It's Time to Think Outside the Branch

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Dating all the way back to the rollout of automated teller machines in the 1970s, banks have encouraged retail customers to make use of alternative channels, which now prominently include contact centers for banking by telephone, and online banking via the web and mobile devices. For much of that time, branch traffic and transaction volume continued to grow as well.

But now a tipping point has been reached. Branch transactions are declining annually across the industry as customers become ever more comfortable with remote alternatives. According to Novantas research, infrequent branch users, essentially "virtual domiciled" customers, now constitute from 20 percent to 30 percent of the customer base at various banks. While these customers may open accounts at a branch, they seldom return for subsequent services.

The trend mirrors that of other retail industries, such as electronics stores and book store chains, which have seen sharp declines in storefront traffic. In fact, our research over the past five years indicates that among new retail banking customers, the majority are virtually domiciled.

This development has caught many retail banks flat-footed, with no formal strategy for a multi-channel marketing that is now fully coming to life. Instead, many limp along with loosely coordinated functional teams-branch, phone center, online, mobile team-that tend to operate autonomously and even as rivals.

From a revenue perspective, an immediate priority is to explicitly assign marketing and sales responsibility for virtual domiciled customers. Because of their usage patterns, these customers are rarely exposed to marketing through the traditional branch channel. For every 1 million customers, Novantas estimates that there is $25 million of additional revenue available to banks that just achieve average wallet penetration within this segment. Banks need strategies to grow this customer base (which is a marketing-led versus a sales-led business challenge).

Another area of concern is merger strategy. With branches losing customer traffic and transaction volume annually, acquirers are at risk of over-paying for physical networks while under-preparing for growing online patronage and competition. A third issue is controlling delivery costs-made even more pressing by the regulatory impact on fees and low interest rates. Many banks are making tough decisions about branch capacity and staffing, for example, without the full picture of customer transaction patterns in each local market.

A final priority is re-directing developmental resources. Many regional banks, especially, entered the recent market downturn in a lagging position on web and mobile capabilities, and then worsened their position by slashing development budgets under the banner of cost control. They risk locking in a competitive handicap that will only grow worse as newer channels expand.

Longer term, there are opportunities to harness the channel migration trend for cost reduction. Channel preferences are shifting as much as 3 percent to 5 percent a year. This raises the need for an explicit channel migration strategy that promotes convenience and minimizes transition hassles.

In many cases today, executives do not yet have adequate information about the emerging virtual domiciled customer group. A new category of management information is needed, namely that of channel usage by customer and a dashboard for managing the migration. Leading banks are actively researching these questions.

Branch networks can represent nearly 50 percent of a regional bank's cost base. These networks need to be streamlined, and they need to be repositioned in away that acknowledges emerging multi-channel competition, i.e. with a lighter physical presence that is more firmly integrated with remote alternatives.

The best way to make it through the multi-channel labyrinth is to stay centered on customers. This focus will only intensify as retail banks think outside the branch.


Spitler is a managing partner and Travis is a partner at Novantas, a management consultancy based in New York.

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