Academic journal article ABA Banking Journal

Change Your Branches to "Physical Portals"

Academic journal article ABA Banking Journal

Change Your Branches to "Physical Portals"

Article excerpt

Want to know where branch banking is going?

Wherever you happen to be. Pervasive computing, the Internet, and the costliness of physical branch transactions have been leading the industry on an unrelenting march toward the goal of providing convenience and access. And banks that balk at virtualizing their branches to provide a new kind of private banking for the masses may find themselves, well[ldots]nowhere.

Over the span of a decade, forces of change have bubbled to create two threats to traditional banking: 1. an exponentially larger competitive playing field, and 2. a more empowered consumer.

In terms of personal empowerment, a study by Summit Bancorp found that nearly 50% of its customers weren't banking at traditional branches any longer, and were relying instead on telephones, ATMs, and computers to conduct transactions. Responding to the same trend, numerous roll-outs of wireless banking projects have sprouted around the globe, many in Europe and Asia. They permit banking, stock trading, and bill payment via mobile phones, personal digital assistants, and pagers.

Industry analysts estimate that by 2003 there will be more than a billion wireless communications subscribers worldwide, but relatively few banks are preparing for the onslaught. (See "Wireless Banking, the next untethered step, April, 2000, p. 50.)

Remarkably, the industry is still grappling with the change that's essential to help convert those threats to opportunities. Inertia generated by 50 years of traditional branch structure and related management systems has kept most banks from optimizing new technological channels, and customers in search of more personalized service and convenience.

Hypothesize this [ldots]

The path branch banking is likely to take can be determined by a set of simple hypotheses.

Here's the first:

The emergence of the virtual market is driving a change in the business structure of the physical market.

Studies by Jupiter Communications, Forrester Research, and our own IBM Consulting Group predict convulsive growth over the next several years in every segment of the Internet retail financial services industry. By 2003, online investing is expected to reach a level of nearly $1.3 trillion. Volumes in online mortgage origination are estimated to hit $375 billion by 2004, and online credit card and loan activity is projected to surpass $60 billion in the next four years.

In addition, Jupiter projects that by 2003, 28% of all U.S. banking households will have online, web-based checking accounts. Internet bill presentment will boost the percentage of consumers who pay bills online from 48% in 1998 to 70% in 2003, and the number of consumers who research loan rates and apply for credit online is expected to more than double in the same period.

If the sheer numbers alone aren't compelling enough, banks have two other reasons to care about this fundamental shift. First and foremost, it's where their profitable customers are going. Forrester has found that over 50% of affluent customers are conducting financial activities online (see chart, next page). And according to PSI Global, the financial services profit potential for these customers ranges from $3,000 to $6,000 apiece per year.

Bankers for years have tried to figure out a way to capture these customers. The web is allowing banks to effectively market to them. At least one top-ten bank confirmed that its online banking customers are the most profitable (except private banking), and generate 2.6 times the revenue of like demographic offline customers. Although older, retired customers do tend to maintain higher balances, they exist in the form of CDs, a product with very low spreads. As time passes the online banking demographics will normalize. Already, for example, approximately 15% to 20% of seniors are online.

Bankers should also care because the cost advantage of becoming an Internet-based banker can be enormous. …

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