A recent poll by American Banker Magazine on impressions on the future of banking generated some interesting perspectives on what this future would be like and what it would entail. While there were several insights, one comment especially captured the essence of this future:
“The future model of banking will center around dramatically increased simplicity delivered through a mobile device (phone, tablet, wearable technology). The result will be an experience that makes banking part of other daily activities as opposed to a standalone event.“
In other words, the business signs on our banks will now read “Open 24 Hours.”
How different this is, when compared to the operational model on which banks have operated for most of the time.
Historically banks, like most organizations (retail for example) that have their roots in a pre-Internet/electronic communications era, have been designed around a ‘bricks and mortar’ physical model of operations and distribution. That is, in order to connect and interact with clients, there had to be a physical place at which the resources and capabilities needed to deliver services were housed. Customers would come to these places when they needed services. In this case, bank branches.
This consolidation and concentration of resources and capabilities was necessary for several reasons but especially because of the limitations and constraints related to the scarcity of expertise, cost and physical dimensions of the technology, volume of records and security and protection, to name a few.
Looking back, we can categorize this as the physical business operating model.
Now let’s take a step back for a minute and consider why it has taken so long for the banking industry in Canada to evolve from this model. When the physical operating model was established:
- Business was conducted during fixed hours which meshed with societal norms of a fixed pattern of activity over a 24-hour period.
- The technology of the day was paper, and paper-processing machines and related tools were the key technologies. Interaction was in-person and in the branch.
- The main item of inventory was cash and currency of physical form – paper, coins etc.
- The regulations and policies that govern financial services organizations and operations were designed to within this context.
In this physical world, management faced a number of logistical challenges. Branches had to be substantial in size and staffed based on a supply level sufficient to meet an unknown and uneven demand of customers throughout the day. Since people had to go home at the end of a work day, time-of-day procedures were put in place such as cash balancing and end-of-day close down procedures.
In order to grow, and also in response to growth in population and expansion of cities and towns, banks had to build new branches (points-of-presence) in new communities. In Canada the population has become increasingly diverse, with many newcomers fluent in languages other than English. This factor compounded staffing challenge as branches needed to provide services in multiple languages, based on branch location. In this physical model, costs to serve increase with demand and channel diversity, productivity levels are uneven and key resources under-leveraged across the operating footprint.
Customers also faced a number of logistical challenges to access services and experts. They lined up to be served. They waited for experts. If the expert that they needed was not available that day, they would have to return at a later time. In this physical model, customers directly experience the fragmented structure of the organization and are subjected to the frustrations resulting from it.
The world and customer expectations have changed significantly with the arrival of the Internet and innovations in Information & Communications Technology. Competition in the financial sector is increasing, resulting in more choice. Banking is global and high speed.
In addition to the Branch Channel (Customer Access & Interaction point-of-presence), we now have Mobile, Internet, ATM and Call Centres – alternate channels through which customer access and interact with their bank.
However even with these technology advances some of the challenges and constraints of the previous operating environment continue. We have moved from the physical to the digital world, but the operating models of many banks are still rooted in the physical world.
The question now becomes: how does the banking industry evolve the distribution and operating model to catch up with society? How do we provide the services that will keep customers loyal? How do we optimize our costs to serve and continue to expand our operating footprint? And what role does technology play in that evolution?
And if you doubt the importance of digital services, consider this. One recent survey revealed that approximately half of Canadians would switch banks to receive more personalized experiences such as seamless cross-channel interactions.
This blog and ones that will follow will explore the branch, distribution and operating model transformation opportunities now possible through current and emerging technologies. In addition I will discuss the underlying factors shaping changing customer expectations and what banks need to change, and the areas with the highest potential impact.