Fintech may be forcing banks toward a "digitaldisruption tipping point," according to a white paper released byCitigroup Inc. onMarch 29.

The report delved into a potentially significant shift thatwould fundamentally change the banking business, citing the exponential growthof investments in financial technology over the past decade, from $1.8 billionin 2010 to $19 billion in 2015. Looking more broadly at other industries wheredigital disruption has rattled incumbent players, Citi pointed out that digitaldisruption "accelerates over time," with market share shiftinggradually at first before reaching an "inflection point" that marks asharper decline in "traditional share."

For U.S. consumer banks, the defining moment of digitaldisruption could begin to show on their balance sheets. The revenue impact ofdigital disruption is projected to increase from 1.1% in 2015 to 17% in 2023,the report said. Citi explained that while banks have both client base andscale on their side, fintech entrants have an "innovation edge,"specifically with respect to the "client experience interface."

Citi pointed to China as a post-tipping point marketplacewhere fintech companies often have as many or more clients than the nation'slargest banks. In China, fintech companies "have both scale andinnovation," the report said.

In a more granular sense, Citi calculated that over 70% offintech investments to date were made in the personal and small and mediumenterprise banking account segment, one of the "most attractive andvaluable profit pools in banking today."

In terms of fintech investments by product, the reportsuggested that payments is the most "contested" space."[P]ayments, lending and personal finance management have been the mostactive in terms of investment activities," the report said.

With respect to branch strategy, Citi suggested thatpressure from digital competitors is likely to influence banks' approaches toautomation and branch distribution. "[W]ith the increased ubiquity of themobile Internet, increasing FinTech competition, and a sluggish revenue andprofitability environment, we expect U.S. banks to follow their EU peers incutting branches," the report said.

"For the small banks that are commercial banking drivenentirely and don't really have a whole lot of consumer banking, I think you'reultimately going to get a lot fewer branches in the system than they havetoday," Keefe Bruyette & Woods Inc. analyst Julianna Balicka said inan interview.

On the other hand, Balicka pointed out that consumer banksmight be a bit further along in the process of closing branches because theyhave been reducing locations incrementally over time.

Delving deeper into the future of branch reductions, theCiti publication envisioned the new role of the branch. "The future ofbranches in banking is about focusing on advisory and consultation rather thantransactions," the report said. "The return on having a physicalnetwork is diminishing." While the pace of branch staff reduction has been"gradual" so far, Citi predicts another "30% reduction in staffbetween 2015 and 2025."

Changing customer behavior seems to underpin thisfundamental shift in banking. "The adoption of smartphones and othermobile devices have fundamentally changed the way consumers interact with theirbanks today," the report said. Omni-channel banking in the ideal strategyfor established banks in the future, Citi added.

In terms of future relationships between banks and fintechcompanies, Balicka envisions "more cooperation than competition." Sheexplained that while fintech companies like marketplace lenders have created"branchless, technology-driven underwriting solutions," they have notfigured out how to "effectively limit customer acquisition costs."

"I think ultimately we will see the emergence ofpartnerships which will help both sides legitimize the platforms," Balickaadded.