Last month’s debit fee follies opened a broader conversation on the costs of basic retail banking.
It’s no secret that a large number of traditional retail accounts do not generate a profit for the big banks – in particular, customers who hold small balances or do not purchase multiple products from the same institution. Industry estimates vary widely, suggesting anywhere from 25% to 75% of accounts either just break even or produce operating losses.
Hmm. When, say, 5% of your accounts are not profitable, they are the wrong target customers. But when more than half might not be profitable, is it possible you have the wrong business model?
Instead of blaming regulation or dreaming up yet another fee to juice short-term revenues, it’s time for a little more creativity on the operating side. Less trimming, more reinventing.
Consider the branch network. It accounts for roughly 60% of the cost of retail banking, yet is declining in relevance. According to the American Bankers Association annual survey, 2009 was the first year the Internet edged out branches as the preferred banking method among all adults. Branch use has been plummeting since then.
The branch model is outdated, and not just because many still use pneumatic tubes at the drive-through lane. The offices are heavy on real estate – especially in high-traffic areas – making the system expensive and inflexible. This prevents a bank from matching its capacity to the ebb and flow of opportunity in a community.
A local presence has its benefits. Bankers feel branches are essential for customer acquisition, since so much of bank choice is based on convenience. And intimate knowledge of a community lowers loan delinquency rates and provides customers with better access to credit, according to a 2011 research paper from the Federal Reserve Bank of Cleveland and Ohio State University.
What we need, then, is a new 21st century branch concept – one that keeps the intimacy, shrinks the real estate, and delivers precisely the services a customer is looking for.
Some banks have started experimenting with mini-branches – stand-alone kiosks or units co-located in other stores – with modest results, so far. The next step is to understand the dynamics and customer usage patterns for various locations. For instance, grocery store banks are convenient for simple services, but offer the wrong atmosphere for more complex transactions. I don’t want to discuss my mortgage terms in close proximity to the fish counter.
Banks have also begun to embrace the variety of new technologies available, which can provide tools to help revamp the branch system completely. Meaningful change requires bold ideas, with a laserlike focus on perfecting the customer experience for all market segments. There are plenty of creative high-touch, low-cost solutions to be explored – from a roving bankmobile, to appointment banking, to a fleet of iPad-toting representatives canvassing the neighborhood.
The right approach to branches could revolutionize a bank’s cost structure and convert those millions of “unprofitable” accounts into the next breakthrough market.
Instead of pushing certain customers out the door, banks should focus on pushing their executives to see beyond the status quo. Maybe those pneumatic tubes have been blocking the view.
Susan Ochs, a consultant in New York, served as a senior advisor at the Department of the Treasury in the Obama Administration.