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Virtual Banks – Are they the new “local” bank?

In last week’s blog, Bank Branches – “News of my death has been greatly exaggerated”, I argued that bank branches are not only thriving, but are the foundation customer interaction channel for most retail banks and that video will be the enabling technology to reinvigorate and reenergize the branch.

In the spirit of equal disclosure, I would like to point out that there are major two competing strategies regarding the retail bank.  Many institutions, as I argued earlier, believe that the branch will continue to be an important channel for their retail customers and are investing heavily in their infrastructure.

Other “virtual banks” believe, and they are betting the bank’s capitalization on their beliefs, that the branch structure as a vehicle for deposit collection and loan creation is financially unsustainable and in order to maintain a robust return on average assets have developed business models that eschews the branch concept.  They chose to deliver their products and services utilizing Internet, call center, ATM and mobile channels exclusively.

Why this trend away from physical location? The virtual banks believe that the market is becoming more rational. They contend that customers will prefer the higher rates on deposits and lower rates on loans and video interactions, associated with lower-cost virtual models to the more traditional, albeit higher cost, physical location models.

Further, these virtual banks see technology moving from the bank branch to the customer (Internet, mobile phone, in-home video capabilities) obviating the need for extensive branch networks. And, while my generation, baby-boomers, finds a traditional bank branch reassuring, today’s younger customers will be looking for institutions that are able to accommodate their lifestyles.

The question for the future is, “what is the most cost effective way to integrate and deliver retail banking functions?” What business model and technologies will maximize the bank’s bottom line and be most accretive to the institution’s stock price. Regardless of the model chosen, banks will strive to provide a  level of customer service consistent with growth and profitability requirements.  In short, banks will make every effort to become as low a cost provider as possible within market constraints.  Banks will  focus on business models and delivery channels that provide the greatest value and benefit to the majority of customers while reducing overall costs to the institution.

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