Since first invented in Renaissance Italy, modern-day banking has been a face-to-face business. The early Venetian bankers conducted business across a bench or "banca" – hence the origin of the term. And ever since, the branch has been the cornerstone of the retail bank.
But now a revolution is underway which is fundamentally changing the way consumers interact with banks. It will spell the end of the branch network as we know it.
Today's branch networks, built up over decades and consisting solely of full service branches all offering the same services, are simply no longer affordable. According to Accenture research, 65% of banks' costs reside within distribution, such as the branch network and contact centers. Branch network costs add up to a staggering $500 billion a year for the world's 30 largest banks.
With margins squeezed by new waves of regulation, competition from non-traditional players and an uncertain economy, returns on equity are failing to cover the cost of capital in many cases. In short, banks can no longer avoid addressing the huge cost of physical branches.
Resizing branch networks, of course, is fraught with danger since branches remain popular with many customers. Surveys demonstrate that customers have a clear preference for face-to-face advice, and branches are still the most important channel for selling high-value products and services. Having a branch nearby is also one of the strongest factors in selecting a bank and until recently, banks were opening more branches – not closing them.
Faced with conflicting objectives – the need to significantly cut branch costs, improve service and maintain the role of the branch as a sales channel – banks need to adopt a new approach. It means the branch of tomorrow is going to look very different. It will be multichannel, digitalized, intelligent, personalized and much more efficient.
Banks will have different types of branches, tailored to the location and the function they serve. These will include kiosk stores found in malls and transport hubs, light and cashless branches relying heavily on automation and a smaller staff to engage in sales, branches focused on specific business segments such as small business customers, and flagship branches showcasing the bank's technology and brand.
There are lessons abroad for this. In Turkey, banks are rolling out advanced kiosks that provide a wide range of teller and sales services and video ATMs where customers can connect and transact with remote staff. UniCredit in Italy has announced plans to reformat three quarters of their branch network as either light or cashless branches. New Zealand's ASB has developed the first virtual branch on Facebook where customers can interact and conduct transactions.
These changes go far beyond a branch refit. They involve a fundamental redesign of the business model and the way customers experience the bank.
The potential savings for the industry are huge. Accenture estimates that streamlining the branch network, coupled with increased automation, could help banks reduce branch networks by 15% and cut staff in the branch network by up to one-third.
It will not be a painless process. Closing branches is often unpopular and attracts unwelcome publicity. Our experience suggests that when banks close branches as a result of mergers, 8% to 10% of retail branch deposits are lost to a competitor. Offsetting this concern, however, is the fact that consumers are rapidly adapting to the digital world. Indeed, studies indicate that increasing numbers of consumers – even older customers – now prefer to bank online.
The big challenge facing the industry is how to create an intelligent multi-channel bank. It can be done. USAA, for example, has virtually no branches but offers online and mobile access to financial advice and other services. American Express services customers via social media by linking customers' cards to their Facebook accounts to provide customized offerings based on spending, location and social media profile. Australia's Commonwealth Bank uses mobile technology to provide home-buying customers with information about housing market trends and mortgage products tailored to their needs.
The model for the future is simple: Provide easy access across physical and digital channels to pull in customers and strengthen relationships. Legacy branch networks and IT systems make it difficult for retail banks to change. But the need to cut costs and meet the threat from new competitors means that change they must.
Piercarlo Gera is a global managing director at Accenture and author of the recently published whitepaper "Banking 2016." Wayne Busch is managing director of Accenture's North America banking practice.