The Agnostic Bank Branch

Purely digital expertise is too easy to clone and almost impossible to maintain as a source of competitive advantage. Today’s post argues that banks will need to combine their physical and digital capabilities to create a sustainable advantage and a re-invention of the bank branch is the right place to start. My basic idea is to have banks make all the capabilities of their bank branches available to the customers of other banks as-a-service. This would create the idea of the "agnostic bank branch" as opposed to branches being reserved for the sole use of a bank's own customers. Imagine the opportunities this would create for reducing the number of branches if we could define "your nearest bank branch" as being "the nearest branch of any bank". 

What’s the different between a bank branch and an ATM?

The answer I'm looking for is that I can use the ATM of any bank to withdraw cash. But if I want to use the other services of a bank branch (account opening, cashing a cheque, making an international payment, etc) I need to go into a branch of the bank that I bank with. For example, I bank with Barclays but I have access to the ATMs of all banks worldwide to withdraw cash. If I want to do something else that requires going into a bank branch, I need to go into a Barclays branch to do it.

Let’s imagine for a moment that this wasn’t the case. Imagine I could open an account with any bank at the branch of any other bank. Or imagine If I could cash a cheque of one bank at the branches of other banks.

Bank branches re-imagined:

Something very interesting would happen. Firstly, I’m guessing we would need less than 50% of the bank branches we have at the moment. I haven't verified this figure but you only have to look at the amount of branch duplication on a typical high street to see the potential for savings from de-duplication:

Secondly, branches would suddenly become a source of revenue instead of being a source of cost. To prove my point, ATMs are currently a major source of revenue for banks. The more ATMs you have in your network the more money you make. The opposite is currently true of bank branches. The more bank branches you have, the more cost you have. The secret to making branches a source of revenue is to make them available to the customers of other banks. And I’m thinking that this should include the customers of neo digital banks – the more revenue flowing into bank branches, the better.

Why this is the right platform play for banks

Banks often talk about making “platform plays”. The idea of a platform play is to package up some kind of expertise and sell it to the outside world to create an extra source of revenue. To date, however, banks have focused on packaging their purely digital capabilities such as fraud and credit risk assessment or payments. The problem with purely digital expertise is that it is very easy to clone and almost impossible to maintain as a competitive advantage. Banks already have access to fraud, credit risk and payment capabilities so nobody needs to buy them from another bank. Fintechs are also crowded around this space and there will likely only be a handful of winners.

Combining digital and physical infrastructure is a completely different story however. It is no longer Amazon’s website and probably not even its data driven algorithms that prevent another competitor from challenging its market position. Amazon has combined a digital experience with a physical infrastructure which would require a competitor to invest billions of dollars to replicate. The same is true for Uber. It succeeds at the interface between the physical and digital world.

As luck would have it, banks have also built up billions of dollars of physical infrastructure (branches, call centres) much of which many customers would like to keep in place. At present this is seen as the banks’ biggest problem because it is viewed as a source of cost. But what if we could standardize the technology of this infrastructure through APIs and make it available for other banks “as-a-service”? It suddenly becomes a platform play. And most importantly, it is a platform play where the incumbent banks have a major advantage.

Branch banking as-a-service

Now let’s look at what it would mean to convert a bank branch network to an as-a-service model using the ATM system as the vision for how it would work. The most difficult service for banks to get their head around renting from someone else would be the opening of new customer accounts and the associated KYC that goes with it. However, it needs to be made clear that the KYC decision of a bank doesn’t happen in the branch anyway. What happens in a bank branch is that the employee does some basic documentation checks such as proof-of-ID. There is no reason why these checks couldn’t be standardized and done by the employee of another bank and then sent on to the second bank who would make the final decision to approve the new account. Moreover, if doc checks were offered as-a-service in bank branches, the regulators might actually consider forcing the new customers of the neo digital banks to pop down to a branch and get their docs checked too. Fake/burner accounts set up with neo digital banks for fraudulent/money laundering purposes are now a major vulnerability for the entire industry.

But I don't I need to keep all my branches for marketing purposes?

Let's think about what this would mean from a marketing perspective (e.g. attracting new customers). It is well known that banks use their branches as a source of marketing advantage and to give a customer the sense that they are dealing with a real bricks and mortar bank. However, if someone shows up at a Barclays branch to get their docs checked for a new HSBC account it’s likely the customer has already made the decision to go with HSBC. It’s not the case that Barclays would need to advertise HSBC accounts in their branch, they could just offer the document checking service for a fee. There is also some marketing upside to consider. If the HSBC is suddenly spending a lot of time in the Barclays bank branch using their transactional services then this is an opportunity for Barclays to cross-sell them other profitable products or even encourage them to switch to their bank. This could make branches an even bigger source of marketing prowess.

As we have seen with the use of Post Office branches in the UK, there is also a potential role for 3rd parties to supply agnostic banking services but the take up with such 3rd party services has to date been low. People are more likely to feel at home conducting banking services in a bank branch.

The timing is right for this idea

The technology is now available for banks to quickly standardize what happens inside branches and to make this available for the entire industry. The processes that take place inside branches are already quite simple and standardized within and across banks. It would just require the creation of an API layer which standardizes the data capture and the data exchange between banks. It's possible that the new Open Banking services could also be put to use here too. Perhaps the ATMs could also be hooked up Open Banking sevices so we could conduct banking business from the ATMs of any bank. The UK seems like a good place to start.

Barrie