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The Future of Retail Banking

Morningstar's Dan Werner and Jim Sinegal see a move toward digital and direct channels.

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Banks are moving toward more digital and mobile-based platforms to better address the needs of millennials, while re-evaluating the importance of their branch footprint. The best-positioned bank to benefit from these changes, in our view, is  PNC Financial Services Group (PNC), because of its aggressive digital bank strategy, which envisions two thirds of its branches being transformed into more digital and millennial-friendly branches by 2018.

We see two firms under our coverage-- Discover Financial Services (DFS) and  Charles Schwab (SCHW)--as the primary beneficiaries of changing consumer preferences. These two companies are leaders in online banking, with almost no legacy cost burden associated with extensive branch networks. Online firms have historically paid higher rates to gather deposits, but this disadvantage is fading along with the need to visit physical locations to obtain cash and deposit checks. If that weren't enough, these firms are clearly providing a superior customer experience without the benefit of face-to-face interaction. We expect virtual banks to use these advantages to gain profitable deposit and loan market share in the years to come.

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Dan Werner does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.