January 18, 2013 6:09 pm

Bank revolution that’s around the corner

By Lucy Warwick-Ching

A robot welcomes visitors to Banco Bradesco in São Paulo, Brazil

A robot whirrs towards you with a neon blue smile, asking which service you require. Digital avatars and on-screen consultants provide personalised financial advice, while voice-recognition software and table-mounted gesture-controlled touchscreens confirm the customer’s identity.

This is not a scene from the latest science-fiction movie – it is the bank of the future. Or, if you live in certain parts of the world, it’s the bank of right now.

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Banco Bradesco in Brazil, uses robots to greet customers to its São Paulo branch. Link 237, an R2D2-inspired robot, meets visitors at the door and invites them to explore the “space”. There are biometric log-in points too, where customers use their fingerprints before conducting transactions.

A branch of ING in San Francisco has adopted a “café branch” culture where people bank over coffee in a modern space, and BNP launched its first “concept store” in Paris where customers sit in plush surroundings, speaking to specialists via video links.

It’s a far cry from the stereotypical British bank: a maze of ropes herding harrassed customers to a long line of tellers behind bullet-proof glass, but it will be coming soon to a branch near you.

The UK lags behind in technology, both front of house and behind the scenes. But this is changing. The first industry-wide scheme allowing Britons to transfer cash to friends and businesses as easily as texting, was launched by the Payments Council this week.

Eight financial institutions, representing 90 per cent of UK current accounts, have signed up to the service which, from 2014, will allow people to make payments to someone else simply by using a mobile phone number. Customers will register for the service through their bank, without having to share their details with anyone else. Those involved in the scheme are Barclays, Cumberland Building Society, Danske Bank, HSBC, Lloyds Banking Group, Metro Bank, Royal Bank of Scotland and Santander.

The adoption of such modern techniques comes not a moment too soon as UK banks face tough business decisions and huge reputational damage after a decade of scandals.

“The situation for UK banks is challenging due to an exceptionally tough economic downturn hitting financial institutions on all their business lines,” says Jean Bouvier, partner at Equinox consulting and co-author of The Future of Bank Branch Networks, a report commissioned by Efma, an international trade body for financial institutions.

The study, which interviewed 3,300 financial services companies from 130 countries, highlights how regulatory pressure on banks has tightened asset liability and capital ratio management. Banking executives surveyed predicted an uncertain and troublesome future, with declining revenue pools and an increase in operating costs.

Biometrics, the future

A portable iris scanner is displayed by Richard Agostinelli of SecuriMetrics at the Biometrics Conference and Exhibition at the Queen Elizabeth II Conference Centre on October 20, 2005 in London. The Biometrics Conference and Exhibition runs over two days and provides information for biometric, smart card and identity management technology to providers and integrators.

The days of Pin numbers, passwords and signatures may be numbered – the future for bank customers is biometrics.

These systems, a mainstay among high-security and government-related industries, use fingerprint, handprint, eye retina scans, and voice recognition technology (already used by private bank Coutts) as a means of identification and may eventually make personal identification numbers and signatures redundant.

“From one generation for the next, we need to learn everything again. generation X uses call centres, generation Y emails, and generation C tweets on social media. Our distribution model is resisting, but for how long?” noted on respondent.

But it will be tough for some banks to change their ways. In its 4,000-year history the banking system has not changed much. Banking began around 2,000 BC when grain was lent to travelling merchants. But it wasn’t until the 14th century that banking as we know it today began to emerge in Italy.

“The bank branch started as a distribution point for cash but has morphed into a place for bank products and an advisory space – where the banker knew something you didn’t,” explains Brett King, founder of US-based Movenbank (which has no retail branches) and author of the new book Bank 3.0.

“This shifted in the 1980s when telephone banking allowed consumers to call up and do basic transactions outside of the branch. In 2008 in the UK, internet became the preferred channel for day-to-day banking, surpassing the branch. Since then, the shift in banking behaviour has only sped up.”

“Banks and building societies who aren’t prioritising mobile technology won’t be able to survive in the coming years,” says Gareth Ellis, at payment systems company, ACI Worldwide. “About 16 per cent of Britons are ‘smartphonatics’ – people who have changed their shopping or banking habits as a result of owning a smartphone.”

Are the days of bank branches numbered?

Two UK bank chiefs give their very different views

Perhaps the UK should look to the US for inspiration, say experts. Nick Hungerford, founder of online discretionary manager Nutmeg.com, says Square.com, a mobile payment system, is shaking up banks in the US by allowing people to pay for things using their phones. Then there is USAA, which caters exclusively to US military staff and their families. It has developed a mobile app that allows soldiers on the front line to pay cheques in by photographing them.

This is not to say, however, that the branchless model will dominate the UK retail banking landscape any time soon. “There is a strong belief among some older customers that bricks and mortar provides stability,” says King. “This attitude is thought to linger from the Great Depression – if something goes wrong, people want to know there is somewhere they can go and yell at someone.”

But he adds that the use of bank branches is decreasing fast and that banks need to adapt. “In 1995, the average Briton would visit a branch twice a week, but by 2016 mobile will be the primary way in which people interact with their bank. Branch use will be down to just one or two times per year,” he explains.

This does not mean that banking will become fully automated, though. Human contact is still important – but it does not need to be with a human being sitting behind a counter in a branch, says David Conway, strategy director at Nunwood market research agency, and the founder of internet-based bank Smile (part of the Co-operative)

“More people are doing the basics of banking online or on their mobile,” he says. “But when people go into a branch it is because they feel their problem is too complicated to solve online. The bank of the future should be trying to push knowledge into the digital channels – in the form of online and phone assistants – so that people can get the information they need without going into a branch.”

Bank shares remain popular
Even during their darkest days, UK bank shares were among the most actively traded among Britain’s private investors, and Barclays and Lloyds TSB shares have continued to appear in stockbrokers’ top-five share buys and sells lists since the start of this year, writes Lucy Warwick-Ching. Graham Spooner, investment research analyst at The Share Centre, says interest in banks has been boosted by a rise in share prices. Shares in state-backed Lloyds Banking Group have risen by 84 per cent over the past year to 52p. Royal Bank of Scotland shares rose by 60 per cent to 350p, while Barclays shares are up 53 per cent at 291p. The sector also received a boost last week after strict liquidity rules designed to prevent a repeat of the financial crisis were relaxed and their implementation delayed. Adrian Lowcock, of Hargreaves Lansdown, says banks are popular with investors partly because they are always in the news, so they generate a lot of debate. “Investors like the fact that banks, like retailers, can be physically seen – you can walk into a branch and see the bank operating,” he explains. Their popularity predates the financial crisis, adds Patrick Connolly at AWD Chase de Vere. “It wasn’t too many years ago that banks were considered safe and secure investments, seemingly making record profits each year, and featuring heavily in many investment portfolios,” he says. They were also big dividend payers. Although the rebound is good news for investors, bank shares are still well below the levels they reached before the collapse of US investment giant Lehman Brothers. Many private investors are still sitting on big losses, and have seen dividends reduced at HSBC and Barclays, or axed altogether at nationalised RBS and Lloyds, where taxpayers are also still nursing losses. “Despite an upturn in share prices and supportive action from central governments and regulators, it is too early to say that banks have turned the corner and that their recent bounce will be sustained,” says Connolly. “If the ongoing restructuring and de-risking of banks proves successful, then their shares will rise significantly in price from here. This is still a big ‘if’ and so, while there is potential and sentiment has improved, we still urge investors to be cautious.” Experts say banks face many future challenges, such as ringfencing, stricter capital requirements, more assertive regulators and greater competition. They say banks may never be as profitable as they were during their heyday, and caution that picking the possible winners from the losers is incredibly difficult. Investors can also use broad-based equity funds that will provide exposure to banks but diversify these risks by investing in other sectors too. AWD Chase de Vere likes Cazenove UK Opportunities and Fidelity Special Situations while Hargreaves Lansdown likes Jupiter UK Growth.