Retail banking is in crisis. Bank of America's recent announcement that it is cutting 16,000 jobs and closing 200 branches is only the latest contraction of the industry.
According to the U.S. Census, in the last two decades, the number of FDIC-insured financial institutions in the U.S. has been cut in half, from 15,369 to 7,666. And since the 2008 financial crash, banks have seen their loan and mortgage business and overall margins further decline, creating pressure to close more branches.
Customers have had little sympathy for their plight. Particularly among customers under age 45, the very concept of a brick-and-mortar bank is fast disappearing. For this tech-savvy consumer, basic retail banking has become a collection of fragmented digital services: checking balances on the web, paying bills with Quicken, investing with E*Trade, using Mint.com to educate and verify and depositing checks using a smartphone app. Customer service to them means staying out of the mostly inconvenient branch system and doing what they want to do—when and how they want to do it.
So far, banks have responded to the crisis in exactly the wrong way. In addition to large-scale layoffs and branch closings, they have made their back-end operations more efficient, often resulting in increased ATM and account fees and more self-service transactions by customers. Meanwhile, their front offices have aggressively pushed higher-margin financial products on customers who neither need nor want them. How many 65 year olds need reverse mortgages? How many 30 year olds should own CDs? Banks have turned this practice into a science. They segment customers based on their "share of wallet” and actively try to predict the next product they'll likely to buy, rather than try to help them to be financially solvent, responsible and independent.
But today's customers can tell the difference between brands that push products and brands that are genuinely trying to solve their problems. In the past, marketing schemes such as "free checking” and "no points on mortgages" helped generate consumer loyalty. Today's sophisticated customer sees through such gimmicks. Whether it's using an app to pay for coffee at Starbucks or updating their iPhone at the Genius Bar, consumers are becoming accustomed to exceptional customer experiences. The cutbacks on customer service and high-pressure sales tactics by retail banks are generating ill will, and making the bank branch irrelevant for the next generation.
Retail banks need to change their business models, and fast, to put customers and not bank branches at the center. Apple stores don't exist solely to make ordering iPhones and iPads easier. They exist to build loyalty and instantly meet customer needs. In the same way, bank branches can be ambassadors to lifelong financial learning, morphing to offer the right financial products and services to each customer at the appropriate time.
The good news for the best banks is that they don't need to change their back-end operations to do this. Rather, they need to isolate the back-end efficiency from the front-end customer experience, innovating to create a retail layer that is integrated, dynamic and customer-centric. The bank branch of the future is not your grandparents' bank. In fact, it may not look or feel like a bank at all, which is why consumers will flock to it.
Some banks are already embracing elements of customer-centricity and seeing positive results. TeamBank, a subsidiary of German Volksbanken Raiffeisenbanken Group, has transformed its easyCredit product around the ideas of fairness and transparency. It has been up-front about fees, even when they appear much higher than competitors who hide theirs. The results speak for themselves: TeamBank is now the number three consumer finance provider in the German market and growing quickly.
As with their European counterparts, the retail banking industry in the U.S. is similarly poised for transformation. But if creative and thoughtful retail bankers don't make the change, someone else will. This month, Walmart partnered with American Express to unveil Bluebird, a prepaid card with virtually no transaction fees. Consumers can put money on the card online or at any Walmart location, increasing customer loyalty and generating in-store traffic.
There's nothing stopping companies such as Target, Google, Amazon or Verizon from taking this a step farther: buying a handful of regional banks for their licenses and back-end systems and creating a completely new customer experience layer. Does it matter if you get your cash at Target and your mortgage from Amazon as long as trust in the system is high, the price is right and everything meets regulatory standards?
Many of these brands appear to have the loyalty that consumers crave. In fact, by broadening into core financial services, those organizations can begin to build broader and deeper lifelong customer relationships. By transforming our conception of what it means to be a bank, such a strategy may just save the retail banking industry for the next generation.
Tony Driscoll is a principal at Continuum, an international design and innovation consulting firm and former corporate strategist at The Walt Disney Company. Carol McMullen is chief innovation officer at the Crossland Group, a global partnership company, and former executive vice president at Eastern Bank.