Time to Reboot

Banks disrupt themselves to remain competitive.

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The humble ATM will soon become a relic of the past. Walk into a bank branch of the future and you are likely to find new virtual tellers that allow you to withdraw cash, make deposits, pay loans and more, all with the help of a real-life teller behind the screen.

These “virtual ATMs” are just one example of  the changes that are radically reshaping the banking experience. As customers become used to using personal mobile devices for everyday tasks, banks are grappling with how to design branches and services that will be emblematic of the digital revolution.

But while banks must arguably be at their most innovative to keep up with technological change, the sector also faces extreme financial challenges resulting from the Great Recession. Interest rates have hovered close to zero since the financial crisis hit in 2008, hurting bank profits and creating an uncertain investment environment. It is at these lean times that banks have to work extra hard to retain customers, and investment in technology is at the forefront of their strategies. It is an especially difficult time for the community bank in Oregon, which also has to compete with the state’s sizable credit union sector. Many midsize and small banks are under pressure to consolidate so that they can better bear the costs of investing in technologies, as well as the increased costs of complying with regulations.

Seventy-five percent of monetary transactions now take place electronically. As customers turn to electronic channels to make deposits, to transfer money and for other transactions, bank branches are getting less foot traffic. The number of branch closures continued to climb between 2014 and 2015. Bank of America closed 6% of its branches between 2014 and 2015, according to FDIC data. JPMorgan Chase closed 2% and KeyBank closed 6%.

But bankers believe branches will not go away completely. There will be fewer branches, but the look and feel will be different to suit the growth in digital banking. Teller-assisted self-service kiosks, video conferencing and cash recyclers that help process cash without a vault are some of the new features that will be inside branches of the future. But they will also be places where customers can meet bankers to discuss other services, such as lending and wealth management.

“When people decide they want a mortgage or they want to borrow for a small business loan — any type of lending or investment activity — it all seems to take place in the branches,” says Terry Zink, CEO of Bank of the Cascades.

The CEO of the Bend-based bank foresees fewer branches in the next 10 to 15 years. The branches that remain will offer a broader array of services — both digital and personal. “We will have more of a centralized hub for our services. Branches will not be quite as many, but you will see more sophistication in the branch, less focus on transactions and more focus on lending and investment activity,” Zink says.

Branches are still relevant, says Brandon Manning, regional manager at Bank of the West. “People are still coming into the branch to talk about their accounts, loans, mortgage. Our focus is being able to have discussions about everything. Traditionally customers did a transaction with one person and another transaction with someone else. Now we need staff that help with all the different needs of the customer.”

Pacific Continental Bank is planning to open a new office in Vancouver, Washington, which Roger Busse, CEO, says will be a good example of the future banking office. The branch, which opens March 28, features a “park and transact video teller,” which will allow clients to access a bank employee via video screen, as well as a large community room for meeting clients and networking events. The new building is “a testament to the power of a banking office that beckons clients inside instead of pushing them solely online,” says Busse.

The investment in new high-tech branches is a large commitment, and banks are experimenting with new technologies before deploying them on a large scale. Columbia Bank is considering opening pilot branches to test out technologies and new job roles for its staff. “It is important for us to experiment before we make a major directional change for our bank,” says Hadley Robbins, chief operating officer.

In the low-interest-rate environment, banks are searching for ways to expand their product offerings to boost profits. Bank of the West — whose holding company BancWest Corporation, became a subsidiary of BNP Paribas in 2001 — has prioritized its mobile banking strategy. “With compressed net interest margins, we need to show customers the value that Bank of the West can provide,” says Manning. In 2014 Bank of the West won a Monarch Innovation Award for its Quick Balance mobile app, which allows customers to view up to five account balances at once without logging in. Customers’ preference for using mobile phones and tablets to perform transactions means banking technology has to be  “consistent and best in class,” says Manning.

The passage of the Dodd-Frank Act, which increased the cost of complying with regulations, has added to the impetus for banks to merge with others to shoulder the regulatory cost burden, as well as the cost of new technologies. Several bank acquisitions have occurred in Oregon over the past few years, and bankers see this consolidation continuing. Zink at Bank of the Cascades says his institution talks to a lot of potential acquisition partners over the course of the year. His goal is to grow into a bank with $5 billion in assets, up from the $3 billion it has now.

Says Robbins of Columbia Bank: “It will be harder for banks that are under $1 billion to navigate the requirements of technology and costs of regulation.”

It is a time of radical change for banks, and one that will be costly. New high-tech branches, sophisticated mobile apps, increased regulations, historically low interest rates — these are all moving parts of the future of banking. As customers’ migration to digital is accelerated, banks that fail to adapt will be left behind.