The business model of retail banking is broken, because that business model depends on branches. Fully one-third of branches may be unprofitable.

That’s the word from Nautilus Hyosung, branch transformation consultants and makers of ATMs. Branch transformation is a hot topic — sessions at BAI Retail Delivery devoted to the topic were standing room only — and it’s no wonder. Self-service or mediated service channels reduce costs while delivering what customers want. A recent research report from McKinsey & Co. indicated that customers want  fast, easy and secure transactions. When self-service fails on any of these fronts, customers move to more expensive teller transactions.

Most banks will transform their branches eventually, Hyosung says. It is expensive — but doing nothing is expensive too.

“Most banks are beginning to go down this path,” Andy Orent, president and CEO of Nautilus Hyosung North America, told Bank Innovation. “They all know they have to do something, but they don’t know where to start.”

One option, closing low-performing branches, can backfire, Hyosung says, citing Accenture research, because customers still tend to choose banks based on branch proximity — even if they rarely go in.

Another place to start is with the machines. ATMs are old — in some cases, 30 years old. Snazzy new machines with video capabilities and the ability to cash checks, and dispense all kinds of bills and coins, are the order of the day, and Hyosung is one of a number of companies selling them, along with NCR, Diebold and others. But more to the point, according to Orent, is that the processes behind the machines, including risk management rules, are old. “We might have 40 to 50 years of branch processes in place,” Orent said, and the self-service machines and tellers rely on these rules to do business.

There is also the matter of digitizing processes, to save time and prevent duplicated efforts in terms of, for example, complying with the array of mortgage regulations.

The place to start, Orent says, is not by buying new machines, but by updating those processes. Orent described how 9/11 forced the airlines to re-engineer processes, change staffing structures, and ultimately, move to a mediated self-service model for the check-in process. And the kicker is that their customers prefer it that way.

With the multiplication of channels, all of which must be maintained and none of which can be dropped, banks seem to be arriving at a 9/11 moment of their own.

“Consumers will use whatever channel they want to use. Kids under 26 — their checking accounts are electronic,” Orent said. More to the point, they’re mobile, but with 60% to 80% of sales still coming through the branch, according to Orent, banks are stuck. They need the branches to work in an efficient manner. Hyosung claims it can help, saying that 75% of consumer transactions performed in the bank can be moved to self-service with little to no loss in business.

If Hyosung is right, then the cost savings in employee hours from reformed processes and updated  can make back the cost — to say nothing of the time, and pain — of a branch overhaul in fairly short order. Which means most banks can’t afford to wait.