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Will physical banking become obsolete?

Enormous advances in digital banking have revolutionised financial products around the world, but some banks believe a physical presence is key to building a new customer base. 

Does anyone need a bricks-and-mortar bank branch any more?

During the COVID-19 pandemic, contactless payments, mobile banking and online banking have all increased in popularity as governments worldwide have moved to restrict movement and physical contact to stop the spread of the virus.

During 2019, the use of mobile wallets – app-based replicas of payment cards – increased by 36.5%, according to Statista, with users expected to reach 1.6 billion by 2023 and transactions forecast to exceed $2.1 trillion. This analysis also forecast that the global digital payments market would hit $6.7 trillion by 2023, with the US and China at the forefront.

A recent report from payment technology firm ACI Worldwide predicted that more than half a trillion real-time payments would be processed over the next five years.

Does this boom in digital transactions spell the end for the traditional branch-based approach to banking? And how can banks still reliant on a physical presence adapt to the new world?

 

A TymeBank customer interacts with the bank’s physical kiosk in a supermarket

 

The cloud

One issue facing traditional banks when entering the digital space is updating their legacy systems.

British bank TSB experienced a major failure affecting thousands of customers when it attempted to migrate to a new IT system in 2018. The outage ended up costing the bank nearly £370 million.

However, incidents like the TSB outage should not stop companies making changes, says Mike Beck, global head of threat analysis at cybersecurity group DarkTrace.

Mr Beck says more financial companies are migrating to cloud-based IT systems, where critical functions and data are stored on remote servers rather than on-site.

Since 2015, the market for cloud-based services has grown from $87 billion to $208 billion in 2019, according to Statista, and is forecast to hit $236 billion in 2020. Providers such as Amazon Web Services, Microsoft Azure and Google Cloud Platform are leading the way in expanding companies’ use of remote servers.

“A lot of the changes we’re working on are taking the security that has been traditionally on premises into the cloud, and using our technology there instead,” Mr Beck explains.

Companies that have done this already are likely coping the best with the current environment of enforced remote working, he adds, ensuring business continuity now and in the future.

“It doesn’t really matter where [staff are] located; the systems are up, they’re online, they have the full suite of tool sets available to them,” says Mr Beck. “Those who are going to struggle are those still dealing with legacy systems that are daisy-chained across geographical locations.”

 

People are increasingly able to access most financial services via mobile apps

 

Data security

Recent public investigations into companies such as Facebook have brought online security and privacy into the spotlight. The European Union’s General Data Protection Regulation, enacted in 2018, also heavily influenced company behaviour around the world.

For fintech companies, security must take centre stage. A slick mobile app and user experience will only get a start-up so far.

Fortunately, evidence suggests companies are taking this aspect of their infrastructure seriously. For DarkTrace, this has meant growing demand for their AI security systems.

“In the last year there has been a considerable shift in attitudes to having AI support security teams,” Mr Beck explains. “You can’t scale security in line with how your business grows, it wouldn’t be financially viable – you just couldn’t do it.

“This particularly applies to our fintech customers. They are building for growth, but they are not going to scale with [more] human security operators.

“That security division needs to be lean and agile. It’s about the human teams making the strategic and operational decisions and letting the AI work alongside them doing the tactical day-to-day stuff.”

 

Digital or physical?

As mobile banking has grown, the number of physical bank branches has shrunk dramatically. The COVID-19 pandemic has accelerated this trend, pushing many branches to reduce hours or services. Some banks encouraged their customers to move online.

In the US – and prior to the pandemic – MUFG Union Bank closed all 22 physical branches of its PurePoint Financial brand, while Capital One continued its branch closure programme in 2020, shuttering another 37 branches at the start of 2020.

In the UK, a similar story is playing out. Data collated by consumer group Which? found that the UK’s network of bank branches shrank by more than a third between January 2015 and August 2019.

But not every banking brand believes in a digital only approach. In the UK, Metro Bank – which opened in 2010 – has bucked the trend. It has been growing a brand new customer base through a more traditional branch-based approach since it opened for business, although it also offers app- and online-based banking services.

GoodBox’s physical digital donation boxes are a necessary physical touchpoint for charitable giving in the cashless age

 

Similarly, South African start-up TymeBank also believes in the power of customer interactions at physical outlets.

Rachel Freeman, the bank’s executive director of business development, advocates a “high touch” approach to banking, giving customers have a physical outlet with which to interact.

In developing countries, where internet access is often far less reliable or affordable, retaining a physical consumer-facing “front end” while making back office systems entirely digital is a far more inclusive way of offering banking services, Ms Freeman says.

This is exactly what TymeBank has done, digitising its back office and opening “kiosks” in grocery stores across South Africa.

Within a few minutes, Freeman says, a customer can enter their information and be presented with a new debit card and account ready to receive cash deposits. In the background, the kiosk is using the information and biometric data to confirm the customer’s identity and go through anti-money-laundering checks.

The technology behind this process is “quite complicated”, Ms Freeman admits, but – crucially – is “very simple for the customer”.

“We believe people like to interact with people,” Ms Freeman says. “They don’t like to fill out forms [or] actually write down things and all that. But if there’s someone nice to talk about TymeBank and the kiosk is easy to use, we can help them think through how to save money.”

While the future of financial services infrastructure is undoubtedly digital, it seems there will always be a place for a physical presence to ensure all types of customers are catered for.

As Ms Freeman points out, many challenger banks are focused on an audience that is “digitally savvy” – but these risks leaving out a significant group of potential clients.

The challenge for all banks – traditional or new – will be to find the best balance between these two aspects to ensure they can find and retain a broad base of customers.

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