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Banking Operating Models – Then and Now

A recent poll by American Banker Magazine reported on the impressions of the future of banking and generated some interesting perspectives about what the future will be like. While there were several insights, one comment especially captured the essence of the future:

The future model of banking will center around dramatically increased simplicity delivered through a mobile device (phone, tablet, wearable technology). The result will be an experience that makes banking part of other daily activities as opposed to a standalone event.

In other words, the business signs on our banks will now read “Open 24 Hours.”

How different this is, when compared to the operational model on which banks have operated for most of the time. Banks have their roots in a pre-Internet/pre-electronic communications era. Like many retail companies, banks were designed around a ‘brick and mortar’ physical model of operation and distribution. We can categorize this as the physical business operating model and the bank of now is heading towards anytime, anywhere access.

Now let’s take a step back for a minute and consider why it has taken so long for the banking industry to evolve. When the physical operating model was established:

  • Business was conducted during fixed hours which meshed with societal norms of a fixed pattern of activity over a 24-hour period.
  • The technology of the day was paper – paper-processing machines and related tools were the key technologies. Interaction was in-person and in the branch.
  • The main item of inventory was cash and currency of physical form – paper, coins etc.
  • The regulations and policies that govern financial services organizations and operations were designed to within this context.

In this physical world, management faced a number of logistical challenges. Branches had to be substantial in size and staffed based on a supply level sufficient to meet an unknown and uneven demand of customers throughout the day. People had to go home at the end of a work day, so time-of-day procedures were put in place such as cash balancing and end-of-day close down.

In order to grow, and also in response to growth in population and expansion of cities and towns, banks had to build new branches, in new communities. In this physical model, costs to serve increase with demand and channel diversity, productivity levels are uneven and key resources under-leveraged across the operating footprint.

Customers also faced a number of logistical challenges to access services and experts. They lined up to be served. They waited for experts. If the expert was not available that day, the customer would have to return. Customers were dealing with the fragmented structure of the organization and were subjected to the frustrations resulting from it.

Fast Forward to the Bank of Now

The world and customer expectations have changed significantly with the arrival of the Internet and innovations in information and communications technology. Competition in the financial services sector is increasing, resulting in more choices for customers. Banking is now global and high speed.

In addition to the physical branch, banks have added mobile, Internet, ATM and call center banking over the past 40 years – originally these were called alternate channels and now they are the expected channels. And every channel is a digital channel.

However, even with these technology advances, some of the challenges and constraints of the previous operating environment continue. While we have moved from the physical to the digital world, the operating models of many banks are still rooted in the physical world, the legacy-operating model.

The branch is here to stay, but the questions now become: how does the banking industry evolve the distribution and operating model to catch up with society? How do we provide the services that will keep customers loyal? How do we optimize our costs to serve and continue to expand our operating footprint? And what role does technology play in that evolution?

Every financial institution is evaluating the branch and all their channels, as well as distribution and operating models. This is an exciting time because banks are exploring the transformational opportunities that are now possible through current and emerging technologies. Banks that take advantage of new technology to power their transformation into a digital world will be ahead of competition in how their business model serves customers. In my next blog I will discuss successful examples of how emerging technologies are being successfully being implemented and improving customer service.

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