Digital innovation in the banking industry – Are branches a thing of the past?
A Portuguese bank is attempting to reinvent the concept of branch and the customers are loving it!
Despite the current perception that big financial institutions are outdated and financial technology (“fintech”) is finally bringing some light to this industry, the reality is that banks have gradually introduced digital technology in their business, though more on non-knowledge-intensive services that can be standardized . Key examples of this are:
- Credit risk models: responsible for the vast majority of credit decisions, namely accept/ refuse credit concession and in which conditions. For each client, the model in place assigns a score or rating as a measure of creditworthiness. It is usually based on the customer historical financial data, its operational performance (in the case of companies) and his or her behavior over the last 12-24 months on average. Apart from providing fast and cheap automated decisions, these models allow for dynamic pricing and targeted marketing – it is not uncommon for one to receive a notification on the mailbox stating: “Congratulations, a loan of 10,000 dollars has been pre-approved just for you” ;
- Trading algorithms: mostly used by hedge and mutual funds, these algorithms operate on specific pre-determined rules that are usually the result of extensive data mining. Similar to credit models, they are capable of placing a huge amount of automate trades that would require hours of manual work otherwise;
- Planning and control platforms, that rely on the communication between different geographies (for universal banks) and applications to develop and implement PPNR regressions, which in turn provide detailed forecasting for all lines of financial intuitions profit and loss accounts ;
- Internal Ratings-Based models (IRB), which became crucial in the last decade to reduce the information asymmetry between banks and regulators, as they better calculate capital requirements. These models are estimated to lower capital requirements by 100-200 basis points of capital, which represents an astronomical save .
On the customer side however, little to none innovation has been introduced besides internet and mobile banking. And even if their capabilities have increased over time, allowing us to transfer money, check balances, review bank statements, etc., studies indicate that their use is limited and physical branches are here to stay .
One Portuguese bank, ActivoBank, is trying to take a step further and reinvent the concept of branch by “digitalizing” it. Created as a separate entity of the biggest private bank in Portugal, Milleniumbcp, ActivoBank seeks to attract a different audience that wants fast service at a minimum price mostly by offering a different experience at the branch. But how?
The idea is that customers can use the branch as a touch point to interact with the bank, but perform most tasks on their own (“do it yourself”) while there with digital support: want to open an account? Use the iPad. Sign papers? Use the electronic pen. Need a credit card? It is printed on the spot. There is no time pressure and the experience is more pleasant.
What is in it for the customer? Well, to start with, no more waiting while the branch manager introduces all your personal data into the system. Because less employees are required, this business model allows for lower fees, reduced lines, and a simple and straightforward process.
The success was immediate, with customer satisfaction at levels that surpassed all competitors and with ActivoBank winning 5 years in a row the award for best retail bank in the country. 
More recently, the bank launched its first virtual branch, directly connecting clients with branch managers through Facebook, in a secure and easy way, that allows for all types of transactions and services. In the words of the World Finance magazine, “ActivoBank caters to digitally-savvy clients”.
Though I praise ActivoBank’s initiatives, digital technology allows for opportunities that haven’t yet been developed. From an operationally perspective, their presence on social media should be leveraged to expand their credit models, by including new variables and / or obtain information faster. From the customers’ perspective, the bank could transform the payments industry (as Venmo is doing in the US) and become a marketplace for alternative investments such as real estate and peer-to-peer lending:
- Banks holds a significant volume of repossessed real estate assets that are usually divested to expert funds at low prices. Opportunities for cross-selling and engagement of customers are therefore lost;
- By connecting customers with companies that do not seek bank financing, the bank can work as a middle man, charging fees and not having any credit risk. (763 words)
 Deutsche Bank, “Digitalisation and the Future of Commercial Banking”, http://www.cib.db.com/docs_new/Digitalisation_and_the_Future_of_Commercial_Banking.pdf, accessed November 2016
 Reply, “Applying big data to risk management”, http://www.frm.reply.eu/upload/File/cms/content/16779_img_Applying-Big-Data-to-Risk-Management.pdf-id=16779, accessed November 2016
 Oliver Wyman, “Stress Testing 102, Rise of the PPNR machines”, http://www.oliverwyman.com/content/dam/oliver-wyman/global/en/2015/sep/Oliver_Wyman_Stress_Testing_102.pdf, accessed November 2016
 Oliver Wyman, “Comparative analysis of the Regulatory Capital calculation across major European jurisdictions”, http://www.santander.com/csgs/StaticBS?blobcol=urldata&blobheadername1=content-type&blobheadername2=Content-Disposition&blobheadername3=appID&blobheadervalue1=application%2Fpdf&blobheadervalue2=inline%3Bfilename%3D906%5C65%5CComparative+Analysis+Regulatory+Capital+Oliver+Wyman.pdf&blobheadervalue3=santander.wc.CFWCSancomQP01&blobkey=id&blobtable=MungoBlobs&blobwhere=1278697097284&ssbinary=true, accessed November 2016
 Capgemini, “The Future of Bank Branches”, http://ebooks.capgemini-consulting.com/The-Future-of-Bank-Branches/files/assets/basic-html/page1.html, accessed November 2016
 Economia ao Minuto, https://www.noticiasaominuto.com/economia/640384/activobank-considerado-melhor-banco-comercial-pela-world-finance, accessed November 2016
Student comments on Digital innovation in the banking industry – Are branches a thing of the past?
I love it how this bank introduces a new and exciting way of banking in a cost-effective way. If you think about the beauty of the idea, most banks unfortunately believe that there is a very significant trade-off between good customer service (which should simply involve more Relationship Manager time) and cost efficiency (one of the highest line items in branch cost is payroll). ActivoBank just successfully proves that there does not need to be a trade-off.
Another great thing is that this new way of operating is a marketing tool in itself, I can see a digitally-savvy customer going through the ugly experience of switching her bank just to experience this new and hassle free way of banking.
One important consideration I would point out is the applicability in other markets: Especially in emerging economies where cash based transactions are still very dominant, the addressable market for this new way of operating can be quite limited because cost to handle secure cash transactions are still very high. That said, I still believe that this model can be successfully adopted in more developed economies with less preference for cash transactions.
This is very cool! Perhaps I am old school, but I actually thought that the different online/mobile offerings banks have started to offer were quite advanced and helpful. But taking a step back and thinking about all the different types of transactions that take place, I suppose that there is so much more banks can do to facilitate a seamless experience.
I really wonder how customers across many different demographics would adopt such changes to their banking experience. Would some skeptics think customer service might suffer as a result? Also, one of the studies sited in your blog mentions that over half of people who use banking services believe that the institution isn’t legitimate if there are no brick and mortar stores. I wonder how banks looking to move more in this direction will overcome strongly held customer perceptions.
As a fellow fintech nerd, I really enjoyed reading this! What I really like about ActivoBank’s branch model is that they have really thought about the customer experience. Instead of just incorporating Internet and mobile banking into their product offering and leaving bank branches unchanged, ActivoBank’s incorporating of UX into the bank branch is a real innovation that appeals to the things customers care about (speed and efficiency) and the things banks care about (their bottom line). I also really like the idea of the virtual branch and wonder how long it will take for all bank branches to become digitized. My major concern with the proliferation of online banking, however, is data security. I would love to know how ActivoBank is thinking about protecting customer information as it engages through social media platforms and how the Portuguese financial regulators are responding to this digitization.