Commercial branch networks present a management paradox: Branch operations report to retail banking, but their largest and most valuable clients are often middle-market businesses.
No one thinks branches make enough money, but little attention is paid to improving the contribution from the most frequent branch users: businesses.
Banks are seeking to move commercial clients from branches into "alternative" delivery channels that cost less to operate, but upon examination, many branches are not economically viable without their commercial deposits. Further, as many as 40% of businesses prefer branches as their primary delivery channel.
The paradox deepens: A recent survey of 1,176 businesses by Barlow Research Associates found that 91% of middle-market businesses not only visit branches but also rank them second in importance only to relationship managers and their assistants. The average number of monthly branch visits exceeds the number of relationship managers, product specialists, and direct computer contacts combined.
A final irony: Branch networks, from which banks are so ardently trying to wean business, may in fact give banks a competitive advantage over nonbanks. Once nonbanks are fully operational on the Internet, what will differentiate commercial banks from nonbanks? Branches are tangible marketing assets that are difficult to duplicate.
Not all banks are driving businesses from their lobbies. Community banks actually promote branch access, and to good effect. But of the 10 largest middle-market banks in the United States, only two ranked above the industry average in branch office satisfaction.
Why are commercial banks intentionally separating their most expensive distribution channels from their most valuable clients?
Commercial bankers abdicated branch management to retail banking when the branch role changed from service to retail sales. As a result, a dwindling number of branches have qualified commercial staff. Businesses still visit branches, but there's often no one there to serve their needs.
A related reason that branches remain critical to business retention is that alternative delivery channels have not yet fulfilled their technological promise. Our research found that most businesses accept centralized service centers for only very limited roles, often because centers are not staffed with qualified bankers.
Finally, there is conclusive evidence that bank mergers have undermined branch service levels. This summer, branch satisfaction among clients of merging banks was just 44%, compared with 65% for clients whose banks had not merged.
Ninety-one percent of businesses visit branches an average of 24.6 times a month. Retailers would say this offers a tremendous opportunity. It is also a significant retention challenge for banks that are downsizing their branch systems.
A new branch paradigm will be required at merging national banks to retain middle-market business customers in the face of nonbank competition, not to mention keeping them from the arms of community banks. With the caveat that paradoxes can only be managed, not resolved, here are six suggestions:
Manage the impact of bank mergers on commercial branches. Mergers have not been kind to businesses that use branches. However, several banks are finding they can minimize the adverse impact by setting and working toward stiff retention goals. This requires paying continuous attention to branch service throughout merger integrations, which typically last 24 to 30 months.
Move commercial bankers to branches. Moving commercial bankers back onto a branch platform sounds like a step backward, and it may not suit a would-be investment banker's white-shoe ideal. But retailers know that you have to go where your customers are.
Develop models for shared governance of branches. Wholesale bankers need to get their oars back in the waters of branch management. The intersection of retail and wholesale too often occurs at the chairman level, not an ideal forum for settling operational problems. Allocating branch expenses is clearly an issue, but abandoning branch management to retail executives is not the answer.
Give the keys of vital commercial branches to commercial bankers. Most banks find that a small percentage of their branches handle a disproportionate amount of commercial activity. Reversing management roles to let commercial bankers lead and staff key commercial branches enables the bank to staff branches appropriately.
Weigh commercial implications of branch closures. Banks that do not factor commercial deposits into their branch retention goals may be committing a fatal error. If significant deposits leave during branch mergers and consolidations, it can fuel the spiral of downsizing and closures. The reality is that bank accounting systems do not always accurately report the value of commercial deposits.
Personalize and integrate "alternative" delivery. Our research suggests that for new, alternative delivery channels to be effective, they must be networked with traditional, personal channels. Branches are not stand-alone channels. When a commercial client presents the branch or commercial phone center with an error, the branch needs to complete a feedback loop to the relationship manager. Without feedback, an executive cannot manage relationships.
Banks are testing approaches to reconnecting commercial clients with branches and alternative delivery channels. No new paradigm has emerged. Our research has convinced us of this: The first nationwide bank to get the channels right, from the customer's point of view, will be a huge winner in this segment sweepstakes. The reward will be worth the pain.