Aggressive bank consolidation and consumer demand for nontraditional access to their accounts are pulling today's retail bankers in two directions.

Industry consolidation through acquisitions and mergers has resulted in an overabundance of traditional bank branches and in duplication of branching networks in many markets.

At the same time, financial institutions and their customers are looking for lower cost, higher service delivery systems.

In addition, suppliers are under pressure to upgrade sales support systems as well as develop alternative methods of delivering banking services.

Traditional retail delivery systems include both mainframe and microcomputer-based teller and platform systems. Direct or alternative delivery systems include automated teller machines, screen phones, home computers, televisions, and voice response systems. These diverse delivery systems will continue to expand as they reduce customer traffic at branch locations and allow banks to target specific customer segments.

There is a consensus in the financial services industry that direct delivery channels are an increasingly viable alternative to traditional retail branch platforms.

ATMs, which began service as a delivery platform 20 years ago, are now widely accepted and used by customers. But there is still disagreement on the roles other delivery channels are currently playing or will play in the future.

In determining the best retail delivery strategy for the market, Speer & Associates Inc. estimated the current distribution of transactions by retail channel for two types of banks. These distributions are presented in the accompanying chart.

This chart was based on numerous Speer studies over the last several years in the areas of retail delivery systems - including ATM and branch networks as well as telephone banking operations.

As these chart shows, major banks typically handle 55% of their total transactions through traditional branches, 39% through ATMs, and 6% through telephone banking.

Even for banks that are aggressively developing and promoting alternative delivery systems, traditional retail branches still represent the main retail delivery channel.

The number of transactions performed at ATMs is still growing at annual rates of 10% to 15%, while the annual growth in telephone banking is estimated to be between 20% to 40%. The growth in "other" channels is the highest, but still negligible in terms of transaction figures.

Even though the branch remains the centerpiece of the average bank's retail delivery strategy, the growth in alternative delivery systems has come at the expense of traditional branches, which are believed to be handling up to 15% fewer transactions.

These types of growth rates for the alternative delivery systems raise interesting questions relative to the capital investments being made in traditional branch teller/platform automation.

Speer's surveys indicate that customers perceive a sharp reduction in their likelihood to use branches, thereby indicating a typical customer transaction is no longer confined to the branch teller.

In 1991, 80% of customers expected to use the branch for most of their banking transactions; however, by 1994 this figure was down to 66%.

Surveys indicate, however, that actual branch visits declined only slightly - from five per month in 1992 to 4.7 in 1994.

This conflicting information has many bankers and vendors wondering in which direction the marketplace is headed.

Speer & Associates believes that customers will alter their banking behavior over time.

Development of alternative delivery systems has centered on the ATM, point of sale terminal, and other remote banking machines. Although ATM deployment has slowed with maturity, ATM transaction volume has grown at an average annual rate of 14% percent since 1988. Telephone banking has increased dramatically of late: 31% of banks offered the service in 1992; 44% did so in 1994.

PC home banking offers the widest range of services of any home banking product due to the PC's interactive abilities.

However, PC home banking remains a small percentage of the current alternative delivery systems market due to the technology and hardware requirements that the customer must purchase and learn to use.

This, too. will change over time as more households acquire and use PCs. In 1994 more PCs were sold than televisions, which indicates growth in home computing. Surveys indicate that 37% of bank customers report they have a PC in their household while 29% of customers indicate an interest in PC home banking.

Although an interest in using a PC for a wide range of banking services exists, PC home banking is not widely available from banks at this time.

Except for telephone banking, Speer does not expect banks with assets over $500 million to make significant expenditures on alternative delivery systems over the next two years.

Speer does believe that because of the potential to attract certain customer segments from competitors and the ability to reduce teller-based branch transactions, the use of remote banking services will grow in popularity to the point that by 2000 up to 70% of all routine banking transactions will be conducted outside the branch.

While alternative delivery methods are growing, Speer does not expect them to fully assume the role of the branch for the foreseeable future. Speer believes that the manned branch office will remain an important acquisition and delivery system end point for most retail and small- business financial services.

It will also remain a key component and a reality for most bank acquisition/merger strategies for the next three to five years, although Speer expects to see a significant change in its valuation as a part of any acquisition.

In spite of the relatively large shift of transactions to alternative delivery systems, a number of recent surveys have shown that the most significant area of investment for banks over the next 12 months will be in branch automation.

Since many financial institutions believe that the branch is still their primary delivery mechanism, they feel that they must modernize - replacing mainframe-based dumb terminals used by both tellers and customer service representatives with PC-based client/server systems connected to local area networks - before they can seriously consider significant spending on alternative retail delivery systems.

Mr. Harris is a senior vice president at the Atlanta-based research and consulting firm.

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