Inthe 1960s, domestic automakers had a set of firmly held beliefs and assumptionsabout their business including that the U.S. car market was isolated from therest of the world and that fuel would remain cheap and abundant. "Well asthe industry learned the hard way, those beliefs and assumptions becameinvalid," said David Mooney, president and CEO of Chicago-based .

Mooney,speaking during American Banker's RetailBanking Conference last week in Las Vegas, said the U.S. bankingindustry today is similarly afflicted with outdated thinking within an obsoleteframework. Specifically, he said there is an inclination to view the emergenceof digital channels as simply a new means of access and an alternative tobranches. "But I would argue that the impact is far more pronounced,"he said. "It's fundamentally changing the dynamic of retail banking."

Alliant,which is the eighth-largest credit union by assets in the U.S., has just 12branches spread around the country. Its members access the creditunion primarily through self-service channels, he said. That is because Alliantbelieves that although banks used to build brick-and-mortar locations with aneye toward making things simple for their customers, mobile has changed thedefinition of convenience. "The bank is now in your pocket," Mooneysaid. Because although 70% of consumers still say branch locationis a critical factor in choosing a bank or credit union, that figure was about95% in the late 1980s. "And that, I would suggest to you, is a profoundchange," he said. "It's not just a behavioral shift, it's a paradigmshift."

Butnot everyone at the conference was of the belief that branches serve littlepurpose in today's environment. Jim Caliendo, president and CEO of PWCampbell,pointed out that Apple is building physical stores all over the world."And who knows more about technology than they do," he said.

ButCaliendo said financial institutions must do away with outdated branch featuressuch as teller lines and instead work to make customers feel welcome from themoment they enter the branch. A well-designed branch gives banks and creditunions the ability to tell customers what they do and how they can help.And branches are still the best way for financial institutions to differentiatethemselves. "There's an opportunity for them to be a marketing tool, andthat isn't something that we did in the past," he remarked.

KateDame, vice president of branch administration for Lowell, Mass.-basedJeanne D'Arc Credit Union,said the credit union has been addingbranches and renovating existing sites. Part of the credit union'srationale is that more millennials are buying first homes, and obtaining aproduct as large as a mortgage is not something they want to do over the phone,she said.

Meredith Deen, COO of Financial Management SolutionsInc., said it is also difficult for millennials to go online and ascertainwhich product is right for them. She related a conversation she had with herown son, who is a college freshman, in which he asked her the differencesbetween individual retirement accounts. Deen said that is the type ofdiscussion best held face to face.

Bank branches are not like bookstores where productselection is simple, Deen said. "We're not like books. It's easy to choosea book online. So there's still a place for branches certainly," she added.

Nevertheless, branch networks are shrinking, and Deen said alot of that is due to a right-sizing that is going on across the industry. Shenoted that in 1970 there were more than 9,000 people per every branch in theU.S., but by 2008 that number had shrunk to just above 3,600 per branch."It got a little crazy with all the branching," she said.

Caliendo of PWCampbell, which designs and builds branches,said other retailerssuch as gas stations and supermarkets have conditioned today's consumers to domore self-service in the facilities, but bank branches in many instances stilldo not have those capabilities. He said today's branches need tofeature much more technology and in most cases should be able to fit in 1,600square feet.

But Mooney of Alliant said branch transformation is not the answer because the revenueand expense problem associated with those buildings is structural. He comparedit to the case of Blockbuster Video, which tried to save itself by offering newproducts. "The problem was that Blockbuster still had an outmoded revenuemodel, so it didn't matter that they made some tweaks. It wasn't nearly enough.And what does that sound like?" he said.

Mooneypointed out that the typical bank branch opens fewer than two new accounts perday. "No retailer could stay in business with that kind ofproduction," he said.

Theindustry is seeing a decline in total branches, which Mooney said is muchneeded after the previous buildup. But it's still not enough, as a typicalfinancial institution has about 60% of its expenses tied up in the branchesthrough real estate, personnel and systems costs.

Mooneyremarked that outdated thinking continues to pervade the industry as somecredit unions seem intent on finding ways to justify their branch count."Are we protecting something that shouldn't be protected?" he said.