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What’s your bank’s future look like?

Success hinges on adaptability, innovation, and reputation protection

What’s your bank’s future look like?

It seems these days that I’m reading more than the normal volume of articles and opinions on banking’s future. Most express a variety of concerns on what’s coming. Yet almost none weighs in on what the opportunities might be for the “fleet of foot.”

Technology, as one would expect, is the principal driver of most of the “top of mind” concerns. There’s no arguing that technology’s impacts are enormous.

But I wonder why the commentary seems so consistently negative. Change does bring opportunity.

Branch economics, Millennials, and hard math

One recent article noted that bank branch locations are feeling the impacts of a digital revolution. Experts within the industry have developed an estimated number of transactions a month below which the average branch cannot operate profitably.

I can’t assess the reasonableness of the “argument.” Nor is the precision of the analysis the point.

But here’s the important statistic: About 25% of the industry’s branches are believed to be unprofitable by this metric, and the deterioration in the numbers of unprofitable branches has been precipitous the last three years.

One example of this phenomenon that is often cited is the preference of younger customers, particularly the “Millennials,” for digital, rather than physical, contact with a bank for delivery of services. Some bankers seem to cherish the idea that all customers will need some level of personal contact at least at some time. They frequently cite the likelihood that Millennials will someday buy houses and need mortgages.

Let’s think about that with some real numbers.

Fannie and Freddie Mac’s statistics have consistently shown that the average life of a mortgage is about seven years and that number has been remarkably constant over the last several years.

Does that mean that Millennials will visit a bank’s physical location only about 7 times over a 40-year working career?

That’s undoubtedly too conservative a view. But if that same class of customer develops early habits of digital access and delivery, then those are likely to be lifetime banking habits. The long-term impact on branch activity will be profound.

Indeed, we’re already seeing the early evidence of just how significant these changes will be.

What does this imply for marketing and more?

It’s also likely that customers have financial needs that are likely to be served by banks in similar proportions in the future based on historical norms. The focus of the challenges we face then shifts from what does a bank do with significantly underutilized physical facilities to how does it market to these people in the years to come? 

These are very different issues.

Those inclined toward negative spin emphasize a shift of a bank’s fixed asset allocations, rather than the enormous challenge with its simultaneous opportunities to market differently and more creatively to this same customer base.

There will be some big winners and some big losers—and note how technological innovation will likely be at the root of any advantage that accrues from these changes.

And how will this impact staffing levels in the traditional sense but also the necessary skill levels prospectively?

Will systems and operations people be in higher demand? 

Will branch skill sets remain similar in the future though perhaps in lower numbers of head count?  There will be winners and losers here too, in the career sense.

Reputation impact on top of business shifts

There is also today a dark undercurrent of reputation risk that is carrying our industry into disturbing and unfamiliar territory. At its root is the explosion of cases of actual and alleged misdeeds by banks and their staffs that have received notoriety in recent months. This is already occurring in tangible and identifiable ways.

In my work with the ABA, teaching an e-class on bank performance, one young man last week asked for my comments on the broad and seemingly benign question of the future of banking. He’s on a lending track in the lead affiliate of a midsize banking company in the Midwest. At the core of his concern I found out is not the viability of the business but the negative public perception about being a career bank employee. Is this an isolated concern?

The media have been full of stories of wrongdoing by very large banks. There’s no need to qualify this statement by saying “alleged wrongdoing,” as the banks have admitted to felonious activities on which the billions of dollars of fines and penalties were based.

These misdeeds include an astoundingly diverse list. It includes assisting U.S. taxpayers in evading income taxes; thwarting and circumventing U.S. government imposed economic sanctions on the likes of Iran and Syria; numerous examples of money laundering on behalf of known terrorist entities; hugely embarrassing misdeeds relating to mortgage foreclosures and fraud since the financial crisis of 2008-9; and price fixing of inter-bank lending and foreign exchange rates.

How much reputation risk can we absorb without serious damage to safety and soundness and the erosion of trust that’s the foundation of the banking business?

Issues must be confronted now

We have lots of hard issues on our plates right now. How we approach them will set the tone for our dealings with our employees, customers, regulators, and stockholders for years to come.

I don’t think that any of these constituencies should be satisfied with the actions ascribed to many of the very large institutions lately.

We’ll deal with our physical capacity issues one way or another and some banks will make lemonade out of lemons. The ethical issues of the industry will be dealt with one way or another too—by us or by outside intervention and a stiff dose of retribution.

We collectively have to reinvent ourselves and our business models not only from the ground up but from the inside out. This is a once-in-a-generation opportunity and we need to get it right financially and ethically. The implications for what each and every one of us does for a living is at stake.

Ed O’Leary

Banking Exchange Contributing Editor Ed O'Leary, a veteran lender and workout expert, spent nearly 50 years in bank commercial credit and related functions, working with both major banks as well as community banking institutions. His last job before retiring was as the CEO of a regional bank headquartered in Alburquerque, N.M. He earned his workout spurs in the dark days of the 1980s and early 1990s in both oil patch and commercial real estate lending. O'Leary began his banking career at The Bank of New York in 1964, and worked at banks in Florida, Texas, Oklahoma, and New Mexico. He served as a faculty member and thesis advisor at ABA's Stonier Graduate School of Banking for more than two decades, and served as long as a faculty member for ABA's undergraduate and graduate commercial lending schools. Today he works as a consultant and expert witness, and serves as instructor for ABA e-learning courses. You can e-mail him at [email protected]. O'Leary's website can be found at

In mid-2016 O'Leary's "Talking Credit" blog received a bronze excellence award for the Northeastern Region from the American Society of Business Publication Editors.

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