Users of alternative delivery channels may not be as numerous or as profitable as common wisdom says they are, according to research from First Manhattan Consulting Group.
After analyzing data from five major banks, First Manhattan concluded that retail customers who depend largely or entirely on branches still far outnumber those who mainly use electronic services.
First Manhattan found that 40% of checking account customers conduct their banking business entirely through branches.
The research also showed that customers who prefer more automated delivery methods are not necessarily the most profitable.
These findings are a cautionary note to bankers rushing to move their customers as quickly as possible to self-service mechanisms.
"We had better be careful in any attempts to radically downsize the branch system," said James M. McCormick, president of First Manhattan.
On the thorny issue of whether to emphasize branch services or remote alternatives, First Manhattan suggests that banks invest aggressively in both, at least in the short term.
"The branch is powerful and strategically important," said r. McCormick, whose firm's retail delivery systems research for the Bank Administration Institute two years ago indicated that use of electronic delivery channels was more widespread than many bankers then assumed.
According to the new research, about 60% of banks' income from retail customers comes from a cross-section who use branches exclusively. These customers hold about 40% of banks' retail accounts.
Customers who rely either heavily or partly on self-service generate only 20% of income. They hold 10% of retail accounts.
Meanwhile, the 50% of account holders who use mixed media provide only 20% of the income pie.
"The mixed-channel user is often the highest-cost to serve," Mr. McCormick said. Therefore, bankers should try to push customers into either profitable branch usage or a self-service orientation.
The catch, he said, is that banks need to lower distribution expenses while keeping the branch customers happy.
To achieve this, he suggested, banks should develop long-term pricing and marketing schemes "to make sure self-service substitutes for branches, not complements them." The latter would result in the cultivation of unprofitable, mixed-channel usage.
Despite their high cost, branches can be an advantage in the competition with many nonbanks Mr. McCormick said. "Nonbanks that do not have branches may find it more difficult to fully supplant the banks in meeting the needs of customer," he said.
Warning bankers not lose sight of the bottom line in their eagerness to encourage alternative delivery systems, Mr. McCormick urged a conservative approach to pricing, so as not to sacrifice valuable transaction fees.
Though Citicorp and others have slashed or eliminated fees to attract users to electronic services, Seamus McMahon, a First Manhattan consultant, urged that banks not "head into this thinking there's some law of gravity."
"So far, we haven't learned how to get paid for the services we're providing," Mr. McCormick said.
