The Future of Retail Banking

In the 1990s, amidst the hype generated by the computer industry, the future of retail banking seemed paved with technology, only to find an abrupt reversal in attitude towards spending on technology in the aftermath of the dot-com meltdown. By the year 2000, retail banking began to experience aftershocks from their technological enthusiasm as banks realized that many customer segments depended on the services found in branches. A larger than expected percentage of customers, including those who were already using the Internet, valued branches as complementary to the more sophisticated Internet offerings. The industry has realized that the potential cost savings of closing branches based solely on projected Internet growth rates may have been overstated. Banks soon noticed that, surprisingly, customers valued the branches, which launched many institutions into a process of chasing the needs of customers rather than leading customers to value.

It can be argued that since the time of the medieval Florentine bankers, the nature of banking and general services used to facilitate commerce has changed very little. Technology is often credited with revolutionizing the banking industry; in reality, technology has been used, for the most part, to pour old wine into new bottles. Each new generation of technology is applied to the legacy of banking services to automate labour-intensive processes, accelerate the speed of transactions, attract new customers, authenticate parties in a transaction, augment profit margins and a host of other traditional banking measurements. Technology has led to a greater sophistication of banking and investment products, making them more complex and harder to understand by potential customers, in many cases resulting in having to educate customers before they will subscribe to new banking products. Paradoxically, although the cost of operating technology-driven products continues to reduce through commoditization, a portion of this saving is lost by the increase in the cost of sales because of the additional education and longer sales cycle. This interrelationship between technology, cost, customer and sales leads institutions to compare the task of providing banking services to the activities of manufacturing companies.

In the future, firms may serve customers by bundling certain financial services that are not currently combined, or they may merge banking-like services with non-banking-like services, such as tickets to concerts and sporting events, and vacation planning. These firms may have electronic delivery vehicles and be accessed through the Internet. In the end, prosperous firms will be those that find ways to deliver services the public wants. Some activities that today we regard as inappropriate, difficult, or illegal for banks will most likely change, and sooner than we expect.¹

Conventional wisdom has perceived that cheap retail deposits were a structural phenomenon rather than something which had to be actively competed for on the basis of price. Structural solutions (i.e. making the branch network more efficient or improving the quality of product designs) are bound to predominate in an environment where the nature of the balance sheet is so complex, not only in the broad categories of funding and lending maturities, but also by the type of sources of funds and borrowers; and where the balance sheet structure is made more complex by processes of irrational pricing, cross-subsidization across generic product types and business sectors.¹

Technological innovations played a key role in rendering decades-old banking laws and regulations obsolete. The relaxation of these regulations has, in turn, further reduced barriers to competition and accelerated the modernization of our financial system. That evolution, however, must continue to occur in a manner that preserves the fundamental soundness of the financial system and, in particular, the nation’s banks. History teaches us that a sound banking system, willing and able to take deposits and extend credit, is a prerequisite for the long-term health of the national economy. Securities markets alone will never be able to substitute for the extensive and detailed knowledge that bankers — especially community bankers — bring to the intermediation process.¹

This book has identified a number of opportunities for organizations engaged in providing retail banking services to prepare for the future. The future is not about doing any one specific thing; rather it is about doing many things right at varying times. The challenge for retail bankers is to balance continually the resources of the firm with the opportunities presented by the marketplace. From a theoretical perspective, resource balancing sounds easy. However, in reality, maintaining a judicious balance is extremely difficult, not because resources are limited, but because market conditions are changing at a dynamic rate, which means that sometimes products must be abandoned before their full return on investment is realized. These conditions create a new problem for bankers, that is, to understand the relationship between the product’s life cycle and the waxing and waning of consumer and SME demand.