April 22, 2019 at 3:15pm
RJ Podeschi ’02/MBA ’04

Do Traditional Bank Branches Have a Place in Today’s Digital World?

My perspective on this topic comes from two points of view: as a professor of management information systems and as a director of Staley Credit Union in Decatur, Ill. Financial institutions have been going through significant evolution as a result of the financial crisis. Over the last decade, banks and credit unions have been forced to think of new business models, develop ways to deliver value with thinner net interest margins and compete for customers raised in a new, tech-enabled generation.

The Great Recession begot historically low interest rates and massive bond purchases through quantitative easing from the Federal Reserve. As a result, financial institutions were forced to come up with other ways of generating revenue apart from the spread between what consumers make from interest-bearing accounts and what the financial institutions make from interest on loans. Non-interest income, such as overdraft protection fees, account fees, etc., began to make up the difference, but margins remained tight. Banks and credit unions, as a result, evolved into commodities. Everyone had roughly the same rates for loans and CDs, and, naturally, everyone said they had the best customer service. To remain competitive and deliver shareholder returns, banks closed branches to achieve operational efficiencies, to the tune of nearly 9,000 closures in the last decade.

This begs the question, “What value does a bank branch serve in today’s digital world?” The modern financial institution offers online banking to allow customers to manage accounts, pay bills, open accounts, make loan payments and download statements. Mobile apps allow for the remote deposit of checks, person-to-person payments and even the ability to turn your credit card off in the event it gets lost or stolen. Many institutions now offer live chat features so we don’t have to go through a complicated phone tree to get to the right person. Suspicious activity notices are texted to us, and we can confirm the charges with a simple “yes” or “no” reply. Why do people still need a bank branch? Exclusively online commercial banks (e.g., Ally and Robinhood) and even investment banks are commonplace now and often offer the most competitive prices.

Believe it or not, the bank branch is still important to most consumers. Money is personal, and the brick and mortar facilitates a physical presence and human-to-human connection. Peace-of-mind and security are the driving forces. Individuals want to know that people in their communities are protecting their money, even though their money isn’t physically resting in the vault. It’s part of the reason why credit union membership grew by over 4% last year, and community banks are keeping pace as well. More than 1,200 banks expanded their number of branches in the last seven years, and the majority were smaller, based on asset size, compared to large institutions like Bank of America. Consumers are voting with their feet and moving their money from the large national brands to those local or regional to their area. Consumers want the convenience of new technology, but they also want the trust and personal relationships that go with it.

From my perspective, I see growth in smaller footprint branches that can handle just about any transaction a customer needs. Many of these satellite branches even allow for loan approval through digital documents and video teleconferencing with loan officers in the corporate office. Technology will serve as a driving force to reduce the friction that has existed for ages in the banking world. These applications will allow for seamless transfer of funds between accounts, people and companies, with built-in safeguards. Branches serve an important role by being in our backyards to facilitate the handling of our financial needs as we travel through life. Apps and websites are still no substitute for having someone listen to and help you solve a problem in person.

RJ Podeschi ’02/MBA ’04 has a Bachelor of Science degree in management information systems and an MBA with a concentration in management, both from the Tabor School of Business at Millikin. He is an associate professor of information systems and chair of the Tabor School of Business undergraduate programs.