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Digital Banking vs Physical Branches: Competition Not Mandatory

17 October 2019
Digital Banking vs Physical Branches: Competition Not Mandatory

As the digital banking world expands and engulfs more and more market share from the physical world, legacy banks can’t help but feel threatened in more ways than one. However, that doesn’t mean that there’s no room for a collaborative co-existence between physical giants and challenger banks today.

In addition to competing for customer acquisition, engagement and retention, banks are also contesting for funding and valuable resources as they undergo their digital transformation in terms of their infrastructure, tools and online presence. Below is an example on how legacy banks and traditional financial institutions (FIs) keep the competition alive with challenger banks.

In a scenario where innovation is born from competition, the head of digital banking at KeyBank Jamie Warder stated that the soaring popularity of challenger banks could act as an incentive for traditional institutions to innovate and join the digital spectrum. Evidently, this is beneficial in the short run and even more so in the long run. Legacy banks need to create strategic goals that are aligned with digital banks and FinTech companies; possibly even acquire them for a mutually beneficial future. In KeyBank’s case, they have established a 4-year-long partnership with AvidXchange, in addition to acquiring small business lender Bolstr and working with PayPal to provide instant transfer services.

As the digital age progresses almost exponentially, smartphone usage and next-gen applications have disrupted many industries in the world today, and banking might just be one of the most affected ones. A study by Citibank revealed that 31% of consumers say they use their mobile banking app the most, while GOBankingRates found that 25% of consumers prioritize banking through a mobile app, although it’s worth mentioning that almost half of consumers preferred banking at a branch or ATM. In that same study, 76% stated that they wouldn’t open an account with a bank that doesn’t provide a mobile app. As per FIServ, consumer preference for digital interactions is at 58% as opposed to branch interactions, mostly due to growth in mobile use. When breaking down digital behavior, there is a preference for online at 37% as opposed to mobile at 17%.

Although banks with a mobile app seem to be the most attractive option, consumers are still mostly undecided and would like the possibility to choose which channel they use.

In an interview with PYMNTS, Executive VP & Head of Digital at Bank of the West Hisham Salama stated “Banks are trying to mimic other banks [on mobile]. We had this realization, from a digital perspective … that in three years, if we’re being compared to banking apps and we’re comparing ourselves to other banking apps, we’ve taken a wrong turn somewhere.”

Does that mean that branches are destined to perish? Unlikely. Half of consumers have visited a branch in-person at least once in the past month, a figure that has been consistent since 2018. If you contemplate why that is, you might think that the main reason is to speak with a staff member at the bank in person; but that only accounts for 14% of reasons given. 53% said they went to deposit a check, 41% withdrew cash, 36% deposited cash and 30% went to cash a check.

Further proof that physical branches are here to stay is highlighted in JPMorgan Chase and Capital One building new brick-and-mortar locations, despite the rising presence of challenger banks in the United States. The aforementioned Citibank study found that 87% of consumers would still trust traditional banks more than non-bank financial institutions.

“Let’s be clear, there is a shift happening … toward digital. You can’t deny that — no data would say otherwise. What’s interesting, though, is the transactional shift is happening much faster than the advice and sales shift. So, I think [branches] matter … [but] they shift from being transactional to being more and more advice-driven [places].” said KeyBank’s Jamie Warder.

So what does the future hold for traditional banks?

Saurabh Bajaj, Chief Product Officer at Feedzai, said in an interview with PYMNTS that advanced technologies such as Artificial Intelligence (AI) and Machine Learning (ML) are the yellow brick road that can guide legacy banks and traditional institutions to competing with digital banks.

 “Data integration is key. Having that single source of truth provides the backbone for a profound understanding of behavior patterns, because the more clean data that is fed into a machine learning system, the more you’re capable of accurately scoring transactions. This is what creates real-time processing,”

Let’s not forget that traditional banking has been around for so long and has such a powerful influence in the world today. With that notion taken into consideration, the fact the digital banking has managed to disrupt an industry that big says a lot about the potential of digital. However, it is unlikely that we will see one industry overcome the other completely. This only means that, moving forward, there is only one direction for both entities; to collaborate and work together to satisfy their most important asset: the consumer.



Digital Banks, Financial Institutions, FI, Legacy Banks, AvidXchange, Bolstr, KeyBank, PayPal, Feedzai, Legacy Banks, PYMNTS, Artificial Intelligence, AI, Machine Learning, ML

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