Decoding the future Banking Model

The banking industry has come a long way since the time Goldsmiths started keeping gold in vaults. It is an industry that has seen tremendous changes over the ages, from the highs to the crushing lows reminiscent of Lehman Brothers in 2008. It’s an industry that has almost seen it all, well “almost” is the key word. There is yet another tectonic change brewing over the banking industry; the age of smart machines and digital infrastructure. This tectonic change is reshaping an entire industry and the way it conducts business. The extinction threats that have been prophesied on brick and mortar branches since the turn of the century have resurfaced yet again with more prominence.

There is a wave of industry excitement in the banking sector with the emergence of smart machines and other digital infrastructure. Right now, a good number of industry players world over are implementing various digital initiatives that aims at taking the customer out of the branch. Consumers have over the years cried out for “convenience in banking”, they want to bank anytime and everywhere. According to a 2016 report by Mckinsey & Company, more than 80% of the respondents in developed Asian markets and more than 50% in emerging markets are demanding a compelling digital proposition from their banks. Banks have taken note and are responding to the call with a very big smile. The move to digital banking means lower Opex and Capex costs further translating in a stronger bottom-line of shareholder value. Many banks have even taken bold boardroom decisions to further consolidate their operations. The leaner the operations, the better, which translates further into that magical number; the PAT (profit after tax). This has seen many banks closing down some branches and others divesting from entire regions, why have a branch serve an area when a smart application can easily do that at a very low cost?

In light of the aforementioned events, many senior banking executives are getting excited about the future. They envision a digital only bank and the end of brick and mortar branches. The cost savings will be enormous and the profits colossal, they can only lick their lips at the hypothetical future that awaits.

But is this really the end of brick and mortar banking as we know it? Are we set for billion dollar banks with a headcount not exceeding a few hundred people who include specialists in IT, Strategy, Risk, Marketing and all other areas taken up by smart machines and other digital infrastructure? These are definitely million dollar questions. I would have the following humble opinion if a bank CEO posed these questions to me over some coffee.

First and foremost, I can’t seem to project the idea of an all “digital bank only” proposition as a future model for all banks, while others will decide to go down this route, I see these to be more of specialist banks serving a particular niche in the market. The big banks out there will not go on a massive restructuring frenzy replacing people with smart machines and digital channels, instead the brick and mortar branch will have to be reinvented into a whole new model; an elite banking center. This effectively means the end of the mass market branch as we know it and the rise of elite banking centers for the affluent and corporate clients. This is so because while the common man out there is asking for convenience and simplicity and overall banking on the “go” anytime and everywhere, the affluent out there are not yet ready to entrust wealth management services to an app or algorithm. Wealthy clients and corporates I believe will still want a one on one interaction with their advisors to ensure maximization of their portfolio. Relationship management to them will still be everything and for now, the best relationship management can only be done by people.

To cut to the chase, I would tell the CEO that banks that will dominate the future and far outperform the stock index will be those that take all their mass market clients onto digital channels while retaining affluent and corporate clients in the re-branded elite branches. Those who go too far and chose the all-digital bank only proposition risk losing out on some affluent and corporate clients, those who lag behind in implementing the digital infrastructure will miss out on the incredible lower Capex and Opex costs, finding the right balance therefore will be everything and can certainly mean failure or success for the CEO and ultimately the bank. This is the future we are heading to and whoever misses the plot loses!


The author is an Economist, Writer and a budding Corporate Executive. All views represented in this article are solely mine and do not represent the views of my employers, church and any other organization am affiliated to.

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