Channel Strategy Evolution in Retail Banking

Abstract

Information and banking technology have combined to throw the retail banking business model into disarray. Many predicted that lower cost online-oriented services such as Citibank’s Citi f/i venture would dominate the retail banking market and drive out high cost old technologies. The subsequent failure of Citi f/i and other virtual banks raises questions about how technology choice affects retail banking competition: Under what conditions would an online-only banking strategy be successful? When can a bank deploy both old and new technologies and still be competitive? Can an ATM network substitute for a branch network? Do customers’ attitudes about technology affect banking strategy? We use an economic model of a competitive retail banking market to address those and other questions. Our model allows banks to choose their technology, including establishing separate branch and ATM networks or relying on third party ATM networks. We also include customers that have differing attitudes toward technology. Our analysis suggests that customer preferences, rather than technology cost structure, drive the evolution of banks’ strategic technology choices. Also, banks in our model tend to deploy ATMs in the same numbers as branches, despite ATM’s cost advantages. Finally we show that virtual banks will remain unprofitable until a much larger proportion of the population is comfortable with online bank transaction technology. These results suggest that banks should carefully study their customers’ preferences to align major strategy shifts with customer attitudes.