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 / Autumn 2013 / Issue 72(originally published by Booz & Company)


To an Analog Banker in a Digital World

What happened to recorded music is about to happen to you. But only a few banks are making the right moves from branches to online services.

Note: This article was originally published by Booz & Company.

There is a tale I like to tell people in the banking industry about change. According to a family legend, one of my mother’s aunts was Henry Ford’s neighbor in the early 1900s. Her husband was a successful businessman, and one day Ford asked them to invest US$100 in his Model T automobile. This was equivalent to about $18,000 today—not a small sum to give a neighbor with a harebrained idea. My great-aunt and her husband evaluated the opportunity for some time, and then told Ford no. They sincerely believed no one would ever buy a car; there was simply too much infrastructure supporting traditional means of transportation, and consumers were clearly quite comfortable with their horse-drawn wagons. In other words, they made a rational business decision, based on observations of consumer behavior, the business environment, competition, labor, and demand.

I think of this story when I hear bankers defend retail distribution against online or mobile banking. Consumers, they say, prefer branches. Yet every day, in New York City, I walk past bank branches with no customers inside. Empty branches are all over the U.S., and as financial-services (FS) industry trends continue—as the alternatives of Internet and mobile banking grow—branches will soon become obsolete.

Most bankers I know understand that a major change is taking place with consumers, and that they face imminent disruption from digital technologies. But they don’t fully know how to respond. Their backgrounds, which have been typically bound up with the branch-building policies of the past 15 years, have not prepared them for the decisions they need to make today. Naturally, they are ambivalent in the face of seeming uncertainty. For example, should they balance their existing branches with an investment in digital services, or should they start selling off their real estate now? The right answer is different for each firm, depending on its strengths, its customer base, and its current footprint. Those that recognize which aspects of their business are subject to change, and act accordingly, will lead the industry and thrive.

To understand how to distinguish successful digital strategies from those that will not work, it is important to understand one basic principle: Although consumer needs remain constant, technology changes the way those needs are met. The fundamentals of banking have not changed since the Templars, a Christian order of knights living in the 12th and 13th centuries, who ran what was perhaps the first multinational bank in history. The Order of the Knights Templar built their business around basic consumer needs: security and access to cash. Pilgrims from Western Europe heading to Jerusalem after the Crusades were easy prey for robbers, especially given the amount of cash they needed to carry for the trip. Because of a previous role as crusading knights, the Templars were exempted from local laws by papal decree, and this enabled them to create an international financial system. Pilgrims could deposit money in London, and then, with a secret password, go to the Templar office in Paris, Athens, or Jerusalem, and make a withdrawal. Word of the Templar bank quickly spread, and soon kings, princes, and even popes were depositing funds there. The Templars deployed this cash by investing in land and lending to small businesses (investment banking); they were involved in manufacturing, import, and export; they had their own fleet of ships; and at one point they owned Cyprus.

In the early 14th century, the Templar story ended abruptly when the group lost their papal support and privileges, and King Philip IV of France (who had inherited a huge debt to them) turned against the order. On October 13, 1307, hundreds of Templars were arrested for heresy and many were killed; five years later, their grand master was burned at the stake. But their model of long-distance banking lived on; you invoke it every time you use a PIN to access cash at an ATM.

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