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Why the Evolving Financial Services Landscape Will Turn Real Estate on its Head

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Why the Evolving Financial Services Landscape Will Turn Real Estate on its Head 1

By Wayne Busch, President of Financial Services and Insurance at NTT DATA Service

The traditional banking and payments ecosystem is undergoing major change as consumer behaviors and preferences shift – and this evolution has been significantly accelerated by COVID-19. Changes to the traditional ways of banking, shopping and transacting with retailers are aimed at removing friction and digitizing processes. We've seen this disruption across virtually every vertical industry, which is now sweeping the financial services industry and subsequently, commercial real estate.

Outcomes of modernizing the financial services industry include reduced foot traffic at bank branches, lower ATM usage and an overall decrease in the use of cash and checks, while reliance on digital wallets and mobile banking apps steadily increases. Overall, digitalization for the sake of progress and convenience points to fewer reasons for consumers to visit traditional banks in person, which is being reinforced by COVID-19 stay-at-home orders across the country. In the year ahead, I anticipate the face of commercial real estate will change drastically as shifting consumer preferences and access to online financial services resources cause bank branches and the storefronts they anchor in many locations to close.

Financial Services' Impact on Real Estate

Wayne Busch

Wayne Busch

Banks across the US have already started closing retail branches, causing commercial real estate markets to shift in response to this growing trend. As these storefronts shutter, leaving large commercial real estate spaces once anchored by banks vacant, this spells trouble for real estate owners who seek to fill these vacancies in 2021 and beyond. This is in addition to a growing "work from anywhere" culture that is encouraging companies to reduce their real estate footprint.  Both of these trends will negatively impact commercial lending at banks.

The future of the traditional bank footprint is unclear, but some financial services organizations are paving the way to new forms of financial services spaces that prioritize experience to encourage younger, digital-first generations to bank with them. For example, Capital One Cafes provide a public workspace that facilitates conversations around banking – and coffee – in a more comfortable, approachable and casual setting. Moving forward, it is likely the financial services industry will abandon large commercial real estate spaces in favor of smaller, more modern and fluid spaces that don't limit patrons to just financial transactions, waiting in lines and interacting with bank tellers.

A Move Toward Digital and Real-Time

Another major trends that will impact the financial services space is the shift away from in-person banking to online payments solutions and the increased adoption of digital wallets. Consumers are opting for real-time, sovereign, and regulated forms of payments that are contactless, instant and largely driven by GPI initiatives. For example, in the US, Zelle is the current leader – outpacing Venmo and Paypal – as a real-time payment service. However, there is competition for Zelle in the consortium, and others are coming out with their own real-time payment programs. Contactless payment, a technology US consumers were not-so-long-ago hesitant to adopt, has skyrocketed in use (up 150% since 2019), accelerated by COVID-19 with cash being deemed "unclean" by the WHO and consumers now preferring to bank digitally. Mastercard alone reported a 40% jump in contactless payments during the pandemic — including tap-to-pay and mobile pay — indicating a trend that has steadily continued throughout 2020.

While this could signal the death of cash, the wallet, and traditional banks, some financial services experts believe it is actually a renaissance for the payments ecosystem and an opportunity to roll out new tech to consumers more willing to adopt. As fintech companies continue to create innovative alternatives to traditional banking, we will see additional M&A activity in the FinServ/FinTech space, with traditional banks gobbling up small, innovative FinTech companies to boost their technology and culture.

Major Changes for the Financial Services Industry

The financial services industry has been rife for innovation and disruption for years, and banks are recognizing this momentum and working with it to streamline payments, remove friction and keep pace with consumer expectations. They're adopting new tech and integrating digital solutions such as facial recognition that matches to a consumers' profile at the bank and authenticates payments, among other high-tech capabilities, in order to attract the next generation of consumers entering the workforce and beginning to bank. Credit card companies are also going digital and getting rid of plastic credit cards in favor of digital wallet integrations and contactless payment technology. Naturally, these changes to the traditional banking and payments ecosystems mean lower foot traffic, lower ATM usage, less cash on hand, check volume declining, less requirements for day one and two processing for banks and a lessening demand for large commercial real-estate space.

Like most other industries, the financial services industry is undergoing a major transformation led by advancements in technology, and as a result the commercial-real estate market is being turned on its head. In 2021, it's likely your trips to the bank will be far fewer and your local bank branches will begin to shutter, leaving empty retail space and opportunities for new gathering and transacting spaces to take shape once people can safely interact again.

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