Lately, banks have been testing video tellers and high-tech mini-branches, figuring that these alternatives to full-fledged branches can increase efficiencies and cut costs while preserving the human interaction customers still desire.
But with the availability of artificial intelligence and sophisticated risk algorithms that can run on mobile devices, some argue theres little need for even stripped-down versions of the branch.
"Micro-branches won't last longer than a couple years," said Alistair Crane, president of content at Monitise. "It's really good for the transition stage. It's fine and novel and a certain type of customer will use them, but I think it'll really quickly get superseded."
Ultimately, consumers come to a bank to access funds or obtain credit. Now that the Internet and smartphones have set new expectations for speed and accessibility, all consumers want are faster decisions, say the micro-branch skeptics.
Consumers "need more access to core functions of the banking platform," Crane said. "Making me still video chat with a human is still pretty painful."
Banks use algorithms to determine whether customers should be approved or denied for account openings and loans. They should use those algorithms to provide a "yes" or "no" answer in real time in any channel, said Crane.
As incumbents compete with startups on mobile features, Crane said, "There's not that much that needs to happen, actually" for banks to meet consumers' digital expectations. "What it takes is a fundamental shift; the bank has to decide that they're going to actively expose this decision-making engine to the outside world."
Atom, a U.K. startup that plans to be the country's first digital-only bank when it launches in mid-2015, looks like it will be exposing some of its risk algorithm. The company, which received a $37.8 million funding round in December, plans a full range of products including consumer and business mortgages.
Dave Birch, at Consult Hyperion in the U.K., thinks bringing the conversation to the customer's mobile device will be much more successful than erecting micro-branches. Most consumers have video chat capabilities, such as Skype and FaceTime, on their personal laptops and smartphones, so why make a trip to a branch?
Even with video chat capability, "I would still much prefer to text," Birch said. He uses the live chat feature through his Barclays mobile banking app when he has questions. Then he has a transcript of the conversation so he can review the information later.
Kasisto, a startup that launched last June, is piloting its virtual personal assistant technology with banks in the U.S. and Asia right now. The plug-in technology allows consumers to use natural language voice or text to ask financial questions of an artificial intelligence program equipped with voice recognition, similar to Siri on iPhones.
The company was spun out of a joint project from BBVA and the Stanford Research Institute.
Consumers can ask for account balances and information or advice on different loan products. Plus users can transfer money using the technology integrated into their mobile banking app.
USAA has created a similar virtual personal assistant that uses machine learning and can anticipate an individual member's needs based on past behavior.
Currently no bank is using Kasisto to make small dollar loan decisions, said Zor Gorelov, co-founder and CEO of Kasisto. But this concept plays well into technology the company is building, he said.
"People banking are not trying to talk to a customer service agent, they're trying to get things done quickly," Gorelov said. "Especially [for] younger people, talking to an AI allows them to get what they need done very quickly and move on."
And some consumers may prefer to speak with an AI when applying for loans, said Birch. According to a study although Birch admits its dated people felt better about being turned down for a loan from an AI than by a real person.
Being turned down is socially embarrassing, Birch said. He wonders whether consumers would be more comfortable talking about personal financial issues with an AI teller presented on a screen, similar to what Diebold's micro-branch enables.
"One of the big things that's going to change over the next couple years are APIs; I see a genuinely new phenomenon of banking being built into other applications," Birch said.
Chinese company Tencent owns WeChat, one of the most popular messaging apps in the world and recently announced a digital only bank, WeBank. The company could integrate some banking functionality inside the chat app.
Another example: public transportation apps could allow consumers to renew their annual pass by connecting to their bank account through an API. The app could also allow consumers to get small dollar loans for the purchase.
But this concept could be alarming for many banks.
"We see very few financial institutions opening up the risk algorithm to the customer," said Addison Hoover, general manager of branch transformation marketing of the Americas at NCR Corp.
Industry experts say the way banks assess risk is both a competitive and public relations strategy. If a bank has found one characteristic that determines whether a customer will repay the loan, that's their competitive advantage over other banks, said Raja Bose, vice president of branch transformation and advisory services at Diebold. And the media could spin the way banks assess risk unpleasantly, he said.
Bose can envision a world where some small loans are accessible on mobile. But this hasn't come to fruition yet. Most digital bank providers, such as Simple, which was acquired by BBVA, and Moven, have primarily focused on deposit taking and not lending.
But this could shift as millennials demand DIFM (do it for me) financial services instead of the former DIY approach, said Bill Sarris, CEO of Linqto, a white-label provider of video conferencing for mobile banking apps. According to Accenture's 2014 Consumer Digital Banking Survey, 56% of millennials want to video chat with bank representatives by accessing a link through a PC, smartphone or tablet.
Monitise said its APIs and software development kits could help banks make the denial of a loan more of a constructive learning process. Its September 2013 acquisition of Grapple Mobile Ltd., a mobile innovation and design company, brought over a couple hundred employees who are experts in customer experience.
If banks develop a friendlier customer experience for the customers they decline for loans, "even if you get rejected by the bank, it goes step by step through what you need to do to build that up and get accepted," said Crane.
While these features could easily be integrated into a digital branch channel, banks should also being looking farther out, building these services into the mobile channel.
Sixty-seven percent of U.K. Generation Y consumers said mobile is their preferred method of banking, and 88% said online banking is their preferred method, according to a Monitise report.
Crane predicts that micro-branches will become obsolete with the rise of wearables, especially those that improve person-to-person functions.
But Diebold and NCR, two companies that build video teller and micro-branch services, disagree. Micro-branches are usually equipped with high-tech features including Bluetooth beacons, near-field communication and video tellers.
"Consumers have never met a channel they didn't like," said Devon Watson, vice president of new business and solution incubation at Diebold. "Every time a new channel is introduced, they keep the old ones too."
Plus as a global company, Diebold must think about developing banking solutions for countries where video calls aren't applicable because of limited infrastructure, Watson said.
And the benefits of physical locations for branding purposes cannot be understated.
Most bank selection decisions are still based on a local presence, said Diebold's Bose. Micro-branches could be used as a more cost-effective branding mechanism, he said.
Digital branches or ATMs equipped can increase a bank's footprint, allowing it to enter new markets or re-enter ones it formerly left without much cost, said Hoover. Plus some functions, such as cash withdrawals, cannot be done through a mobile device, he said.
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