New York City is widely considered to be the financial services capital of the world. It is home to many of the world’s largest banks and the world’s largest stock exchange, NYSE Euronext. Therefore it would be natural to assume that if you wanted to know what the future of banking looks like, you would look to the Big Apple for some insight. If you wanted to learn even more about the latest innovations, you might look to London, Hong Kong, or Tokyo. But what if I told you the future of banking is not in any of those mega financial centers, but in Africa? This conclusion may sound counterintuitive at first, but it rings true once you consider one of the newest ideas in financial services: branchless banking.
Branchless banking is a way of delivering financial services without the traditional brick and mortar buildings. Methods of distribution include mobile phones, the internet, point of sale (POS) devices, ATM’s, and retail outlets. Africa has become a leader in this new distribution channel not because it had some unique foresight, but out of necessity. African countries lack the infrastructure to support the banking systems of the developed world and, more importantly, their customer base lacks the amount of capital necessary to make such a system profitable. The purchase of land, the construction of buildings, and the hiring of staff are all capital intensive. Once those investments have been made, banks need to have large operating margins to cover their costs.
Since such margins are a pipe-dream in Africa, this is where branchless banking comes in. Whether it’s making payments to other people or making a deposit or withdrawal, many of the most common financial services delivered inside a bank branch can be done outside of it via mobile phones and ATM’s. M-Pesa, the provider of the largest mobile phone payment system in the world, has 15 million accounts, as of early 2012. Smartphones can deliver even more services, like depositing checks, than mobile phones without internet access. More involved financial services, such as loans and investment accounts, can be delivered at third-party outlets, like post offices and grocery stores. This movement away from bank branches and toward third-party outlets will be similar to the switch from Blockbuster to Redbox. That didn’t turn out too well for Blockbuster. These nontraditional methods of delivery reduce transaction costs, which makes small transactions profitable and encourages the unbanked, those who don’t use financial services, to join the financial system.
This type of banking may be perfect for low-income markets like those found in Africa, but why would we import this idea to the United States, where many people have a high net worth and are satisfied with the current way of doing business? The answer is simple: gigantic costs savings. Let’s look at the data for Bank of America. Currently, Bank of America has 5,600 hundred branches and 290,000 employees. Let’s conservatively estimate that eliminating all branches would reduce the number of employees to 100,000 (I argue this is a conservative estimate because most staff positions are not at a bank’s headquarters, but at its branches). All the money that was spent on building, maintaining, and staffing bank branches could be used to pay higher interest rates on deposits, charge lower interest rates on loans, or develop new digital delivery technologies.
Realistically, Bank of America, or any of the big four banks for that matter, will not be able to close all of its branches in the near future. It has building leases, employment contracts, and service expectations that would prevent this from occurring at a sufficiently rapid rate. That’s why I think the branchless banking revolution in the United States will come through startups like Simple. Instead of worrying about scaling down costs, startups can focus their energies on scaling up revenue. To avoid the concomitant costs and hassles of becoming a full-fledged bank, these startups often partner with established banks. For example, Simple partners with the Bancorp Bank to ensure its clients funds are FDIC-insured. This allows Simple to focus on developing the alternative delivery methods that branchless banking depends on.
This branchless banking revolution is bound to occur sooner or later because the cost savings are so enormous. We just have to wait for it to get here from Africa first.