The financial industry is facing unprecedented market disruption. Technology is changing the way institutions and consumers alike consider and conduct transactions, expanding the breadth of opportunity on both sides of the counter.

Consumers now have many options for managing their financial health, from online banking services to mobile apps, giving them more control over when, where and how they want to bank. What’s more, traditional banks are facing increased competition from alternatives such as PayPal or Apple Pay, which are gaining mindshare and trust among consumers and redefining the transactional experience.

Savvy banks have recognized these disruptors and are fighting back, investing in their branch offices and offering services that cater to the needs and wants of consumers. Technology is a major driver in helping banks win back the hearts and minds of their most important asset: their customers.

To survive and even thrive in today’s market, financial institutions need to adopt a customer- first strategy in all areas of their business. They must rethink their network strategy to ensure that customers receive the best user experience, whether online or in-house, and that branch offices have immediate and complete access to financial data.

Breaking the Traditional Bank

Today’s banking experience is much more varied than the bank lobbies and drive-through tellers of yesterday. The invention of the automatic teller machine in the late 1960s heralded a new era in banking, one rooted firmly in technology designed to streamline operations but ultimately served to depersonalize banks themselves.

As customers grew more comfortable with the idea of machine-based transactions through the ATM, banks saw a decrease in foot traffic and, as a result, put less emphasis on their branches by reducing their teller ranks and offering fewer services.

The marginalization of the branch office continued with the advent of online banking, enabling customers to check their balances, pay bills, transfer money between accounts and even apply for loans. Banking became simply a transactional experience, as branches, for the most part, were relegated to making deposits and handling customer issues. In a 2015 survey conducted by the American Bankers Association (ABA), 31 percent of respondents chose online banking as their preferred method of managing their bank accounts, marking the sixth year online topped branch banking.

As online banking became the norm, a slew of online-only banks emerged, further marginalizing traditional institutions. Ally, Capital One 360, Simple and Moven are but a handful of companies comprising this fast-growing area of banking, attracting customers with low fees, breadth of services and ease of conducting transactions— in many cases, simply point and click.

Today, further technological advances in mobile banking apps— which enable most services afforded by online banking as well as mobile deposits—all but have made the branch obsolete. A separate 2015 ABA survey found that 45 percent of mobile device owners in the United States use their devices to manage their bank account, with 39 percent using them at least once a month to manage their account.

The Impact of Alternative Payments

As the popularity of online banking grew, so, too, did alternatives to traditional financial institutions. The emergence of PayPal in the early 2000s heralded a new era in different payment methods, enabling users to bypass traditional cash, check or money order transactions. And its impact is huge: In 2015, PayPal managed 4.9 billion customer transactions totaling $282 billion.

Following on the heels of PayPal, other non-traditional financial services have gained traction worldwide. One successful example is peer-to-peer lending organizations, which count Lending Club and Prosper among its U.S. companies. In 2015, Lending Club issued more than $9 billion in loans, with members seeing an average between 5 percent and 9 percent return on their investment. Prosper, meanwhile, issued $3 billion in loans at interest rates ranging from 6.6 percent to 35.9 percent. Investors earn 5 percent to 9.5 percent, depending on the amount of risk involved.

Security, Government Regulations Loom Large

Online may be the dominant method by which customers prefer to transact their financial business, but that added convenience has raised concerns regarding their financial security.

In 2015, the largest data breach of banks and financial institutions in U.S. history was reported, with the customer data of more than 100 million people stolen. And in 2014, financial services stalwart JPMorgan Chase reported a security breach of financial and personal information of 76 million households and 7 million small businesses, which will cost the company an estimated $1 billion.

The list of data breaches is growing larger, despite best efforts by financial institutions to lock down their security. As a result, government regulations are imposing strict guidelines on the security, privacy, integrity and availability of financial information. The Gramm-Leach-Bliley Act of 1999 was the first to expand on consumer data privacy in the banking industry, and since then, a patchwork of regulations at the state level have served to provide some level of security of customer data. However, as the number of breaches expand, some speculate a data breach and security standard will be implemented at the national level.

Until then, the impetus is on financial institutions to maintain security for their customers’ sensitive financial and personal data. That means putting a much larger emphasis on their cybersecurity efforts, including improving their data networks and network security, even as they continue to improve customer access to accounts.

The Branch is Back

The increasing data security threat coupled with banks’ need to compete effectively against online-only and other alternatives to traditional banking has brought the branch back into focus.

Another tick in branches’ favor is their potential as a revenue generator. The financial crisis in late 2008 served as a wake-up call to many financial institutions that customers will be the main drivers of their growth. These institutions are, in turn, making changes to their business to ensure a more customer-centric mindset. Technology serves as a catalyst for those changes, as more banks grasp the importance of knowing customer needs, actions and desires, and tailor experiences that cater to them. Big data is helping to make that happen. In 2015, financial services firms were projected to spend $6.4 billion in big data-related hardware, software and services, growing at a CAGR of 22 percent through 2020.

IT services consultancy Accenture, in its 2015 Technology Vision for Banking report, noted for banks to truly take advantage of big data to create an “Everyday Bank” service, they must:

• Capture data contained in internal exchanges with customers, such as from emails and voice recordings.
• Incorporate the enormous amount of data from outside banks’ firewalls, including public data—social media, for example.
• Build customer trust by demonstrating that adequate safeguards are in place to protect confidential information and assets. More than 20 percent of bank respondents see security as the top barrier to greater adoption of personalization tools.
• Draw on analytics to micro-segment customers and offer more personalized products and services—ideally in real time—to maximize the benefit of transient customer context (for example, location).

Branches also are reinventing themselves as more than a place to conduct financial transactions. A growing number of financial services companies are opening their branches for use as ad hoc community centers or meeting spaces to foster a feeling of community. Others are differentiating themselves by adding services not usually associated with a bank: A Capital One branch in New York City’s Union Square features a coffee bar open to the public, where customers can work in an open lounge and take advantage of the free WiFi. West Coast-based Umpqua Bank, meanwhile, offers yoga classes and other services ranging from gift-wrapping classes to pet portraits, as well as free use of the branch’s computers and iPads and a big screen for Skype use in a community conference room.

Technology is the Driver

Consumers more and more are demanding an omni-channel banking experience, enjoying the convenience of online banking with the comfort of being able to interact face to face with a banking representative should an issue arise.

As banks refocus their efforts on creating a customer-centric experience, technology plays a major role in making that happen. Banks are upgrading their infrastructure to support the systems and services that run big data transactions to help banks anticipate their customers’ needs and interact proactively rather than reactively. And branches are adding more customer-centric technology offerings such as free WiFi—now a customer expectation in any industry—and kiosks to interact with bank reps who might not be on site but answer the need for one-to-one interaction.

Conclusion

Technology is changing the face of banking, with online and mobile banking complementing the new generation of bank branches to offer a complete and affirmative customer experience. A robust networking environment can help financial institutions remain relevant and successful today and in the future.