Five Tipping Points That Indicate Our Banking System is Doomed

When is the last time you stepped foot into a bank?

According to a recent survey by Fiserv of 3,000 bank users, during the past 30 days, more than 80 percent said they logged into their bank’s website an average of 11 times; but 61 percent said they had also visited their bank during the same stretch.

Normally we would think they made the trip to do something they couldn’t online, but that would be incorrect. According to the research 53 percent of customers prefer online banking, but 44 percent still like to complete their transactions and receive financial advice in person.

As an industry, banks have studied their customers from thousands of different angles to determine if there are any cracks in the system. They intuitively know the banking industry is in the second half of the bell curve, but so far haven’t spotted the fault lines they know are coming.

FMSI is an organization that studies bank visits and concluded the average number of teller transactions has declined more than 45 percent in the past 20 years. Over the past 1- years, in-person teller-transaction volume per hour has dropped more than 32 percent.

In 2007, the average cost per-transaction was $0.85, but that number has risen to more than $1.08, an increase of more than 25 percent.

Bank executives also know when they close a branch, 40 percent of their customers will switch to a new financial institution and the number of new small business loans drops by 13 percent. In low-income neighborhoods, lending activity shrinks by 40 percent.

According to Accenture, 40 percent of millennials would consider banking without a branch. Ironically, Gen-Z – those between ages 18-21 – use their branch bank more regularly than any other groups, with 25 percent visiting at least once a week.

So what are the telltale signs that branch banks will follow the path of Kodak? Here are some of the major tipping points looming in the near future.

Since the 2007 financial crisis, banks have closed more than 10,000 branches, an average of three per day. In the first half of 2017 alone, a net 869 brick-and-mortar entities shut their doors.

Over the next couple years, bank closures will accelerate to 10-15 per day or 3,000-5,000 per year. Here are some of the primary reasons:

1. By 2025 the largest banks will be tech companies

One-click ordering from Amazon, tracking deliveries on Etsy, auto-populating information on Google Chrome, stored account information on Uber, and other innovations and subsequent expectations have changed our understanding of what is possible and what is expected from ecommerce. With tech and retail sites setting new standards, customers increasingly expect interactions with their banks to be easy, fast, transparent and on their own terms.

These demands and other competitive factors are pushing banks inexorably toward a new model. By 2025, leading banks will be operating as digital financial superstores that blur the lines between technology and finances. These developments have left banks in a tough spot.

Institutional failures have created an opening for non-bank lenders and fintech providers to leverage cutting-edge technology and fringe status to deliver the type of service and experience consumers have come to expect from the best digital providers.

Even as large banks attempt to reassert themselves in a digital age, they face competition from new market entrants, eager to apply far-reaching networks, artificial intelligence, cloud-computing platforms and other tech advantages to the world of banking. 

2. Banking deserts are forcing rapid adaptation

In June 2017, the U.S. Federal Reserve Bank estimated there were more than 1,100 banking deserts in America, defined as areas at least 10 miles from a bank. That number could easily double if small community banks continue to close their doors.

This situation may seem grimmer than it actually is since banking deserts still only represent 1.7 percent of the population. For most of the country, banks are still within easy reach, typically just two miles away. Nine out of 10 Americans live within five miles of a bank; half live within one mile.

That said, the U.S. is one of the heaviest banked nations in the world with 32 branches for every 100,000 adults – far more than countries such as Germany and The Netherlands. 

However, as banking deserts grow, so will the tools for interacting with a financial institution from a distance. Many fintech companies view this as an opening, the perfect proving ground for their latest offering.

3. Live human-robot ATMs

Bank tellers will be the telegraph operators of the 21st century when we look back 100 years.

The largest banks in the U.S. have been investing millions of dollars in updating capabilities and physical appearances of thousands of ATMs, an invention that turned 50 earlier this year.

As ATM capabilities grow, customers at bank branches will spend more time interacting with machines for their day-to-day needs, while bank personnel will move from behind the counter and focus more on complex transactions, such as coordinating loans for homes or small businesses.

The next wave of ATMs with larger, digitally enabled screens akin to tablets will offer almost all of the services human tellers now provide as well as new capabilities like setting up cash withdrawals on your phone that you can be easily completed at a nearby ATM.

ATMs are already outfitted with more flexible denominations – $1, $5 and $10 bills instead of only $20 bills – and introduced cardless transactions, wherein customers can log -n more securely with their phones.

Soon, having a remote conversation on an ATM with a live loan officer or bank executive to handle more complicated banking matters will make hanging on to most existing bank properties superfluous.

4.) The law of accelerating tipping points

Overall, customers interact with banks an average of 17 times a month. Yet only two of those interactions involve human contact. In the U.S. only two out of 15 monthly bank dealings involve going to a branch.

JPMorgan Chase, which operates a network of more than 16,300 ATMs and 5,300 branches across the U.S., saw its teller transactions fall by 25 percent from 2014 to 2016. 

In 2013, an Accenture survey found that 48 percent of Americans would switch banks if their current bank branch closed. In last year's survey, that share shrank to just 19 percent.

Visiting a bank has increasingly become a long tail activity. Virtually every branch manager can describe a customer interaction that is impossible to cope with over a phone or online. But these edge cases are proving to be less of a compelling argument as online capabilities improve and attitudes change.

5.) Cryptocurrencies are paving the way for circumventionist thinking

If you’ve ever had a conversation with your bank about handling fractional cent micropayments, coming from a rapidly scaling online business where the transaction volume can approach hundreds of millions per hour, you’ll quickly understand how ill equipped today’s banking industry is for dealing with next-generation business models.

Even though today’s cryptocurrency industry is deeply flawed, it has a way of pointing a glaring spotlight on the structural limitations buried in our existing bank infrastructure.

On one hand, stealing bitcoins is the perfect crime. No one has ever been convicted of stealing bitcoin and there are no bitcoin-cops or justice systems. A lost bitcoin is not recoverable.

However, national currencies are becoming increasingly dysfunctional. It’s no longer possible to use cash for many transactions like purchasing airline tickets, hotel rooms or rental cars.

The idea of using a personal signature to secure a payment by check is fairly preposterous with our ability to use phones to copy and replicate nearly everything.

Massive data breeches have become a daily activity with headlines about Equifax, Chipotle, Gmail, Arby’s, Verizon, Yahoo and Uber showing us how vulnerable we’ve become as a digital society.  

With no perfect solutions to point to, we are left with a heavily regulated and rapidly decaying banking system whose days are clearly numbered and a fledgling and faceless cryptocurrency industry trying to usurp the power and authority of today’s banking elite.

Yes, we will still have banks for many years to come, but I have yet to come up with a compelling reason why we need the physical branches.

If JPMorgan Chase, Bank of America, Wells Fargo and Citigroup were all to close their locations tomorrow, what effect would that have on the financial health of the nation?

Besides the obvious loss of jobs and vacant real estate, how would this change the way business is done?

Nearly 39 percent of bank customers like the idea of going bank-less, but that still leaves many who don’t.

With easy-to-use smartphones to manage most transactions and clickless payment systems like Uber, Lyft, and the Bodega vending machine, our need to interact with bank personnel is fading.

Bank closures are about to shift from linear to exponential, and to some this will be disconcerting. But in this transition we will find countless opportunities for new business and industry, and by 2030 we’ll be wondering why we ever needed them in the first place.