The Future of Banking

Fewer banks and branches, but more wearables? Convenience and mobile tech are driving this industry’s evolution.

When Fifth Third Bancorp said recently that it would close 100 branches and sell properties intended for branches, the Cincinnati-based bank was candid about the reason.

In a statement, Fifth Third CEO Kevin Kabat said, “Consumer demographics and our customers’ preferred channels of banking are undergoing significant changes. Technology continues to impact our service delivery and revenue generation tactics and strategies.”

Fewer Americans are setting foot in bank branches these days, opting to conduct transactions with mobile apps or ATMs. New companies, like Moven, only offer mobile and ATM access, but provide debit cards, account linking and an easy way to send money to friends.

Consumers’ views of banking are changing fast, with fewer people seeing the value of visiting a bank branch. In its 2015 North America Consumer Digital Banking Survey, which included more than 4,000 adults in the U.S. and Canada, consulting and technology management firm Accenture found that 81 percent of consumers said they would not switch banks if their local branch closed. Only two years ago, that number was 48 percent.

In addition, 38 percent said good online banking services were the top reason for staying with a bank. That came in ahead of locations and low fees, both being named as the top reason 28 percent of the time.

Here are some banking-industry changes consumers are likely to see in the next few years:

Fewer branches. “Branch traffic is falling, and banks will have to figure out how to adapt to that,” says Wayne Busch, managing director for banking at Accenture.

The Fifth Third branch closures, which the bank expects to complete by mid-2016, may be an early sign of what’s ahead. “That’s just one small piece in a very big story that’s unfolding,” says Jason O’Donnell, chief investment officer at the Bluestone Financial Institutions Fund in Wayne, Pennsylvania. The fund focuses on small and midsize community banks.

“You’re going to see a lot fewer branches, and huge consolidations, with fewer banks. The branches that we will have will look and feel very different. In another five or 10 years, the average branch size will be 50 percent smaller than the branch sizes we see now, and we’ll see more use of kiosks and other technologies,” O’Donnell says.

Fewer banks. Smaller community banks are facing headwinds as the industry races to implement new technologies. At the same time, megabanks are dealing with increased regulation and the yearly Federal Reserve stress tests.

That may leave regional banks, perched between the tiniest and the largest institutions, in a good position.

Although the pace of bank consolidation slowed for several years after the financial crisis, Busch and O’Donnell both expect mergers and acquisitions to pick up in the coming years.

Some smaller banks may become acquisition targets because of their particular niche. “A real change is that a variety of different organizations are competing not to be Bank of America or Chase, but to pursue one or two segments of value,” Busch says.

O’Donnell notes that smaller banks may get rolled into midsize banks. Those mergers and acquisitions will give the midsize banks increased capabilities to take market share from larger firms, O’Donnell predicts. “There will be a ‘middling’ of the industry, with a lot fewer banks. The acquisition pace has picked up considerably over the last several quarters. As consumers, one of the benefits is that we’ll get better service in a bunch of ways,” he says.

“True community banks, with under $500 million in assets, are dead banks walking,” O’Donnell adds. “Some of this regulation has actually pushed its way down to these tiny banks.”

That’s hurt small banks’ profitability. “The beneficiaries are the guys in the middle. They’re big enough to absorb some of these extra regulatory expenses, but small enough that they don’t have to worry about the federal government suing them every other month,” he says.