I’m going to ask you to play a game with me. More of a thought experiment, actually. I can’t promise it will be fun, and I’m not sure every reader is going to get the same result, but that’s what makes this game so interesting.
"The models for scoring the relative risk and benefit of traditional banking products fall apart when trying to understand newly-developed ones"
OK, here goes:Pretend you receive an email from one of your peers to attend a vendor presentation for a new, revolutionary technology that’s going to change the way branch banking works, and you can get in on it way before your competition. Everybody is excited about it, and now you’re interested too.
Here’s where I’m going to ask you to use your imagination: The technology I’m proposing here was actually invented in the mid-19th century, but let’s pretend instead that it was just invented by some sexy fintech in Seattle. None of your competitors have it yet, and it’s considered a major evolution in branch banking.
What is this magical product? The pneumatic tube. Apparently, those crazy folks in Seattle invented a way for you to double (or triple!) the number of concurrent drive-through customers by sending paperwork and money back and forth between a teller in the bank and a customer sitting in her car outside, via a plastic tube. Suddenly, one teller can serve more than one drive-through customer at a time! The investment in infrastructure is tiny, compared to the way you would have to add that capacity with your current methods. And after you’ve seen your money riding through a tube inside a smaller tube, you can’t imagine how you wouldn’t benefit from the cool factor of having this amazing capability. It’s a no-brainer.
Not so fast, Chief. You’re required, by policy and regulation, to conduct proper due diligence and a risk assessment on any new vendor or technology your company acquires. You have an RFP process. There are legal concerns. You need to get 3 competing bids and research the financial stability of the vendor. There are plenty of other factors you need to include in your decision-making.
So here you are, in your own financial institution, and my question to you is this: If this brand new technology landed on your desk today, would it be approved? Think about your current process for evaluating and acquiring new technology, and answer honestly.
I strongly suspect that your answer lines up pretty well with mine. While those of us living in this universe wouldn’t give this technology a second thought, our alternate-universe counterparts have a pretty tough hill to climb. There’s nobody else making these tubes, because they’re brand new, so you’re not going to get competitive bids. And then there are financial reviews, reference checks, regulatory concerns, and a million things that could go wrong - mostly improbable, but you can never be too careful.
For those of us who think about innovation in the branch, this is a real problem. Barely a day passes that we don’t read an article or blog post predicting the death of the brick-and-mortar branch, and aside from the convenience of the electronic channel, the reason most cited is that there’s nothing interesting happening there. But there’s a bigger reason for this: innovation in banking is really difficult.
Think about recent investments in fintechs and “Innovation Centers” at the biggest FIs. We could put people on Mars for the money being spent on reducing ACH times by a couple of hours, and that’s a tiny bit of the $200 Billion annual bank tech spend.
Many of the best ideas that come from these massive investments never survive contact with the world of risk, compliance, and regulators. Our models for scoring the relative risk and benefit of traditional banking products fall apart when trying to understand newly-developed ones, because they’re strongly biased against them. Not intentionally, of course, but because our risk and governance models assume that changes in the banking industry will continue at the steady pace they have since Scrooge and Cratchit invented the thermostat war.
So what do we do? How can we push back against the notion that the branch is dead? How can we show ROI from brick-and-mortar? And most important: why aren’t we innovating in the area where we’re taking the biggest beating?
The answer is twofold: First, we need to look for help outside of banking. And second, we ought to be spending some of that R&D money on innovation that will really move the needle: new ways to model and manage risk.
The first part is probably easier, and looks like a successful strategy for preserving the branch as a vital part of a bank’s long-term strategy. Some banks are stealing from Starbucks’ playbook, creating comfortable spaces for customers to hang out and drink coffee. Others are reaching out to the community, offering lunch-and-learn sessions and educational opportunities. Still more are leveraging technology like Interactive Teller machines to reduce costs while delivering personal service. Some are offering community rooms, where customers can hold events and gain mindshare with new prospects. And don’t forget the opportunities that come from offering related services like wealth management or accounting via co-branded (or variably-branded) meeting spaces.
The second challenge is far more difficult, but has the potential to create some serious innovation in our industry. We need to take a hard look at the creaky, complicated, and often-contradictory way we measure the risks associated with new products and business models as well as the regulation that drives it. If we were to start with a clean-sheet approach to our risk and compliance needs, and then leverage the power of data analytics and artificial intelligence to understand the complexities of regulation and the enormous number of factors that contribute to a product’s inherent risk, we just might find ourselves with a better set of options for maintaining – or maybe even growing – our branch business.
Both of these require a deep commitment of time and resources to achieve success, and neither one will be enough on its own. But that doesn’t mean we can’t get started. My own bank is only weeks away from opening the doors on a new branch that will be a test bed for all of the physical changes I listed above, as well as a few I’d rather not share with the competition. Not all of them will be successful, but we’re almost guaranteed to have a couple of hits. Our challenge then will be to understand how to replicate that success across the rest of our locations, but that’s a great problem for a bank to have.
As for the second challenge? You can be sure somebody far smarter than I am is already working on it. I don’t know who, but I’m always on the lookout. And for the sake of your bank’s future and your own sanity, I hope you’re looking for it too.
Just promise me you won’t let it be risk-assessed to death.