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Traditional banks continue to flirt with obsolescence

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There are many things retail banks do well: custodial duties, managing customer calls, cultivating relationships, keeping secrets.

People need institutions that can reliably manage trust, serve as fiscal caretakers and guide them through challenging financial matters — whether it’s restructuring a business or resetting a PIN.

In other words, banking services are needed. But the long-term sustainability of banks is another matter.

In 2017, Heather Cox, USAA’s then-chief technology and digital officer, was named one of the top “Women to Watch” in the banking industry. Less than a year later, after working in the banking sector for more than a decade, she left the industry.

Why? Maybe she saw the writing on the wall. She certainly indicated it in the past.

Before joining USAA, Cox was Citigroup’s chief technology officer. During that time, she gave a speech in 2015 to the industry saying, “people need banking, but they don’t necessarily need banks.”

The demise of the brick-and-mortar banking channel supports Cox’s suggestion. Since 2009, more than 11,000 branch locations have been eliminated. The trend was so rapid that when Codigo found four out of five banks and credit unions had no plans to close any branches in 2018, it was news.

But branch closures are symptomatic of bigger issues banks face. Namely, the industry is flirting with obsolescence.

Part of this is because a traditional piece of the banking business model — making money off high interest rates — is going away. Banks will no longer make money off of money. Doing so is no longer profitable. High interest rates are gone and never coming back.

But technology is the real factor sealing the fate of retail banks.

Most of the things that consumers once relied on banks to do — managing savings and checking accounts, lending money, issuing credit cards — are already transitioning away from banks to the fintech sector, which has found ways to do these things more efficiently.

Retail banks are not agile. They are highly bureaucratic, risk-averse and slow to respond to consumer demand. These banks also rely too much on legacy systems, which Forrester warned about in 2017. High transaction fees are baked into this system, which automatically excludes millions of people from the financial mainstream.

In addition, the entire industry is mired in costly, clumsy regulations and compliance demands. In 2017, JPMorgan Chase reportedly employed 43,000 people just to manage “controls” in the decade following the financial crisis. In other words, one in six Chase employees is devoted to compliance.

For the average consumer, this all translates into financial transactions that are slow and expensive. Such a deeply rooted business model is toxic to innovation.

Credit unions, however, long ago recognized the value of lowering the costs of their services. And some larger financial institutions, such as Credit Suisse and Barclays, are now leveraging blockchain technology to increase speed and consumer convenience.

But banks can deploy all the blockchain technology they want. Blockchain won’t help banks to compete with “free,” which is what millennials — today's predominant demographic — demand.

According to 2016’s Digital Banking Report, millennials (those born between 1980 and 1998) see no real differences between one big bank and another. In fact, more than 70% of millennials said they would rather visit a dentist than a bank, according to the report.

Meanwhile, the same study found millennials are receptive to using Amazon, Apple, Square, PayPal and other services to meet their banking needs.

Some in the industry will roll their eyes at these findings. They have been warned about the fintech threat for two decades. However, it was not the startup fintech that posed the greatest threat to banking. It was big tech.

High-tech heavyweights like Google, Amazon and Apple have only added to the view that banks are less relevant. They’ve shown consumers they no longer need banks to move money.

Apple can already do banking better than any bank. Users have the device at their fingertips and they are loyal brand advocates. And because Apple obsesses over improving the customer experience, that momentum will only build.

Even lending can now be done more efficiently and transparently using blockchain technology. Banks cannot compete with such a business model because they offer no value in the process.

The typical bank loan costs too much and puts borrowers through a cumbersome process. And each loan — auto loans, mortgages, business loans, lines of credit and credit cards — requires a new application. Blockchain makes these hurdles a thing of the past.

Don’t get me wrong: banks are not going anywhere. They are just being forced to find other ways to earn profits beyond renting money to others.

The institutions that will remain standing will be those that help build a consumer-friendly trust network and that connect the old economy to the new. These banks will provide new forms of investments, financial advice and offer new types of custodial services, for both real assets and digital ones.

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