particular—that define its customers’ lives.

Beyond the novelty and convenience of a modern online experience, going digital has resounding operational and market implications, as we reported in March. Because at the end of the day, it’s still about the bottom line, the report concludes. Smarter payments provide better operational efficiency, freeing up valuable working capital and reducing business cycle risks. More accessible and cost-effective distribution platforms create opportunities for new customers and new markets, including the 2.5 billion that remain unbanked. And innovative new products and services open up new revenue streams and business models, like online gaming and micropayments.

Ultimately, it’s the makeover we’ve all been waiting for. For forward-thinking banks, it’s an opportunity to move forward and differentiate themselves. For empowered consumers, it portends to arrival of smarter, cheaper, and more innovative services. And for the world, a more efficient, better connected system benefits us all.

Follow Alec on Twitter: @sfnuop